StrategyCSCA

and Competitive
®
Analysis Learning Series:
Case Studies – Sample Responses
What
 Dante is Strategy?..
Pharma Inc.
 QualChem Inc.
 Advoguard Insurance Company
 Schmidt Elektro AG (SEAG)
 HVC Technologies
 Intergistics Solutions
 Strategy and Competitive
Analysis Learning Series:

What is Strategy?..
CSCA®
Case Study – Sample Response
Dante Pharma Inc.

© Copyright 2017 Institute of Certified Management Accountants 2

Dante Pharma Inc. Sample Response:
1. Strategic Analysis

Dante Pharma is a relatively strong company in a profitable but somewhat mature industry. Its high number of
patents, diverse geographic market, and growing customer base give it a sound foundation for future growth.
The company also has a relatively strong financial position compared to industry standards and its competitors.
There are risks, however, and these risks could impact the company’s ability to sustain its growth in the future.

SWOT Analysis: Dante’s strengths include a significant number of patents (monopolizing market), a leading
diabetes medication, a customer base that is growing (baby boomer retirees in the U.S. who are living longer),
and diversification of customer base with customers in Europe and the Gulf countries. Dante has a relatively
good financial performance. It has an excellent return on equity and net profit margin, both better than average
and better than its main competitors. The debt to equity ratio is very high and much higher than the industry
average and the competitor numbers. This high level of debt can be an advantage in terms of leveraging profits,
but it also increases risk.

Dante’s weaknesses include exposure to several patents that will be expiring (opening up competition for these
medications), an older customer base (meaning that they will be customers for a shorter period of time than
younger customers), dependence on the U.S. market, and a high level of debt.

Dante faces the following risks: foreign exchange exposure, government regulation, competition from generics,
legal action, customers from politically unstable countries, high level of debt, risk inherent in medications,
expensive R&D, industry consolidation, pricing pressure, tax regulation, and the need to invest large sums of
money to generate future, uncertain cash flows from its new products.

Dante’s opportunities include acquiring a competing company that could provide additional sources of revenue
and more patents. Other opportunities include further investment in research to develop new patented
pharmaceutical drugs and expanding their market to other countries in Asia. Threats include the competition
from Canada, Turkey, and India; volatile economic conditions; and an unstable political environment in the
Middle East.

In summary, the strategic position of Dante is strong, and its performance looks sustainable. Smart risk
management and smart investment will help the company to grow and be successful.

Strategic decisions
Dante has a competitive advantage because it has patented products that cannot by law be copied, but this
advantage lasts only as long as the life of the patent. This is the reason it needs to constantly invest large sums
in R&D to generate new patents/products. This is also likely the primary motivation behind the planned
acquisition of Target Co., since this company seems to have a promising pipeline of new patentable drugs. The
company is faced with three main strategic decisions: the proposed acquisition, the level of investment in R&D,
and diversification of products and markets.

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Additional information that would be helpful in a strategic analysis is more information on the company’s risk
tolerance level, corporate culture, specifics on the changes in regulation, the level of competition from generic
drugs, more details on the proposed acquisition, demand prospects for other geographic markets, and related
products that they could produce given their current operations.

To make more definitive recommendations, I would need to review the detailed financial analyses and other
background information on the target company.

2. I recommend that Dante continue to invest heavily in R&D despite its heavy debt load. Without new
products, its growth and success will not last. The company should also undertake a study to determine which
market segments to target for product R&D. The goal would be to identify segments that will offer high growth
and also leverage Dante’s core research strengths. Debt can help finance its investment in R&D, which will
leverage its internal strengths while taking advantage of new opportunities. The corporate-level strategy should
be to continue its focus on the pharmaceutical business and not diversify into other businesses. Focusing the
company’s resources is important.

Given the information in the scenario, the acquisition seems to be justified, as it yields a positive NPV and
would expand the company’s product line while providing future cash-generating products. A potential problem
could be how the deal is financed since Dante already has a high level of debt. In addition, making the
acquisition could limit the funds available for R&D. From a qualitative perspective, the culture seems to be a fit
and an acquisition would have the effect of lessening competition and leveraging costs. There are always risks
with mergers and acquisitions, including difficulty merging operations and employee morale issues. Overall,
however, on the basis of the limited information provided, the acquisition is recommended.

3. In terms of implementing the strategy, the first thing that should be done is ensuring that all decisions align
with the company’s mission and vision. Also, a detailed financial analysis should be done for each of the
decisions. If the financials work, the company also should ensure that nonfinancial factors have been
considered. For example, how will the acquisition affect morale? The senior leadership team should then review
these strategic initiatives with the Board of Directors as part of their annual strategic planning process. Once the
Board has agreed to the strategy, the plan should be linked to the annual financial plan. To deploy the strategy, a
communication plan should be set to ensure all staff understand the strategy and buy into it. Strong leadership
will be required if major changes are going to take place and prioritization will likely be needed as well. Since
Dante is a large, established company, it may be slow to change from both an operational and employee
perspective.

4. To report the results of the strategy, I recommend the balanced scorecard performance measurement model.
In addition to financial results, this model reports on customer satisfaction, internal business processes, and
learning and growth. The balanced scorecard presents the whole picture of results, not just the bottom line. It
also presents a longer-term view, because if customer satisfaction and business processes are not doing well,
future financial results will suffer. The balanced scorecard also shows linkage to the strategy and among the
different levers of growth. For sustained positive results, all perspectives should be doing well. This model also
serves as a good communication to staff, giving them a “balanced” view of results, and identifying areas that
might need improvement. There are many possible KPIs that Dante could use for each perspective, but they

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should limit the number of KPIs to a reasonable number. One suggestion for each follows: financial perspective
= profit margin; customer perspective = market share on three leading medications; internal business process
perspective = number of new patents; learning and growth = employee training hours.

NOTE: Alternate interpretations of the scenario and data would be acceptable assuming that the responses
reflect well-conceived analysis and recommendations that are logical and well-written.

