Test 4: answer key

Question 1 · 2 marks · Management of Working Capital · medium

Scenario. Aryan Auto Components Ltd. uses a 360-day year for working-capital analysis. For the year, raw material consumed was ₹72,00,000 and average raw material inventory was ₹6,00,000. Cost of production was ₹1,08,00,000 and average work-in-progress was ₹9,00,000. Cost of goods sold was ₹1,44,00,000 and average finished-goods inventory was ₹18,00,000. Average trade receivables were ₹15,00,000 against annual credit sales of ₹1,80,00,000. Annual total purchases were ₹90,00,000, of which credit purchases were ₹60,00,000; average trade payables were ₹7,50,000. Assume the stated annual figures are representative of the year.

Using the operating-cycle data of Aryan Auto Components Ltd., what are the raw material storage period and the work-in-progress holding period, respectively?

1. 30 days and 36 days
2. 36 days and 30 days
3. 30 days and 30 days (correct answer)
4. 45 days and 30 days

Answer: C — 30 days and 30 days

Working. Step 1 - Raw material daily consumption = ₹72,00,000 ÷ 360 = ₹20,000. Step 2 - Raw material storage days = ₹6,00,000 ÷ ₹20,000 = 30 days. Step 3 - Daily cost of production = ₹1,08,00,000 ÷ 360 = ₹30,000. Step 4 - WIP holding days = ₹9,00,000 ÷ ₹30,000 = 30 days.

Explanation. Option (c) is correct. Raw material storage period is average raw material inventory divided by average daily raw material consumption; WIP holding period is average WIP divided by average daily cost of production. Raw material days are ₹6,00,000 ÷ (₹72,00,000 ÷ 360) = 30 days. WIP days are ₹9,00,000 ÷ (₹1,08,00,000 ÷ 360) = 30 days. Option (b) is wrong because 36 days would require daily consumption of ₹16,666.67, equivalent to annual consumption of ₹60,00,000; the stated annual consumption is ₹72,00,000. Option (a) is wrong because the stated WIP and production cost produce 30 days, not 36 days. Option (d) is wrong because it assigns the 45-day finished-goods holding period to raw materials; the raw-material figures produce 30 days.

Where it goes wrong. Do not use cost of production as the denominator for raw material storage or raw material consumption as the denominator for WIP. Match each average inventory balance with its own annual cost base and use 360 days consistently.

Authority. Chapter 9: Management of Working Capital - Unit I, Section 6.1: Working Capital Based on Operating Cycle

Question 2 · 2 marks · Management of Working Capital · medium

What are the finished-goods storage period and the debtors’ collection period of Aryan Auto Components Ltd., respectively?

1. 45 days and 30 days (correct answer)
2. 30 days and 45 days
3. 45 days and 36 days
4. 60 days and 30 days

Answer: A — 45 days and 30 days

Working. Step 1 - Daily cost of goods sold = ₹1,44,00,000 ÷ 360 = ₹40,000. Step 2 - Finished-goods days = ₹18,00,000 ÷ ₹40,000 = 45 days. Step 3 - Daily credit sales = ₹1,80,00,000 ÷ 360 = ₹50,000. Step 4 - Debtors’ collection days = ₹15,00,000 ÷ ₹50,000 = 30 days.

Explanation. Option (a) is correct. Finished-goods storage period is average finished-goods inventory divided by average daily cost of goods sold: ₹18,00,000 ÷ (₹1,44,00,000 ÷ 360) = 45 days. Debtors’ collection period is average receivables divided by average daily credit sales: ₹15,00,000 ÷ (₹1,80,00,000 ÷ 360) = 30 days. Option (b) reverses the two calculated periods. Option (c) correctly states 45 finished-goods days but incorrectly calculates receivables at 36 days; the credit-sales daily rate is ₹50,000 and ₹15,00,000 represents 30 days. Option (d) overstates the finished-goods period; the average stock of ₹18,00,000 divided by the stated daily cost of goods sold of ₹40,000 gives 45 days, not 60.

