SBL Suggested Answer By Sir Hasan Dossani

Mar / Jun 2019 Attempt

Smart Wear

Answer 1A – Analyze external environment & impact on business model, mission and goals (10+2 =
12 marks):
(Source: Intro, Exhibit 1 & 3)

BRIEFING PAPER
FAO: Board of Directors
From: Consultant
Subject: External environment and major risks
Date: dd-mm-yy

This briefing paper analyzes the external environment of Smartwear and

assess major risks

External Environment
 Political
o Noria experiencing political uncertainty because of its coalition government, which may
not last for its full term (unfavorable)
o Smartwear should delay any major expansion / investment plans in Noria until political
environment becomes favorable

 Economy
o Suffered more than 3 years of economic misery. Ministry of Finance forecasts negative
growth for next year also
o Inflation 7% for over a year
o Noria was able to benefit from growing number of price sensitive customers, hence should
continue to focus on low cost strategy and reduce high infrastructure cost in order to
remain competitive

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  Social
o Record high levels of unemployment
o 8% of adult population unemployed
o Steady decline in the standard of living
o Noria should analyze customer needs and affordability and select product quality and
price accordingly

 Technological
o Many online only retailers are operating in Noria, due to which Smartwear market share
has reduced
o Swartwear should consider having e-commerce and online presence

Answer 1B – Asses major risks and suggest actions (10+2 = 12 marks):

(Source: Intro & Exhibit 2)

Major Risks
(give maximum 4 risks)

Risk Mitigation Action

Political risk
 Noria experiencing political uncertainty Scatter your business in several countries
because of its coalition government, (geographical diversification)
which may not last for its full term
(unfavorable)

Strategic risks
 As per major institutional investor,  Revisit business strategies to improve
strategic direction of the company is market share and profitability
wrong
 Have e-commerce / online presence
 No online presence

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 Risk Mitigation Action

Finance risk
 Weak financial position  Change in strategy to increase revenues
and minimize costs
 Difficulty in raising any funds for future
projects (e.g. CDMS project of $ 38m)

Liquidity risk
 Dividend payout may deplete cash  Tighter cash flow management
reserves
 Debt financing

Exchange rate risk

 Operates in multiple countries within  Treasury management
Europe
 Forward contracts / hedging
 Have suppliers in South East Asia

Market risk
 Falling share prices  Improved business performance
 No dividend payout  Better profit forecasts for stock exchange

Supplier risk
 High dependency on suppliers in other  Strong monitoring
continents
 Annual contracts instead of 3-5 years’
contract

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Answer 2A – Analyze strategic position in Southland (8+2 = 10 marks):
(Source: Exhibit 4)

REPORT
FAO: Board of Directors
From: Consultant
Subject: Strategic Position in Southland and Shop Closures
Date: dd-mm-yy

Introduction:
This report analyzes the strategic position in Southland and evaluates
strategic and ethical implications of the planed shop closures

Strategic Position in Southland

 Political stability
o Southland seems to have stable political environment unlike Noria which is experiencing
political uncertainty
o This suggest good business conditions and stability

 Economy
o Booming economy
o Average annual earnings is $ 51,700, which is highest amongst the three countries
o Inflation is 1.4%, which is lowest amongst the three countries
o Consumer debt as a percentage of GDP is 67.5%, which is lowest amongst the three
countries
o This suggest higher disposable income

 Social
o Unemployment rate is 6.2%, which is lowest amongst the three countries
o This suggest better standard of living
(You can also apply Porter Diamond if you feel easy)

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Answer 2B – Evaluate strategic and ethical implications due to planned shop closures (12+2 = 14
marks):

Strategic implications
(topic: divestment strategies / exit barriers)
 In case these outlets have positive contribution margin, then their closure may further
increase losses
 Closure may give wrong signal to customers that company is struggling
 Company will face “exit” barriers, such as
o Heavy staff redundancy payments
o Penalties in cancelling shop leases
o Legal liabilities
 As Centrum is an emerging economy, full withdrawal may lead of loss of future
opportunities