© Copyright 2017 Institute of Certified Management Accountants 5

 CSCA®
Case Study – Sample Response
QualChem Inc.
QualChem Inc. Sample Response:
Q1. Strategic Analysis

SWOT Analysis:

QualChem’s strengths include:

 Product advantages, such as the patent and USDA approval for Blue Miracle, unique environmental
advantages (safe, lower temperature cleansing, no banned ingredients), and workplace advantages
(odorless)
 Capabilities for chemical tolling, formulating, processing, packaging, laboratory services, sourcing
chemicals, and supply-chain management
 Highly qualified and experienced employee base
 Experience launching private-label products for others
 Experience raising capital through stock and bond offerings
 Contacts within the poultry industry and knowledge of the poultry industry
 Goal alignment through stock-based compensation for key staff

Weaknesses include:
 Financial challenges, including profitability shortfall, high overhead, and cash shortages
 No success with the big poultry producers
 Underdeveloped sales function
 Governance; the board of directors is small and composed of “insiders”
 The vision and strategic objectives are not clearly defined; the mission is tied to the old business and not
the new opportunities

Opportunities include either new or further penetration into the following markets:
 Big, national poultry producers
 Small, regional poultry producers
 Small, organic/natural poultry producers
 Beef, pork, dairy, seafood producers
 Producers interested in corporate social responsibility and environmental sustainability
 Foreign markets

Threats to the company include:

 The further decline in legacy contract manufacturing business
 Aggressive pricing by competitors could put further pressure on margins in the legacy business
 Employees may demand higher salaries or defect to competitors
 Ability to raise further “tranches” of financing is not guaranteed
 Activist shareholders may force action to improve the stock price – or sale of the company to a
competitor – before the potential for Blue Miracle is realized

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Environmental Scan:

QualChem is a publicly-traded, mature company that has experienced well-qualified employees with a low
turnover rate. The company has an established customer base for legacy contract manufacturing business, but
not for the new product. Profits are declining and cash flow is a problem. It is getting more difficult to compete
in the legacy business. There are idle, underutilized resources and the company has a large investment in
specialized equipment. The company’s new product is patented and has USDA approval.

Using PESTEL to analyze the company’s external environment shows the following:
 Political
o There are country-specific regulations governing the import and export of food products
o The company has to abide by international trade agreements
 Economic
o The rising middle class in developing economies is creating demand for meat and poultry
 Social
o Consumer demand for organic and natural products is increasing
o Workplace comfort and safety concerns are important
 Technological
o Established bacterial control systems are in place in poultry plants, including automation
 Environmental
o Sustainability initiatives are growing
o There is continued pressure to reduce energy consumption
 Legal
o As a public company, it has SEC requirements
o OSHA safety requirements must be followed
o Product liability and product safety must be considered
o Intellectual property and patent protection laws must be followed

Note: using multiple models/tools in the response is not required.

Another tool that could be used to analyze the company’s strategic position is Porter’s Five Forces.

Competitive Analysis using Porter’s Five Forces:

Competitors – Competitive rivalry among existing chemical suppliers to the poultry producers is high – three
well-established manufacturers dominate – and it will be very difficult to break through in this market.
Competition is also high in the legacy contract manufacturing and chemical distribution business as a result of
industry consolidation and the emergence of competitors in low-cost regions.

Customers – Bargaining power of customers is high. Chemicals like chlorine are commodities and the poultry
producers pit the existing competitors against each other in order to get the best price. The largest customers are
highly competitive with each other and benchmark against each other. The customers are skeptical and resistant
to changing to Blue Miracle. The leading poultry producers may be locked in a battle of hyper-competition
where they copy each other’s best practices and settle for generic solutions.

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Suppliers – Supplier power does not seem to be an important factor. The chemicals involved are readily
available. QualChem is experienced in supply-chain management and has a strong competence in sourcing
component chemicals.

New Entrants – Large capital costs are required to establish a chemical manufacturing and distribution
operation. New chemical treatments would have to gain USDA approval. QualChem has passed these barriers
and is attempting to gain a foothold as a new entrant in the poultry production supply chain. Established
suppliers dominate and QualChem cannot profitably match their pricing for commodity chemicals.

Substitutes – Switching costs for the customers are high, including OSHA approval, re-engineering of the plant,
and retraining of plant personnel. QualChem is attempting to introduce Blue Miracle as a substitute for
commonly-used chemical treatments.

Strategic Decisions That Must Be Made:

1) What is the focus for Blue Miracle business development? There are many directions in which QualChem
could go with this promising product, but if it pursues too many opportunities at once, it will dilute its
efforts and may not be successful in any.
a. Large poultry producers or smaller, regional producers, or organic/natural producers
b. Domestic or global
c. Poultry only, or branch into other food industries
2) How can the company improve cash flow? Opportunities include:
a. Raise additional cash through debt or equity offerings; but this could possibly dilute existing
shareholder value; at some point it will become impossible to raise additional cash through
public or private placements if prospects for profitability do not improve
b. Continue or exit contract chemical tolling/manufacturing, as prices do not cover full
manufacturing cost
c. Cost control/overhead reduction: explore possibility of layoffs and selling the manufacturing
plant

Additional Information Needed:

Additional information that would be helpful in a strategic analysis is more information on the company’s risk-
tolerance level, corporate culture, specifics on possible changes in regulation, and more information of the
economic opportunity in emerging markets overseas.

Additional information that would be helpful in formulating a strategy includes a detailed set of pro forma
financial statements for the company as a whole, for the Blue Miracle chemical, and for the proposed
opportunities.

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Q2. Formulate one or more strategies for the company.

A candidate could suggest one or more of the following strategies:

 Match strengths with opportunities by continuing to focus on domestic poultry producers, but move
attention to smaller organic/natural brands. Those brands are not locked in the hyper competition
characteristic of the large producers, and are competing on factors other than price. Blue Miracle’s
advantages are more aligned with their own strategies. The companies may be more agile and able to
introduce new practices more easily, such as changing over the chemical approach for part or all of a
plant. It may be easier to get the attention of higher-level decision makers with broader responsibilities
who will be interested in the energy savings, yield gains, and labor productivity that would result from
lower temperature cleaning.

 After successfully gaining a solid reputation with a representative sample of small, domestic
organic/natural poultry producers, the company can use this base to explore opportunities in other food
production – beef, seafood, etc. It can also explore opportunities to supply poultry producers in other
countries, including emerging markets where production plants are being newly established. There will
be new regulatory hurdles to meet before QualChem can successfully expand into these markets.