Where it goes wrong. Use cost of goods sold for finished-goods holding days and credit sales for receivables collection days. Do not use total sales if only credit sales are relevant, and do not interchange the inventory and receivables denominators.

Authority. Chapter 9: Management of Working Capital - Unit I, Section 6.1: Working Capital Based on Operating Cycle

Question 3 · 2 marks · Management of Working Capital · hard

Taking the credit purchases figure rather than total purchases, what are the creditors’ deferral period and the net operating cycle of Aryan Auto Components Ltd., respectively?

1. 45 days and 180 days
2. 45 days and 90 days (correct answer)
3. 30 days and 105 days
4. 45 days and 135 days

Answer: B — 45 days and 90 days

Working. Step 1 - Daily credit purchases = ₹60,00,000 ÷ 360 = ₹16,666.67. Step 2 - Creditors’ deferral days = ₹7,50,000 ÷ ₹16,666.67 = 45 days. Step 3 - Gross operating period = R + W + F + D = 30 + 30 + 45 + 30 = 135 days. Step 4 - Net operating cycle = 135 − 45 = 90 days.

Explanation. Option (b) is correct. Creditors’ deferral period is average trade payables divided by average daily credit purchases: ₹7,50,000 ÷ (₹60,00,000 ÷ 360) = 45 days. Net operating cycle is R + W + F + D − C = 30 + 30 + 45 + 30 − 45 = 90 days. Option (a) uses the correct 45-day credit period but adds it instead of deducting it, producing 180 days. Option (c) uses total purchases of ₹90,00,000 rather than credit purchases of ₹60,00,000, producing an incorrect 30-day creditors’ period and a 105-day cycle. Option (d) identifies the creditors’ period correctly but reports the gross cycle of 135 days without deducting the 45 days of supplier credit.

Where it goes wrong. The operating-cycle equation deducts the supplier credit period. Also, the denominator for creditors’ deferral is credit purchases, not total purchases where a separate credit-purchases figure is given.

Authority. Chapter 9: Management of Working Capital - Unit I, Section 6.1: Working Capital Based on Operating Cycle

Question 4 · 2 marks · Management of Working Capital · hard

Scenario. Apex Distributorship has predictable and uniform cash requirements. Its annual cash outflow is ₹90,00,000, the fixed transaction cost each time marketable securities are converted into cash is ₹200, and the annual opportunity cost of holding cash is 12 percent. Apply William J. Baumol’s cash-management model and use the annual figures consistently.

According to William J. Baumol’s model, what is Apex Distributorship’s optimum cash balance (economic order quantity of cash), approximately?

1. ₹1,22,474
2. ₹17,321
3. ₹2,44,949
4. ₹1,73,205 (correct answer)

Answer: D — ₹1,73,205

Working. Step 1 - U = ₹90,00,000; P = ₹200; S = 12/100 = 0.12. Step 2 - C = √(2 × U × P ÷ S). Step 3 - C = √(2 × ₹90,00,000 × ₹200 ÷ 0.12) = √₹30,00,00,00,000. Step 4 - C ≈ ₹1,73,205.

Explanation. Option (d) is correct. Baumol’s optimum cash balance is C = √(2UP/S), where U is annual cash disbursement, P is fixed transaction cost and S is the annual opportunity cost per rupee. Substituting U = ₹90,00,000, P = ₹200 and S = 0.12 gives C = √(₹30,00,00,00,000) = approximately ₹1,73,205. Option (a) omits the factor 2 in the numerator and obtains approximately ₹1,22,474. Option (b) enters 12 instead of 0.12 as the opportunity-cost rate, understating the result by a factor of ten. Option (c) effectively doubles the required numerator by applying the factor 2 twice, overstating the optimum balance by √2.

Where it goes wrong. Convert 12 percent to 0.12 before substitution. Keep annual cash disbursement, annual transaction cost and annual opportunity-cost rate on a consistent time basis, and do not omit or duplicate the factor 2.

Authority. Chapter 9: Management of Working Capital - Unit II, Section 11.1: William J. Baumol’s Economic Order Quantity Model

Question 5 · 2 marks · Management of Working Capital · medium

At the optimum cash balance calculated under Baumol’s model, what is Apex Distributorship’s annual holding cost?

