IBTC lecturer, Nicky Brouwer, has broken down the Strategic Case Study Pre-Seen and highlighted some things you should know when preparing for the 2023 February Case Study exam.
Here is what she had to say;
We currently sit in the wave of uncertain markets; will the world experience a recession, or can the central banks pull us back from the edge? That’s the thinking of many, yet maybe we’re experiencing an adjustment, part of a flow to greater efficiency and awareness in all we say, do, and consume.
The Hottayr case study is squarely in this paradigm shift to enhanced efficiency, digital communication (including updates), as well as a goal of sustainable living. Sustainable living is not simply green, it is a rainbow of overall flow efficiency in the way we operate, cash flows, we embrace technology and care for ourselves and our world.
7 Key Themes
I have presented principal themes within this case study that stand forward yet link to sustainability.
1. Mission, vision, and core values all focus on a sustainable world and people harmony
Hottayr is the premier heat pump manufacturer in terms of quality and efficiency. The company started in 1952 and listed in 1967, it is large, stable, leading-edge corporate. Do tally up all the employees at the different sites. Note the mission, vision and core values – trustworthy supplier of excellence leading to a zero-carbon world. Employees trust and respect each other. These are all values to take the world sustainably forward. Yes, a healthy company will make profit, yet that is a barometer of success not the driving force. Be ready and able to bring these values into your responses.
2. Sustainable solution to the gas shortage and less efficient use of gas
Gas to run boilers is in limited supply overseas. How will the central heating systems evolve to a more sustainable model? The heat pump is the current option, yet we still have the refrigerant to consider, as well as the relatively high cost of replacing gas boilers for heat pumps in individual homes. Refrigerant is a dangerous greenhouse gas. Will we discover a sustainable alternative to refrigerant?
Hottayr has a specific Research Director, Prof. Amina Rajab. This focused space is bound to find a way into a case study exam, do Hottayr (we…as you work here now) experience a breakthrough discovery on the sustainability front?
3. Digital efficiency
Hottayr is at the leading edge of evolving heat pump digital technology. Energy consumption information is continuously available and uploaded to Hottayr via its App. Further, heat pumps can be updated to the latest software to improve efficiency.
Yet, the IT division is under the command of the CFO, and there is not an IT director. Does the CFO have the experience and skills to guide the company in this area where technological advancement is the theme of business at present?
4. Transparent balanced board
Hottayr has a comprehensive board, yet there are bound to be areas that can be assessed as this is a favourite theme. Know the corporate governance standing of the Board and its committees, what are strengths and what are pitfalls. There are 4 NED’s and 5 Executives and then the Non-executive Chairman.
The Chairman is a lawyer with a wealth of experience, where my that help or harm us? Two of the NED’s, Patricia is also NED of a television documentary maker and Ye who has held several posts in government, may present us will ethical issues or conflict of interest situations.
5. Expansion into new markets or regions
Hottayr already exports successfully, hence receives foreign currency (be ready for a hedging variant!). We could be face an expansion locally or overseas/outside Norland borders. Valuation as well funding options need to be considered.
In fact, any potential corporate action will trigger the need for a valuation of Hottayr/ a division/ a potential acquisition or merger and you would need to explain potential valuation techniques with relevance to the situation. Do cover all methods and expand on the most relevant, which is usually the free cash flow basis of valuation. Apply your response, it cannot be purely theoretical.
Tucked under valuation we can also add in the importance of knowing different funding options – debt (e.g. from the bank or bonds) and equity (e.g. rights issue or placement). Hottayr pays a good dividend, so let’s say, for example, Hottayr wants to acquire Flownyce or a business that sells airconditioners into warmer climates. One of the directors may suggest cutting the dividend to fund the expansion. In response you can put forward all the considerations i.e., clientele effect, signalling and bird in the hand, whilst still considering both sides of the proposal.
6. Intangible value, yet what is happening to the financial results
Hottayr’s greatest value is it its intangible focus on QUALITY and EFFICIENCY at all levels. Yet on the financial front we note a slight decline in operating margin, although sales have grown nicely at 8% from last year. There is no inventory on the statement of financial positions of Hottayr or Thermwyk, do they practice Just-in-time stock management? Do suppliers hold all stock and items manufactured on order?
The company has a healthy portion of debt, which is proportionately lower in 2021. Could more be raised if there was an acquisition that needed funding? What needs to be considered here?
7. Contribution to the stock markets as we ride the waves of change
Each and every company on a stock market is a contributor to our global markets, they all play their part to take us to a better world. Hottayr has a beta of 1.12, meaning it is a slightly riskier investment than the average market index, translating into a higher weighted average cost of capital. The share price popped up a few months ago yet is lower again. That said, it has doubled in the past two years.
Share price of a company is the present value of future cashflows (essential foundation point!). The extent to which the share price reflects future cash flows is via the efficient market hypothesis. Be able to chat comfortably about these topics.
Exam technique
CIMA case study exams are specific in their nature and require an equally specific approach and response from the students. Below is a comprehensive guide on exam technique and how to prepare for as well as write the case study exam.
- Be in the company, write about 'us'. Become so familiar with working in and for Hottayr that you almost replace your other job reality with this one. Write you emails and other communications as if writing the exam. Make your points clear, explain them and ensure the reality of the situation is captured in a deep enough manner.
- Questions are more and more requiring your ideas and practical solutions. Scenario planning is a frequent question to assess practical application. Yes, there is sound financial and strategic theory embedded in the tasks, yet as a deep subtle backbone. In other words, it is extremely unlikely you’re asked a theory-based question. You really need to place your work hat on and present plausible real solutions and ideas, with some good meat on.
- Your role is to present issues for consideration by a Board who can then make the decision(s). You are not the decision maker. There is no right or wrong answer. Take a step back; there needs to be a comprehensive communication presented of issues to consider i.e., a 3600 view. Sometimes you need to evaluate, provide pros and cons (risks and opportunities), action to be taken or simply identify issues to consider. Ensure holistic presentations in all aspects.
- With an ethical question keep an open mind to present the implications of various avenues. Yes, walk the high road yet be open minded, tactful, and comprehensive in responses presented. You may need to scope out the possibility and implications of two or three courses of action.
- Practice interpreting the task requirements correctly. What do the different verbs require. I would suggest gaining this knowledge from mock exam practice and suggested solution layouts. To paint the picture of three possible task requirements: 1. Provide the merits(benefits) of two different actions – here give merits of each for comparative purposes rather than pros and cons of each; 2. Evaluate usually implies look at both sides of the situation like pros and cons of one course of action; 3. Describe a course of action on, for example, communicating a merger to employees – here you need to discuss a number of actions to be taken.
- Be on constant look out for the word “and”. This splits a task in 2, literally. Give each part equal weighting and present under two separate headings so the marker can see your split. Present on what is asked, avoid temptation to go off on a tangent to put down things you know.
- This brings us then to the planning…. The most vital part of your exam. This contemplative 10 to 20 minutes at the start of every task is an area to perfect. To write down your points that will then serve as headings for each point, this is after determining how many points you need from the % allocation. Pause that extra moment before diving in, be clear on your tack and approach to each point. This ensures focused direction the full way through answering your task.
- Use examples for exchange rate related questions. Create simple scenarios like if the exchange rate goes up from A$1: M$1.5 to A$1: M$1.7 and paint the impact on a transaction and hedge.
- A few minutes prior to the end of question time do pause and read your answer for sense and to ensure you earn the marks due to you.
Those are my musings and guidelines as we move into the Hottayr Case Study, get comfortable and enjoy as we feel we are in for a good grounded (and warm!) journey.