 QualChem must reorganize and focus all of its resources on bringing Blue Miracle successfully to
market. The company seems to have recognized that its future is not in chemical contract manufacturing.
The structure of the industry has changed and QualChem is no longer competitive in that business.
However, QualChem continues to be burdened with its legacy manufacturing plant and employs a
significant and expensive staff that supports the old business model. Production and staffing should be
downsized to improve profitability. The current investors bought into the Blue Miracle story and
potential, and the company must move rapidly to the new business model.

 To raise cash and reduce overhead, sell the legacy contract manufacturing business and plant to an
industry competitor, negotiating favorable terms for the ongoing processing of Blue Miracle by the
acquiring company.

 Until the plant can be divested and/or layoffs executed, QualChem should accept chemical
tolling/manufacturing orders that cover variable costs and make positive cash contributions, even though
they may not cover full cost including overhead.

Q3. Implement the strategy.

To implement the recommended strategies, I recommend that QualChem do the following:

 Redefine the Vision and Mission of the company to focus on safety of the food supply.
 Rebrand and improve the website to communicate the new strategy.
 Communicate Core Values that emphasize safety and reliability.
 The CEO must work to ensure that the strategy message is clear and consistent to all stakeholders
including employees, customers, and investors.

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  Create long-term and short-term goals to guide the path to success.
 Lay off underutilized plant workers.
 Engage all remaining employees in the new mission/strategy.
 Hire new business development staff to focus on the multitude of smaller poultry processors.
 Pay careful attention to staff morale through all these changes. QualChem must build a new company
culture, and the human side of change management will be critical to success.

Q4. Performance measurement model.

To report on the results of the strategy implementation, I recommend the use of a balanced scorecard. The
Balanced Scorecard (BSC) provides an effective framework for a strategic management system.
In a classic BSC framework, goals are established for financial results, customer growth and satisfaction,
internal process efficiency, and learning. Tactical plans are established to reach each goal, and responsibility is
assigned. Key performance indicators are agreed to in advance. Linkages and dependencies among tactics can
be illustrated with a strategy map.

KPIs to monitor progress toward the strategic goal of establishing a base of satisfied customers in the domestic
organic/natural poultry processing industry (customer perspective) could include:
 number and quality of customer contacts established
 number of deals closed
 number of supply agreements implemented
 satisfaction level of established customers

Potential KPIs for the other balanced scorecard perspectives are as follows:
 Learning and growth perspective – employee training hours
 Financial perspective – Return on Investment
 Internal businesses process perspective – average time from placing an order to completion

Incentive compensation can be designed to further support completion of the KPIs.

NOTE: Alternate interpretations of the scenario and data would be acceptable assuming that the
responses reflect well-conceived analysis and recommendations that are logical and well-written.

© Copyright 2017 Institute of Certified Management Accountants 11

 ®
CSCA
Case Study – Sample Response
Advoguard Insurance Company

© Copyright 2017 Institute of Certified Management Accountants 12

Advoguard Insurance Company Sample Responses:
1. Strategic Analysis

Porter’s Five Forces Analysis:

Threat of new entrants. It is not easy to enter the insurance industry. The threat from the outside is low;
however, there is a threat of other large financial services companies entering the market.

Power of suppliers. Suppliers for the insurance industry are the human resources and capital. The only real
threat here is other companies enticing employees with expertise to join their companies.

Power of buyers. Individual consumers do not have a lot of power, but large corporate customers do.

Availability of substitutes. Competitors can offer many substitutes, so the threat is high.

Competitive rivalry. The insurance industry can be highly competitive. The difference between companies is
not great, and as a result, insurance has become like a commodity. Instead of differentiated products, companies
tend to compete on price, which means companies with a low cost structure, efficient operations, and excellent
customer service can beat the competition.

SWOT:

Strengths include steady growth, consistent profitability, Excellent rating from A.M. Best (A), and solid
reputation.

Weaknesses include small profit level, highly competitive market with price competition, premiums for P&C
insurance declining, conservative investment strategy, and a market focused exclusively on the U.S.

Opportunities: Expanding into different countries and the possibility of leveraging products to make additional
sales to a new group of consumers. Another opportunity is the possibility of realizing cost economies from a
higher volume. Advoguard could also locate customer service overseas at a lower cost.

Threats: Advoguard is threatened by larger, better capitalized, and more profitable competitors. The company
faces the potential threat of a hostile takeover as its size and performance would make a takeover defense
difficult. Advoguard also faces the threat of continued profitability erosion as more insurers compete on a price
basis. Further, the company faces the threat of new products that could be launched by more risk-tolerant
competitors and technology-driven entrants.

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Strategic decisions that must be made:

1. Should Advoguard diversify into other related businesses?

2. Should Advoguard expand into markets outside the U.S.?

Additional information needed:

Additional information that would help prepare a strategic analysis: more detailed information on Advoguard’s
financial situation, a competitive analysis, outlook for other related product lines, and identification and analysis
of potential overseas expansion.

Additional information that would help formulate a strategy: detailed financial projections of how adding a new
product line would impact the bottom line, an acquisition analysis, risk analysis of entering new markets
overseas.

2. Strategy Formulation

I recommend that Advoguard undertake the following strategic initiatives:

Home Business Insurance:

Advoguard should exit the home business insurance line as it is relatively small and not very profitable. The
company has few competitive advantages in this area (possibly the ability to leverage its sales force), and there
is no indication that this line of business has significant potential for increased sales growth or improved
profitability. Advoguard should try to sell this division to a competitor. If this is not feasible, it should wind the
business down and redeploy resources.

Diversification:
The recommendations of the VP of Planning to diversify products and markets could increase revenue growth
and profitability for NAC. Advoguard could leverage its distinctive competencies through diversification; using
the expertise in P&C insurance to enter the life insurance market. There are two ways of doing this: either
through organic growth or acquisition of other companies. Either means, or a combination of the two, could
help Advoguard achieve its goals. I would recommend an acquisition of a global multiline insurance company.
This would enable the company to quickly enter the new lines of business and the global market.

Advantages of diversification include:

 Leveraging distinctive competencies for another related industry. Many of the competencies developed
in running the P&C business could be used in the life insurance industry as well.
 Economies of scope. A new line of business could share resources with the P&C line of business. For
example, Advoguard could use its current distribution channels to sell life insurance and annuities, too.
 Product bundling. A company can differentiate itself by offering a related bundle of products. For
example, Advoguard could offer a package deal – buy life insurance and receive a discount on liability
insurance.
 Diversification creates new revenue sources and can generate more cash.