1. ₹10,392 (correct answer)
2. ₹20,785
3. ₹5,196
4. ₹17,321

Answer: A — ₹10,392

Working. Step 1 - Optimum cash balance C ≈ ₹1,73,205. Step 2 - Average cash balance = C/2 = ₹1,73,205 ÷ 2 = ₹86,602.50. Step 3 - Annual holding cost = average cash balance × opportunity cost rate = ₹86,602.50 × 12% = ₹10,392.30, approximately ₹10,392.

Explanation. Option (a) is correct. The average cash balance under the model is C/2. Annual holding cost is therefore (₹1,73,205 ÷ 2) × 12 percent, approximately ₹10,392. Option (b) applies 12 percent to the entire optimum transfer amount rather than to the average cash balance, doubling the holding cost. Option (c) halves the average-balance base a second time, using C/4 instead of C/2. Option (d) applies a 20 percent opportunity-cost rate instead of the stated 12 percent.

Where it goes wrong. The optimum cash balance is the transfer amount, not the average cash balance held throughout the period. The average balance is one-half of the optimum transfer amount under the Baumol assumptions.

Authority. Chapter 9: Management of Working Capital - Unit II, Section 11.1: William J. Baumol’s Economic Order Quantity Model

Question 6 · 2 marks · Management of Working Capital · hard

At the optimum cash balance, what is Apex Distributorship’s approximate total annual relevant cash-management cost, comprising holding cost and transaction cost?

1. ₹10,392
2. ₹15,589
3. ₹20,785 (correct answer)
4. ₹31,177

Answer: C — ₹20,785

Working. Step 1 - Holding cost = (C/2) × S = ₹86,602.50 × 0.12 = ₹10,392.30. Step 2 - Number of transfers = U/C = ₹90,00,000 ÷ ₹1,73,205 ≈ 51.96. Step 3 - Transaction cost = (U/C) × P = 51.96 × ₹200 ≈ ₹10,392.30. Step 4 - Total annual relevant cost = ₹10,392.30 + ₹10,392.30 = ₹20,784.60, approximately ₹20,785.

Explanation. Option (c) is correct. Annual holding cost is approximately ₹10,392. At the optimum balance, annual transaction cost is also approximately ₹10,392, so the total relevant cost is approximately ₹20,785 after rounding. Option (a) includes only one of the two cost components. Option (b) adds only half of the transaction cost to the holding cost, although the full number of annual transfers must be charged. Option (d) adds the holding cost to an amount that already includes holding cost, thereby counting holding cost twice.

Where it goes wrong. Do not report only the holding cost as the total cost. At the optimum Baumol balance, transaction cost and holding cost are equal; total relevant cost is their sum.

Authority. Chapter 9: Management of Working Capital - Unit II, Section 11.1: William J. Baumol’s Economic Order Quantity Model

Question 7 · 2 marks · Scope and Objectives of Financial Management · medium

Scenario. At Clarity Ltd., senior managers receive incentives based mainly on current-year accounting profit. The chief executive rejects a long-term project with positive net present value because depreciation would reduce current reported profit, while approving company-funded personal perquisites. The board is reviewing the objective of financial management and the finance manager’s principal decision responsibilities.

Which statement most appropriately analyses the chief executive’s conduct and the objective that should guide Clarity Ltd.’s financial decisions?

1. There is no agency problem because managers are formally appointed; current-year accounting profit is the complete measure of shareholder value.
2. The agency problem refers only to transaction costs of raising finance; the project should be rejected whenever it reduces reported profit in the first year.
3. The chief executive’s conduct is only a dividend decision; wealth maximisation requires maximising accounting profit without regard to the timing of returns.
4. Using company resources for personal perquisites illustrates an agency problem; shareholder wealth maximisation instead evaluates cash flows, their timing and risk. (correct answer)

Answer: D — Using company resources for personal perquisites illustrates an agency problem; shareholder wealth maximisation instead evaluates cash flows, their timing and risk.