Ethical implications
(topic: you can refer to social footprints i.e. employees, customers, suppliers, society)
 Employees: Redundancies
 Customers: loyal / price sensitive customer will be affected
 Suppliers: reduction in our order volumes will adversely affect supplier’s size of
operations
 Society: heavy job losses in Noria will prolong the economic crisis as per Finance
Minister

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Answer 3 – Internal control issues and recommendations (12+4 = 16 marks):
(Source: Exhibit 3)

MEMO
FAO: Buying and Merchandising Director
From: Consultant
Subject: Internal controls and recommendations
Date: dd-mm-yy

This memo evaluates the effectiveness of internal control systems on the

procurement side and recommend control improvements

Weakness Improvements

 Most suppliers working with Smartwear Tough screening and tendering criteria should be
for more than 5 years implemented to ensure all suppliers are selected
on merit

 Buyers barely contact suppliers (culture Regular meetings and visits

of carelessness)

 Contracts awarded for a period of 3-5 Contracts should be awarded for shorter periods
years with fixed prices (except inflation). e.g. 1 year and should be tendered each year in
Prices not compared with market / order to ensure price competitiveness
industry / competition

 Poor working conditions and clear Stronger monitoring of compliance with ethical
contravention of general terms and practices and general terms and conditions
conditions agreement not noticed by agreed with suppliers
buying department

Surprise visits and audits

 Formal regular reporting mechanism Formal reporting mechanism should be

absent, hence Board is unaware of any implemented and a performance dashboard to
problems be presented in each board meeting

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Answer 4A– Benefits of CDMS (6+2 = 8 marks):

REPORT
FAO: Board of Directors
From: Sales and Marketing Director
Subject: CDMS and NPV analysis
Date: dd-mm-yy

This report describes the benefits of introducing CDMS and evaluates

NPV analysis

Benefits of CDMS
 Better availability of data and analysis
 Clear understanding of customer profile
 Better able to satisfy customer needs
 Better marketing strategies
 Increase in revenue and market share

Answer 4B– Analysis of NPV (10+2 = 12 marks):

Analysis of NPV
 Initial investment of $38m:
o What is the basis of initial capital outlay? Is it based on tender or quotation?
o Sales tax recovery not included as inflow in later years
o Five year maintenance cost shown in year 0 instead of being shown in respective years
 Additional contribution of $22m:
o What is the basis of this amount?
o Why this amount is constant / fixed throughout 5 years rather than being incremental
 Why is operating cost fixed throughout 5 years, despite 7% inflation in the economy?
 Why is interest payable on loan fixed throughout 5 years instead of reducing due to principal
repayment installments?

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Answer 5A– Benefits of Integrated Thinking (6+2 = 8 marks):

Slide 1:
Benefits of Integrated Thinking

 Provides better understanding of business to investors and stakeholders

 Considers social and environmental aspects in decision making

 Reduces cost of capital

Accompanying Notes:
(Bullet 1 link with institutional shareholders misunderstanding on strategy as per Exhibit 2)

(Bullet 2 link with mission statement and shop closure strategy)

(Bullet 3 link with falling share prices and dividend issue)

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Answer 5B – How IR provides more information (6+2 = 8 marks):

BRIEFING PAPER
FAO: CFO
From: Consultant
Subject: Integrted reporting
Date: dd-mm-yy

This briefing paper explain how IR provides more relevant information

for shareholders about creation of sustainable long-term value

 Define IR

 Talk about limitation of financial statements

o Only shows historic performance
o Focuses on financials only
o Does not talk about future strategies

 Talk about main contents of IR

o Analyzes external environment
o Future strategies
o How organization creates value
o 6 capitals (financial, manufacturing, intellectual, human, social, natural)

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