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International Expansion:
Opportunities for Advoguard expanding into different countries include the possibility of leveraging products to
make additional sales to a new group of consumers. Another opportunity is the possibility of realizing cost
economies from a higher volume. Advoguard could also locate customer service overseas at a lower cost.

The risks of entering global markets can be managed but not eliminated. For foreign currency risk, Advoguard
can use currency futures contracts or options. Other risks can be managed by hiring local personnel and
partnering with already established companies in the region. Risks can also be mitigated by ensuring the
company has done due diligence researching the market, so that it is delivering what the market wants. An
investment of time and patience can lower the risk and increase the probability of success.

Investment Policy:
The advantages of a conservative investment policy for an insurance company are significant. Insurance is an
inherently risky business, and it is necessary to maintain sufficient reserves to pay claims as policyholders count
on the company to have the ability to do so even if something catastrophic were to occur. An overly
conservative investment strategy, however, could hinder growth potential. Being able to invest in riskier
investments would likely yield a higher return that would provide additional funds to expand. I recommend that
Advoguard adjust its investment philosophy to make it a little more aggressive.

In summary, Advoguard needs to expand operations to achieve higher levels of revenue growth, which in turn
will lead to a higher stock price.

3. Implementation:

Implementing the diversification of products and markets strategies could be a challenge. The company has
been in business for 55 years, and insurance companies tend to be conservative. The first thing that should be
done is ensuring that all decisions align with the company’s mission and vision. Also, a detailed financial
analysis should be done for each of the decisions. If the financials work, the company also should ensure that
nonfinancial factors have been considered. For example, how will the changes affect morale? The senior
leadership team should then review these strategic initiatives with the Board of Directors as part of their annual
strategic planning process. Once the Board has agreed to the strategy, the plan should be linked to the annual
financial plan. To deploy the strategy, a communication plan should be set to ensure all staff understand the
strategy and buy into it. Strong leadership will be required if major changes are going to take place and
prioritization will likely be needed as well. Since Advoguard is a large established company, it may be slow to
change from both an operational and employee perspective.

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4. Performance measurement:

To report the results of the strategy, I recommend the balanced scorecard performance measurement model. In
addition to financial results, this model reports on customer satisfaction, internal business processes, and
learning and growth. The balanced scorecard presents the whole picture of results, not just the bottom line. It
also presents a longer-term view, because if customer satisfaction and business processes are not doing well,
future financial results will suffer. The balanced scorecard can be linked to a strategy map and also shows
linkage to the strategy and among the different levers of growth. For sustained positive results, all perspectives
should be doing well. This model also serves as a good communication to staff, giving them a “balanced” view
of results, and identifying areas that might need improvement. There are many possible KPIs that Advoguard
could use for each perspective, but it should limit the number of KPIs to a reasonable number. One suggestion
for each follows: Financial perspective = profit margin; Customer perspective = market share for each of the
different product lines; Internal Business Process perspective = Number of new products; Learning and Growth
= Employee training hours.

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 CSCA®
Case Study – Sample Response
Schmidt Elektro AG (SEAG)

© Copyright 2017 Institute of Certified Management Accountants 17

Schmidt Elektro AG (SEAG) Sample Response:
1. Strategic Analysis

SWOT
This strategy tool represents a framework for analyzing a company’s strengths, weaknesses, opportunities, and
threats. SWOT provides a framework to analyze both the internal and external factors facing a business. SWOT
analysis can be used as a tool when developing and aligning company strategy, goals, and mission.

With regard to strengths, SEAG has a CEO who has grown up in the business and has experience in all areas of
the operation. This second-generation CEO has shown a strong ability to compete and achieve success in a
marketplace that contains larger competitors. He has shown a strong ability to lead the company forward in a
transformation to the electric power tool business, and has led the company in achieving a relatively large
market share with both its drill and sander products.

SEAG displays weakness in some of its operational aspects. The company must become more focused on
improving efficiency in the production processes, improving on-time deliveries, and ultimately improving
customer satisfaction. SEAG has a clear weakness in its lack of training, which could ultimately prevent success
in the future if proper initial and ongoing training is not implemented.

SEAG has opportunity to expand. The company has the opportunity to increase control over its value chain
through the acquisition of PEM, its electric motor supplier. SEAG also has the opportunity for growth through
international expansion. The financial press has forecasted potential for significant growth in emerging markets.

SEAG also faces threats. The company competes in a market with larger competitors. These larger competitors
may try to engage in a pricing battle in the electric power tool marketplace. The larger competitors may benefit
from economies of scale, and thus have a cost advantage that could be leveraged in a pricing battle with SEAG.
SEAG could also experience threats from foreign competitors, as well as existing competitors, if it moves into
international markets. These competitors may have more knowledge of the international markets and thus better
strategy for specific markets (such as emerging markets).

Value Chain Analysis

The value chain is comprised of all activities that add value to the products or services of a company. Value
chain analysis describes the process of analyzing how activities contribute to the value of the products or
services of a company. The value chain is generally comprised of six steps: research and development, design,
production, marketing, distribution, and customer service.

SEAG’s manufacturing process is clearly inefficient. Moving the work in process around the plant floor is a
major non-value-added activity. This needs to be corrected. The plant floor needs to be evaluated to determine
the best possible layout. Mapping the value chain and identifying the best placement for machinery, equipment,
and tasks is essential. It is clear there is no reason for the current layout. The layout should be reconfigured after
a thorough analysis of the value chain. SEAG needs to improve initial and ongoing training to help ensure
production efficiency and quality. This will help to ultimately improve customer satisfaction.

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BCG Growth Matrix
 The drill is a star because it has a high relative market share and the market growth rate is high.
 The saw is a question mark because it has a low relative market share and the market growth rate is
high.
 The sander is a cash cow because it has a high relative market share and the market growth rate is low.
 The router is a dog because it has a low relative market share and the market growth rate is low.

Strategic Decisions
SEAG’s overarching strategic decision is:

 How to maximize company growth and profitability over the long term?

Specific strategic decisions that can be addressed include:

 How to optimize the product portfolio and which products/categories to invest in?
 Whether to acquire PEM?
 If the decision is made to acquire PEM. what should SEAG’s financing strategy be?
 How to approve manufacturing efficiency?
 Should SEAG expand internationally? Should SEAG focus on emerging markets?
 If so, what strategy should be implemented to maximize returns and manage risk?