Working. Step 1 - Identify the separation: shareholders own the company, while managers make operating and financial decisions. Step 2 - Compare interests: personal perquisites and incentives tied only to current reported profit may conflict with shareholder interests. Step 3 - Classify the conflict as an agency problem. Step 4 - Apply the wealth criterion: assess present value of cash benefits less costs, taking account of timing and risk.

Explanation. Option (d) is correct. Where managers place personal interests such as perquisites ahead of shareholders’ interests, an agency problem arises. Wealth maximisation focuses on shareholder value and evaluates benefits and costs through cash flows, cost-benefit analysis, time value of money and risk. Option (a) is wrong because formal appointment does not remove the separation between ownership and management, and reported profit alone does not capture risk and timing. Option (b) is wrong because agency problem is not limited to transaction costs; it concerns divergence between managers’ and owners’ interests, and first-year accounting profit is not the sole decision criterion. Option (c) is wrong because the facts concern managerial self-interest and investment evaluation, not merely dividend distribution; wealth maximisation does consider the timing and risk of returns.

Where it goes wrong. Do not equate profit maximisation with shareholder wealth maximisation. Accounting profit may ignore cash-flow timing and risk, while agency problems arise when managers’ personal objectives diverge from the owners’ interests.

Authority. Chapter 1: Scope and Objectives of Financial Management - Sections 7.1: Profit Maximisation; 7.2: Wealth Maximisation/Value Creation; Section 12: Agency Problem and Agency Cost

Question 8 · 1 marks · Scope and Objectives of Financial Management · medium

Which set correctly represents the three principal financial decision areas of a finance manager?

1. Investment, production and human-resource decisions
2. Investment, financing and dividend decisions (correct answer)
3. Investment, statutory audit and taxation decisions
4. Financing, marketing and dividend decisions

Answer: B — Investment, financing and dividend decisions

Working. Step 1 - Identify the use of funds: investment decision. Step 2 - Identify the source and mix of funds: financing decision. Step 3 - Identify distribution of earnings to shareholders: dividend decision. Step 4 - The complete set is investment, financing and dividend.

Explanation. Option (b) is correct. Financial management centres on deciding where to invest funds, how to procure or finance those funds, and how much of the earnings to distribute to shareholders. Option (a) includes production and human-resource decisions, which are not the three principal financial decision areas identified in the chapter. Option (d) substitutes marketing for investment. Option (c) substitutes statutory audit and taxation for financing and dividend decisions.

Where it goes wrong. Remember the three finance decisions as investment, financing and dividend. Do not substitute related business functions such as production, marketing, audit or taxation.

Authority. Chapter 1: Scope and Objectives of Financial Management - Section 1: Introduction (Investment, Financing and Dividend Decisions)

Question 9 · 2 marks · Strategic Analysis: External Environment · medium

Scenario. EcoPower Solutions manufactures rooftop solar systems. The government announces a revised domestic-manufacturing subsidy and changes its solar-sector policy priorities. At the same time, a rising interest-rate cycle increases the company’s borrowing cost. Household demand is shifting towards clean-energy products, and a new tandem-cell design is expected to improve panel efficiency. Industrial buyers and investors are also imposing carbon-emission caps as part of their environmental-footprint requirements, while the state electricity regulator revises binding net-metering rules governing grid connection and consumer billing.

In EcoPower’s PESTLE analysis, how should the revised government subsidy and the rise in market interest rates be classified, respectively?

1. Political and economic (correct answer)
2. Legal and socio-cultural
3. Technological and environmental
4. Social and legal

Answer: A — Political and economic

Working. Step 1 - Identify the source of the subsidy change: government policy and intervention. Step 2 - Map it to Political. Step 3 - Identify the interest-rate cycle and its effect on borrowing cost and cost of capital. Step 4 - Map it to Economic. The ordered classification is Political, Economic.

Explanation. Option (a) is correct. Government subsidies and policy priorities arise from government intervention and are political factors. Interest rates affect the firm’s cost of capital and expansion decisions, making them economic factors. Option (b) is wrong because the subsidy is presented as a government policy shift, not a legal rule, and an interest-rate cycle is not a socio-cultural influence. Option (c) is wrong because neither item describes a technology change or an ecological condition. Option (d) is wrong because the subsidy is not a change in consumer attitudes, and the interest-rate cycle is an economic rather than legal factor.

Where it goes wrong. A government announcement is not automatically a legal factor. Classify a policy or subsidy according to government intervention as political; classify interest-rate movements according to their effect on financing cost as economic.

Authority. Chapter 2: Strategic Analysis: External Environment - Section 2.3.3: PESTLE - A Tool to Analyse Macro Environment

Question 10 · 2 marks · Strategic Analysis: External Environment · medium

EcoPower observes that households increasingly prefer solar products because of changing lifestyle attitudes, while a new tandem-cell design improves panel efficiency. Which PESTLE categories apply to these two developments, respectively?

1. Economic and political
2. Legal and socio-cultural
3. Environmental and legal
4. Socio-cultural and technological (correct answer)

Answer: D — Socio-cultural and technological

Working. Step 1 - Household preference and lifestyle attitudes affect demand through consumer behaviour: Socio-cultural. Step 2 - Improved cell design changes product performance through innovation: Technological. Step 3 - The ordered classification is Socio-cultural, Technological.

Explanation. Option (d) is correct. Consumer attitudes, lifestyles and buying patterns are socio-cultural influences affecting demand. A new cell design that changes panel efficiency is a technological development that can affect cost, quality and innovation. Option (a) is wrong because the stated demand shift is not an interest-rate, inflation or other economic trend, and the cell design is not a government policy. Option (c) is wrong because the first fact is specifically about consumer attitudes, while the second is a technical innovation rather than a legal requirement. Option (b) is wrong because neither the consumer preference nor the cell design is a legal rule; the consumer preference is socio-cultural, not a statutory requirement.

Where it goes wrong. Do not classify every clean-energy preference as an environmental factor. The fact given is a change in consumer attitudes and buying behaviour, which is socio-cultural; the panel design itself is technological.

Authority. Chapter 2: Strategic Analysis: External Environment - Section 2.3.3: PESTLE - A Tool to Analyse Macro Environment

Question 11 · 2 marks · Strategic Analysis: External Environment · hard

Which PESTLE classification is appropriate for (i) carbon-emission caps imposed by industrial buyers and investors as part of environmental-footprint requirements and (ii) binding net-metering rules issued by the state electricity regulator?

1. Legal and political
2. Technological and economic
3. Environmental and legal (correct answer)
4. Economic and environmental

Answer: C — Environmental and legal

Working. Step 1 - Identify the first influence as a limit on emissions and environmental footprint: Environmental. Step 2 - Identify the second as a binding regulator-issued rule governing grid connection and billing: Legal. Step 3 - The ordered classification is Environmental, Legal.

Explanation. Option (c) is correct. Carbon-emission caps tied to environmental footprints and ecological impact are environmental influences. Binding net-metering requirements issued by a regulator govern business operations and the rights and obligations of grid-connected participants, so they are legal influences. Option (a) incorrectly treats the buyer- and investor-driven emissions requirement as a legal rule and the binding regulatory code as merely political. Option (b) misclassifies both: neither item is a technology advance or a change in the cost of capital or purchasing power. Option (d) incorrectly treats net-metering rules as environmental rather than legal and the carbon-footprint cap as economic rather than environmental.

Where it goes wrong. Classify the substance of the external influence, not just the institution mentioned. Environmental-footprint and emissions constraints are environmental; binding rules governing operations and compliance are legal.

Authority. Chapter 2: Strategic Analysis: External Environment - Section 2.3.3: PESTLE - A Tool to Analyse Macro Environment

Question 12 · 2 marks · Strategy Implementation and Evaluation · medium

Scenario. Nexus Fintech is entering a rapidly changing market and wants employees to challenge existing processes, develop new products and commit to a compelling long-term vision. At the same time, its payment-processing and compliance teams must meet defined service levels, follow control routines and respond to measurable targets. The board is considering how transformational and transactional leadership styles should be applied to these different requirements.