Additional Information Needed

Additional information that would be helpful in the strategic analysis of SEAG includes: detailed financial data
on SEAG and its competitors and an evaluation of economic conditions in the European Union and the relevant
overseas target markets. Additional information that would be helpful in formulating a strategy includes:
detailed financial data for PEM, synergies that could be realized with an acquisition, and estimated cost savings
that could be realized with further vertical integration.

2. Recommended Strategies

Expansion poses many potential opportunities and challenges for SEAG. Acquiring PEM or expanding
internationally could provide significant benefits to SEAG.

SEAG has been successful in transforming from a basic hand tool company to an electric power tool company.
The company has shown it can successfully compete with larger competitors. The company has won significant
market share in both its drill and sander products. These successes could be leveraged through expansion. The
acquisition of PEM could allow SEAG to have more control over its value chain, and more control over
expanding production capabilities through capital expenditure decisions. If SEAG wants to grow, it must have
the ability to ensure enough electric motors are produced to meet demand. International expansion could lead to
significant increases in demand, which would require significantly more electric motors. The success of the
company’s drills and sanders may expand through international markets.

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From a financial point of view, which is based on the financial data provided, the acquisition of PEM looks
promising. PEM has displayed strong financial performance relative to its industry peers. PEM’s Return on
Equity, Gross Profit Margin, and Net Profit Margin, are all above the industry averages. Furthermore, PEM’s
Net Profit Margin is the highest relative to its major competitors. PEM has a Debt to Equity percentage that is
above the industry average; however, SEAG has very little debt. Based on the strength of PEM’s overall
financials, it appears the company has effectively used its debt. SEAG would need to conduct a full financial
analysis on PEM and the deal terms of the acquisition.

As SEAG considers and evaluates the opportunity to acquire PEM, it is important to understand the type of
integration this acquisition would represent and the potential advantages that this type of acquisition could offer
SEAG.

If SEAG were to acquire PEM, it would represent a backward vertical integration. Vertical integration is a
strategy whereby a company expands its business to include multiple parts of the distribution channel or value
chain. Backward vertical integration is commonly exemplified when a company purchases a supplier.
Therefore, if SEAG purchases its supplier, PEM, this would represent backward vertical integration.

SEAG could potentially recognize benefits or advantages if it were to engage in a vertical integration strategy to
acquire PEM. SEAG could realize cost savings by removing the intermediary mark-up. SEAG could also help
to ensure future competitive and differentiation advantages through becoming the only company to have access
to the high-quality PEM electric motors. Possibly the most important advantage is that SEAG could gain a
larger amount of control over the entire value chain. SEAG would have total control over the operations of the
electric motor production. Although it would be critical to retain competent PEM employees, and develop the
knowledge of SEAG’s staff regarding the electric motor operations, this new control could be very
advantageous for SEAG. This control would allow SEAG to better ensure that the required electric motors are
produced and available for tool production when needed. This control is particularly important if SEAG decides
to expand internationally. International expansion could require the need for production of significantly more
electric motors. If SEAG owns the motor production aspect of the value chain, then the company has control
over capital expenditure decisions regarding building out the electric motor production facilities. This potential
expansion of the motor production facilities could include both the increased size of the facilities as well as the
location of the facilities, which could be international.

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3. Implementation
Regarding the financing of a potential acquisition of PEM, a full financial analysis would need to be completed,
including analysis of the debt on PEM’s books, as well as analysis of the purchase price. However, based on the
data provided, SEAG currently has a low amount of debt on the books. Since SEAG would be able to acquire
debt financing at a low interest rate, and because of the tax benefits of debt, taking out a loan to finance the
acquisition may be the best alternative. Although issuing new shares would allow the company to maintain
lower debt and interest obligations, the dilution to current shareholders could pose a negative effect on long-
term shareholder value. SEAG has a relatively strong cash flow and appears to be in a good position to cover
the additional debt obligation. However, the requirement to cover the interest and principle obligations of
additional debt could put a financial strain on SEAG if the business, or overall economy, experiences difficulty.
A full analysis of the financing alternatives, as well as a full analysis of both SEAG and PEM, must be
conducted before making financing decisions.

As SEAG considers and evaluates the potential opportunities of international expansion, the Board and
management of SEAG should consider many factors and utilize a framework or tool to help guide this process.
SEAG can utilize PESTEL analysis to analyze macro-environmental issues that affect entire economies, not just
specific markets. PESTEL analysis can be used by SEAG to evaluate factors outside of the internal workings of
the company, including Political, Economic, Social, Technological, Ecological, and Legal.

Finally, as SEAG moves forward, it is imperative to have quality governance in place. Decisions on expansion,
particularly complex international expansion, must be made in a manner that is in the best interest of
shareholders. SEAG must carefully and thoroughly analyze all opportunities and challenges before committing
to expansion. SEAG needs to keep focused on both internal and external factors. Before expansion, SEAG must
address its operational issues and improve both initial and ongoing training for employees. It is imperative that
SEAG improve operational efficiency, productivity, and quality. This will help to ensure improved on-time
deliveries and customer satisfaction. External factors such as Political, Economic, Social, Technological,
Ecological, and Legal must be considered in the evaluation of expansion opportunities. SEAG should purchase
market research to help identify the best geographic regions for expansion, as well as the specific products to
market. The company must gain a deep understanding of the financial and cultural aspects that could affect the
business opportunity. These elements are critical to the opportunity evaluation process.

4. Performance Measurement
A balanced scorecard is a system of performance evaluation that considers both operational and financial
performance measures. The balanced scorecard utilizes four different perspectives to evaluate performance:
Financial, Customer, Internal business process, and Learning and growth. The financial measures are
considered lagging indicators and the nonfinancial measures are considered leading indicators. All
indicators/measures should be linked to SEAG goals and strategy. Developing, implementing, and utilizing a
balanced scorecard will allow SEAG to focus not only on lagging financial indicators, but also on those leading
indicators that align with long-term execution of strategy. By developing and implementing a balanced
scorecard, SEAG can improve its clarity of strategy. The scorecard can help SEAG identify, measure, and
monitor key indicators that lead to future success and achievement of long-term goals and strategy. SEAG
should establish key performance indicators to measure factors that correlate with company strategy, and
compare actual performance to the scorecard to identify areas that need improvement.

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  For the Financial perspective, SEAG could implement KPIs such as sales growth, ROI, and profit.

 For the Customer perspective, SEAG could implement KPIs such as customer satisfaction survey
ratings, % on-time deliveries, quantity of repeat customers, and market share.

 For the Internal business processes perspective, SEAG could implement KPIs to evaluate business
processes and internal operations that are critical to achieving customer satisfaction and financial goals.
KPIs for the internal business processes perspective could include number of defects, product quality
survey ratings, quantity of warranty claims, number of new products (measure for innovation), and
manufacturing efficiency.

 For the Learning and growth perspective, SEAG could implement KPIs to evaluate employee
knowledge, skills, and motivation by measuring factors such as employee satisfaction (survey rating),
hours of training, and turnover.

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 CSCA®
Case Study – Sample Response
HVC Technologies

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HVC Technologies Sample Response:
1. Strategic Analysis

HVC’s strengths include its established market position in both the lasers and the coatings manufacturing
business. The synergies between the coatings services and coatings manufacturing business are an important
factor, too. This potential synergy, i.e., the ability to use its expertise in the manufacture of coatings equipment
to boost the value-add associated with coatings services, is a potential core competence for HVC Technologies
and provides a way to differentiate itself from its rivals. HVC’s weaknesses include its lack of growth, primarily
as a result of its positioning in markets or market segments that are not growing. In addition, the company faces
short-term pressure that might inhibit its ability to focus on long-term objectives.

HVC Technologies needs to consider the following factors about its environment. The lasers market is changing
with increased focus on standardized machines. This is important for HVC because HVC is not represented in
this market segment. Tapping into this growth will require incremental investment in new product lines.
Additionally, the overall coatings market, i.e., encompassing both the manufacture of machines and the
provision of services, is on the verge of significant changes. Customers are moving away from rendering the
service internally and shifting towards outsourcing. In general, the use of coatings is expected to grow and
expand into markets where it has not been applied in the past. This expansion thus creates the potential for
consolidation in the services industry at a geographic level. It is also resulting in new markets for coatings,
particularly high-value coatings.

HVC Technologies has several strategic decisions to make. It must decide how to address its individual
businesses, i.e., lasers manufacturing, coatings equipment manufacturing, and coatings services. In addition, it
must decide whether to continue this mixture of businesses, even though the synergies between them are
limited, or make changes. It must finally decide whether to move away from a purely manufacturing focus and
boost the importance of services.

Three strategy tools will help HVC make these decisions. First, a SWOT analysis can be prepared. A SWOT
analysis covers the internal (strengths and weaknesses) and external (opportunities and threats) factors that
influence a firm’s strategy. Strengths include HVC’s strong market positions in lasers and coatings
manufacturing, HVC’s strong reputation for quality in lasers, and potential synergies across business segments.
Weaknesses include slow growth and a lack of external financing power. Opportunities include new markets for
coatings and the standardized laser segment. Threats include the potential for pricing pressure in the stagnant
coatings machines manufacturing segment and the possibility of increased competition in coatings services.

Second, a GE/McKinsey matrix can be developed. This is a portfolio planning model that provides a graphic
representation of the individual lines of business within a multibusiness company and the relative attractiveness
of each business segment as a source of profit. Each business is evaluated in terms of its market attractiveness
and its competitive advantage. These two overall criteria are then judged as a basis for allocating capital. The
judgment involves deciding whether to divest, hold, or build the business. A third model is the BCG growth-
share matrix, which is a tool to analyze the attractiveness of a business and a company’s competitive positioning
therein. It provides a foundation for competitive positions and developing business strategies. Under the BCG
growth-share matrix, the business of a company is assigned to four potential categories – dogs (low market

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share and low industry growth), stars (high market share and high growth), cash cows (high market share but
low growth) and question marks (low market share and high growth).

Additional information that will be helpful to prepare the decision includes HVC’s financing capabilities. As
financing is usually not unlimited, the company will have to consider trade-offs between its various strategic
alternatives. It would also be beneficial to acquire industry segment data showing the market share for all
competitors in major markets. Information on management’s appetite for risk would also be helpful.

2. Strategy Formulation

HVC Technologies should implement the following strategy to create a competitive advantage. It should sell the
laser business and invest the proceeds in a horizontal integration strategy in the coatings service business to
boost its market share and expand its geographic reach, i.e., acquire providers of coatings services around the
world. While doing so, HVC should reposition itself as a global provider of high-quality coatings solutions
covering the entire spectrum of activities related to coatings – ranging from the manufacture of coatings
equipment, the development and formulation of highly-specialized coatings materials on behalf of customers, to
providing coatings services to third-party customers who outsource this activity. HVC should differentiate itself
from competitors in the coatings service business by emphasizing its expertise in the development of the
coatings material and thus focusing on high-value-add services. In other words, the two segments can exploit
synergies. HVC should differentiate itself from other manufacturers of coatings equipment by emphasizing that
it also offers coatings services, i.e., it is familiar with the needs of the users of coatings services. In other words,
here, too, the two segments can exploit synergies. Finally, HVC should segment its business by focusing on any
company that currently is or potentially can use high-value coatings services through outsourcing. It should also
take a global view, i.e., not limit the scope of its services to particular regions. This means HVC should aim to
cover all potential customer industries and localities where a need exists for high-value coatings services.

This strategy is based on the following considerations. The market for coatings services is fragmented with
many regional players. There is no global provider at the moment. HVC can become this global provider and
thus exploit the global diversification it already has for its manufacturing activity. This approach will create a
competitive advantage over companies with a regional focus. In addition, the fragmented nature of the coatings
service market makes it ideally suited for a horizontal integration strategy. Such a strategy involves purchasing
competitors that compete in the same line of business, i.e., in this case other providers of coatings services.
HVC will benefit by expanding its geographic reach and increasing its capacity to exploit one of its key
competitive advantages, its expertise in the planning and research into the development of the coatings material,
which is derived from its manufacturing business. Finally, adding the coatings service business will create
economies of scale for HVC’s service business, particularly with regard to the specialized expertise needed
regarding coatings materials.

3. Implementation

I recommend taking the following steps to implement the strategy.

The following actions should be taken for the lasers business prior to the sale:
 The lasers business needs to be made as independent as possible so that accountability for the lasers
business is clearly defined and tactical actions are aligned with the strategy to divest the business.