Nexus Fintech’s product teams need a leader who communicates a compelling future vision, inspires employees to challenge existing assumptions and promotes innovation during major change. Which leadership style is most consistent with this requirement?

1. Transactional leadership
2. Transformational leadership (correct answer)
3. Directive operational control
4. Routine administrative supervision

Answer: B — Transformational leadership

Working. Step 1 - Identify the required outcome: a shared future vision, intellectual challenge and innovation. Step 2 - Match these characteristics to transformational leadership. Step 3 - Exclude transactional leadership because the facts are not centred on explicit rewards, penalties or maintaining current routines.

Explanation. Option (b) is correct. Transformational leaders use charisma and enthusiasm, communicate a vision, provide intellectual stimulation and inspire employees to embrace major changes and innovation. Option (a) is wrong because transactional leadership relies more on systems, explicit goals and rewards or penalties, and is associated with improving current practices. Option (d) describes routine supervision rather than inspiring commitment to a new strategic direction. Option (c) focuses on operational direction and control, not the vision-led change described.

Where it goes wrong. Do not confuse inspiring employees to embrace a new mission and innovation with the exchange of rewards for measurable performance. The former is transformational; the latter is transactional.

Authority. Chapter 5: Strategy Implementation and Evaluation - Section 5.5: Strategic Leadership

Question 13 · 2 marks · Strategy Implementation and Evaluation · medium

For Nexus Fintech’s compliance teams, managers set explicit service-level targets, monitor routine performance and link rewards or penalties to achievement or non-achievement. Which leadership style does this describe?

1. Vision-led entrepreneurial leadership
2. Transformational leadership
3. Charismatic change leadership
4. Transactional leadership (correct answer)

Answer: D — Transactional leadership

Working. Step 1 - Identify the management method: explicit goals and measured performance. Step 2 - Identify the motivation mechanism: rewards or penalties linked to results. Step 3 - Match the combined features to transactional leadership.

Explanation. Option (d) is correct. Transactional leadership uses formalised motivation, clear goals and explicit rewards or penalties for performance. It focuses on systems, control of activities and improving current practices. Option (b) is wrong because transformational leadership seeks to inspire followers through vision, intellectual stimulation and major change. Option (c) is not the described exchange-based leadership approach; charisma alone does not define the target-and-reward routine in the facts. Option (a) describes a vision- and opportunity-oriented approach, not the explicit performance exchange described.

Where it goes wrong. The words target, compliance, routine monitoring and reward or penalty point to transactional leadership. Do not select transformational merely because the manager is leading a team.

Authority. Chapter 5: Strategy Implementation and Evaluation - Section 5.5: Strategic Leadership

Question 14 · 2 marks · Strategy Implementation and Evaluation · hard

Which statement correctly distinguishes the two leadership styles for Nexus Fintech’s innovation programme and compliance operations?

1. Transformational leadership inspires through vision and intellectual stimulation and is suited to major change; transactional leadership uses defined goals and rewards or penalties to improve current practices and operational efficiency. (correct answer)
2. Transformational leadership relies mainly on explicit rewards and penalties, whereas transactional leadership creates a higher-purpose vision and promotes intellectual stimulation.
3. Both styles primarily focus on short-term supervision and differ only in the amount of authority delegated.
4. Transformational leadership is mainly suited to stable routine operations, whereas transactional leadership is the style associated with radical innovation and major organisational change.

Answer: A — Transformational leadership inspires through vision and intellectual stimulation and is suited to major change; transactional leadership uses defined goals and rewards or penalties to improve current practices and operational efficiency.

Working. Step 1 - Match the innovation programme to vision, intellectual stimulation and major change: Transformational. Step 2 - Match compliance routines to systems, clear targets and rewards or penalties: Transactional. Step 3 - Select the option that preserves this distinction and the corresponding organisational contexts.

Explanation. Option (a) is correct. Transformational leadership provides vision, excitement and intellectual stimulation and can help an organisation embrace major change. Transactional leadership builds on existing culture and current practices through clear targets and explicit rewards or penalties, supporting efficient and smooth operations. Option (b) reverses the defining characteristics of the two styles. Option (c) is wrong because the styles differ in their underlying approach to motivation and change, not merely in delegated authority. Option (d) reverses their contextual suitability: transformational leadership is associated with turbulent settings and major change, while transactional leadership is more suited to stable environments and routine execution.

Where it goes wrong. Avoid reversing the styles. Vision, inspiration and major change indicate transformational leadership; explicit exchange, targets and maintaining or improving current routines indicate transactional leadership.

Authority. Chapter 5: Strategy Implementation and Evaluation - Section 5.5: Strategic Leadership

Question 15 · 2 marks · Strategy Implementation and Evaluation · hard

Scenario. Everest Industrial Solutions is implementing a strategy to establish four new production plants. The strategy rests on assumptions about interest rates, customer demand, carbon requirements and supplier conditions. The strategy office periodically reassesses whether these assumptions remain valid; reviews milestones such as site acquisition and plant commissioning to decide whether the strategic direction needs adjustment; scans business publications and industry conferences for unanticipated information; and maintains a crisis team for sudden events. A competitor’s unexpected acquisition of Everest’s principal technology supplier occurs during implementation.

Everest’s strategy office (i) continuously tests whether assumptions about interest rates, demand and supplier conditions remain valid and (ii) reviews sequential implementation milestones to decide whether the overall strategy requires adjustment. Which pair of strategic controls is being applied, respectively?

1. Strategic surveillance and special alert control
2. Implementation control and premise control
3. Premise control and implementation control (correct answer)
4. Special alert control and strategic surveillance

Answer: C — Premise control and implementation control

Working. Step 1 - Activity (i) checks the continued validity of strategic assumptions: Premise control. Step 2 - Activity (ii) reviews sequential actions, milestones and results during execution: Implementation control. Step 3 - The ordered pair is Premise control, Implementation control. General scanning of publications and conferences is strategic surveillance; an unexpected crisis requiring immediate review is special alert control.

Explanation. Option (c) is correct. Premise control systematically and continuously monitors the assumptions on which the strategy was built, including selected environmental and industry factors. Implementation control assesses unfolding events and results from sequential actions or milestones and considers whether the overall strategy needs adjustment. Option (a) is wrong because strategic surveillance is unfocused general monitoring, while special alert control responds to unexpected events; neither describes the two stated activities. Option (b) reverses the controls: testing the continuing validity of assumptions is premise control, not implementation control. Option (d) also reverses the relevant classifications and incorrectly treats routine assumption testing as a special alert.

Where it goes wrong. Premise control asks whether the assumptions supporting the strategy remain valid. Implementation control asks whether the strategy is progressing through its planned actions and milestones and whether adjustment is needed.

Authority. Chapter 5: Strategy Implementation and Evaluation - Section 5.6: Strategic Control

Question 16 · 1 marks · Strategy Implementation and Evaluation · medium

The unexpected acquisition of Everest’s principal technology supplier by a competitor creates an immediate threat to Everest’s implementation plan. Management convenes its crisis team for an intense, immediate review of the strategy. Which type of strategic control is this?

1. Premise control
2. Special alert control (correct answer)
3. Strategic surveillance
4. Implementation control

Answer: B — Special alert control

Working. Step 1 - Identify the event: an unexpected competitor acquisition affecting a critical supplier. Step 2 - Identify the response: immediate, intense strategic review by a crisis team. Step 3 - Match the trigger and response to Special alert control.

Explanation. Option (b) is correct. Special alert control is triggered by unexpected events that require an immediate and intense review of strategy; an unexpected competitor acquisition affecting a key supplier is such an event. Option (a) is wrong because premise control continuously tests the validity of strategic assumptions rather than responding to a sudden crisis. Option (d) is wrong because implementation control evaluates sequential actions, milestones and results during execution. Option (c) is wrong because strategic surveillance is unfocused general monitoring of information sources, not the immediate crisis response described.

Where it goes wrong. Do not classify every event discovered during monitoring as strategic surveillance. A sudden, significant event that triggers an immediate and intense strategic review is special alert control.

Authority. Chapter 5: Strategy Implementation and Evaluation - Section 5.6: Strategic Control