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  Management and employee compensation should be made solely dependent on the performance of the
lasers business; the lasers business should be allowed to operate within the HVC Technologies Group in
a completely independent manner, and the management of the lasers business should be given the
authority to organize and manage the business as if it were already independent of the HVC
Technologies Group.
 These authorities should be openly communicated to the employees of the lasers business so that they
see themselves as part of a different company. This open communication is important as a means to
engage them and gain their commitment towards the divestment of the lasers business.

The following actions should be taken for the coatings business:

 A management team equivalent to the management team of the coatings manufacturing business should
be appointed for the coatings services business. This team should report directly to HVC Technology’s
executive management. This will ensure that responsibility is clearly defined and the strategic
importance of the coatings services business is given appropriate focus.
 Employee variable compensation should be based 50% on the employee’s operating unit (services or
manufacturing) and 50% on the overall group’s results. This will align the employee’s compensation to
a controllable metric (results of the employee’s operating unit) while encouraging cooperation with the
respective other operating unit. This cooperation is needed to ensure that synergies are exploited
between the two units regarding the development of high-value services.
 A strategy map and balanced scorecard should be prepared to link strategic objectives to operational
performance. This will improve performance measurement and communicate objectives. This is
important as a tool to avoid excessive focus on short-term goals to the detriment of long-term goals. This
is a significant risk if there is a significant change in a company’s business model.

4. Performance Measurement

HVC Technologies needs to develop a performance measurement model that focuses on the short-term financial
objectives without losing sight of the longer-term objectives that it must achieve when making significant
changes to its business model. I recommend using a balanced scorecard combined with a strategy map.

A balanced scorecard is a tool that creates a framework to integrate financial and strategic goals, which can then
be cascaded down into the organization. The balanced scorecard needs to focus on:
 how the shareholders view the company, i.e., revenue and EPS growth over the short term;
 how customers see the company in terms of its development as a provider of high-value coatings
services; and
 the critical success factors that must be achieved to manage the transition from being a manufacturer to
becoming a global provider of high-value coatings solutions. These metrics include the margin earned
on coatings services, and the growth in coatings services revenue.

The balanced scorecard utilizes four different perspectives to evaluate performance: Financial, Customer,
Internal Business Process, and Learning and Growth. The financial measures are considered lagging indicators
and the nonfinancial measures are considered leading indicators. All indicators/measures should be linked to the
company’s goals and strategy. HVC should establish key performance indicators (KPIs) to measure factors that

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correlate with company strategy, and compare actual performance to the scorecard to identify areas that need
improvement.

 For the Financial perspective, HVC could implement KPIs such as sales growth, profit, and ROI.
 For the Customer perspective, HVC could implement KPIs such as customer satisfaction survey ratings,
percentage of on-time deliveries, quantity of repeat customers, and coatings service market share.
 For the Internal Business Processes perspective, HVC could implement KPIs to evaluate business
processes and internal operations that are critical to achieving customer satisfaction and financial goals.
KPIs for the Internal Business processes perspective could include defect rate, product quality survey
ratings, quantity of warranty claims, number of new products (measure for innovation), and
manufacturing efficiency.
 For the Learning and Growth perspective, HVC could implement KPIs to evaluate employee
knowledge, skills, and motivation by measuring factors such as employee satisfaction (survey rating),
hours of training, and turnover.

A strategy map is a tool that links the relationship between strategic actions and overall goals. It is used to link
strategic planning with operational implementation. This link is important for HVC Technologies because there
may be pressure to focus on short-term results to the detriment of long-term objectives.

© Copyright 2017 Institute of Certified Management Accountants 27

 CSCA®
Case Study – Sample Response
Intergistics Solutions

© Copyright 2017 Institute of Certified Management Accountants 28

Intergistics Solutions Sample Response
1. Strategic Analysis

SWOT
An appropriate strategic planning tool to analyze Intergistics is a SWOT analysis. A SWOT analysis provides
an evaluation of the internal factors (strengths and weaknesses) and external factors (opportunities and threats)
impacting a company’s strategy. A SWOT analysis of Intergistics is as follows.

The company’s strengths include its market leadership in air freight; its expertise at horizontal integration; its
business model, which is portable and can be easily applied to new businesses; its expertise at freight
forwarding of high-value, small-scale manufactured items; and its close interaction with its customers through
its key role in the customer’s logistics process. Its weaknesses include that its business is inadequately
diversified; its customer segmentation is narrow with customer base limited to manufacturers; disagreement
internally among senior management and the board regarding the company’s strategy going forward; problems
integrating a company; and its current strategy to achieve growth through horizontal acquisitions based on
stock-based transactions is at risk because the company’s stock price is declining. The company’s opportunities
include the potential to expand into e-commerce businesses and into the food segment, which are both
somewhat similar to Intergistics’ current business (high-value, small-scale manufactured items) and would
create synergies based on Intergistics’ core competencies in managing global supply chains on behalf of
customers. The threats for Intergistics include the issues impacting the viability of air freight, such as high fuel
costs and the concerns about the environment; the slowdown in global trade which is leading to more
competitive pressure from industry competitors that have not played a role in Intergistics’ segments until now;
and the potential replacement of shipments through 3D printing.

Another tool Intergistics could use is PESTEL analysis which will help to analyze the business environment.
This analysis involves reviewing the political, economic, social, technological, environmental, and legal factors
impacting a company’s strategic position. Intergistics is impacted by many dynamic factors, including
technology (possible competition from 3D printing), the environment (concerns about the impact of air travel on
the environment), the economy (growth of foreign trade, etc.) and government and political forces (possibility
of protectionism, backlash against global supply chains, and globalization).

Porter’s five forces of competition framework is another tool, and this provides a basis to analyze Intergistics’
environment in terms of competition. Under Porter’s framework, competition comes from existing industry
competitors, from suppliers (bargaining power of suppliers), potential new entrants, buyers (bargaining power
of buyers), and the threat of substitutes. This framework shows that Intergistics is exposed to competition from
its existing industry competitors, substitutes (3D printing), the threat of new entrants (other freight forwarders
who have not been active in air freight), and from buyers (the bargaining power of buyers will grow through the
potential use of 3D manufacturing).

Intergistics’ core competence is its expertise at managing global supply chains involving high-value, small-scale
manufactured items. The scenario states that Intergistics benefits from this competency due to the economies of
scale it can achieve in negotiations with transportation providers and because of the network effect it creates

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that allows Intergistics to be embedded at the heart of a global manufacturer’s logistics processes. This creates a
competitive advantage based on diversification.

Intergistics’ segmentation strategy is currently to focus on providing freight forwarding services to global
manufacturers who operate global supply chains involving small-scale, high-value manufactured parts. Its
geographic segmentation is not limited to any particular region. It does, however, limit its means of
transportation to supply chains requiring air freight.

The strategic decision that Intergistics must make is whether its current business and business model will
remain viable in the future, or if it should diversify because of the potential issues that might impact future
operations. If it decides to diversify, it must also decide how to diversify.

Additional information that would be helpful to prepare a strategic analysis for Intergistics includes factors
impacting its ability/capacity to raise debt to fund new strategies. The scenario indicates it may become more
difficult to proceed with its business model of funding a horizontal integration strategy with stock. This type of
information includes Intergistics’ credit rating, its current debt levels, and the amount of incremental debt that
the company could raise, the strength of its current balance sheet, and its strategy regarding its credit rating. It
would also be important to know why Intergistics has not pursued partnerships and under what circumstances it
might reconsider its approach if it proceeds with a diversification strategy.

2. Strategy Formulation

Intergistics should pursue a concentric diversification strategy based on its core competencies. This is
diversification of a business in related areas, i.e., Intergistics should not pursue something outside its core
competency of managing global supply chains involving high-value, small-scale items. The diversification
strategy should be complementary to Intergistics’ existing business so that the company can take advantage of
synergies associated with this core competency. Intergistics should therefore expand its business to include food
and e-commerce.

There are several reasons why this diversification is appropriate.

 This type of diversification will take into account the issues and concerns of both the Board of Directors
and the CEO. As a result, the internal disagreement will decrease if not eliminated.

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  Both segments have similarities to Intergistics’ current product segments, making concentric
diversification a viable strategy. Food (some segments) and e-commerce are high-value, small-scale
items that require rapid and reliable transport. Both have connections to air freight.
 This will improve Intergistics’ product and customer segmentation. Its freight forwarding services will
now include manufactured items, food, and retail goods (through e-commerce). Its customers will
include manufacturers, retailers, wholesalers, and end customers.
 Expanding into both food and e-commerce will enable Intergistics to increase its exposure to land
freight, where it can then benefit through economies of scale. Intergistics’ expertise at managing supply
chains for these types of items can be applied here, too.
 Diversification into e-commerce will diversify Intergistics’ business in two important ways. First, its
business will diversify into a business-to-consumer activity. Second, Intergistics will become more
involved in land freight.

3. Implementation

The implementation of this strategy should take the following factors into account.
 Intergistics should organize itself by product segment so that the success of its diversification strategy
can be measured. This success must be based on the marginal revenues and costs associated with the
new business segments. Marginal costs and revenues are those items that result specifically from an
activity and would not exist otherwise. This means Intergistics should have three product segments:
high-value, small-scale manufactured items for delivery to manufacturers (existing business), food for
delivery to food retailers and wholesalers (new business), and e-commerce items to be delivered to end
customers (new business).
 The CEO will be responsible for preparing the diversification strategy and obtaining agreement from the
board.
 Once this strategy is agreed upon, it should be communicated to employees so that it is clear that the
internal disagreement within the company is resolved. The staff should see that management is unified
and supportive of the strategy.
 Each product segment should have its own senior executive with responsibility for the revenues and
profits earned from the business. Clear, dedicated accountability will be important to ensure that the new
product segments are given appropriate visibility.

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  The responsibilities of the various participants in the process are as follows. The Board must approve the
strategy and then monitor its implementation. The CEO should implement the approved strategy and
manage the company on a day-to-day basis accordingly. The CFO needs to focus on the financing of the
strategy and the measurement of the results. The question of financing is important since it is not clear
whether the entry into new product segments can be financed via stock, or whether the company will
have to raise debt to fund the strategy. Measuring the results is important to ensure that management is
receiving information on the success of the new strategy as a basis for making changes, etc. The
management accountant’s responsibility will be to provide decision support when evaluating the
strategic alternatives, and to help establish a performance measurement system that will help guide
evaluation of results. This measurement system should include reporting for the product segments and
developing budgets and forecasts based on these product segments.

4. Performance Measurement

Intergistics should develop a performance measurement model that focuses on the short-term objectives without
losing sight of the longer-term objectives that it must achieve when diversifying its business model. The short-
term objective is to finalize the integration of the recent acquisition. The long-term objectives are to expand into
new product segments.

I recommend using a balanced scorecard combined with a strategy map. A balanced scorecard is a tool that
creates a framework to integrate financial and strategic goals, which can then be cascaded down into the
organization. The balanced scorecard captures financial and nonfinancial factors that contribute to the
company’s achievement of strategic targets.

The Intergistics balanced scorecard should focus on the four perspectives of financial, customer, internal
business processes, and learning and growth. In the financial perspective, the company should focus on how the
stockholders view the company, i.e., revenue and EPS growth over the short term, since this will be important
for determining whether the company can continue its stock-based acquisition strategy. Intergistics should also
focus on the critical success factors that must be achieved to manage the transition from being a freight
forwarder of high-value, small-scale manufactured items for transport to other manufacturers to becoming a
freight forwarder of different types of high-value, small-scale products, such as food as well as e-commerce
items. Also to be considered is the transition to transporting to different types of customers, i.e., not just other
manufacturers but also to food retailers/wholesalers and the end consumers in the e-commerce channel.

Examples of the items to measure in the balanced scorecard include:

 Revenue and EPS growth for the total company (financial perspective)
 Revenue for each of the product segments
 Increase in stock price
 Transport volume for each of the product segments
 Number of new customers in each of the product segment (customer perspective)
 Improvements in the supply-chain processes; i.e., speed to customer (internal business process
perspective)
 Improvement in staff morale as measured by employee surveys

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  Improvement in employee skills as measured by training hours (learning and growth perspective)

A strategy map is a tool that links the relationship between strategic actions and overall goals. It is used to link
strategic planning with operational implementation. This link is important so that Intergistics does not
overemphasize the need to resolve the integration issues associated with its recent acquisition to the detriment
of its long-term objectives under the new diversification strategy. In addition, the strategy map is a good way of
communicating the strategy to employees, which will help obtain buy-in and flawless execution.

© Copyright 2017 Institute of Certified Management Accountants 33