Core activity area A - Evaluate opportunities to add value Contents

Core activity area A - Evaluate opportunities to add value

Core activity area A - Evaluate opportunities to add value


  • Session 1: Selecting Capital Investment Appraisal Techniques: (A holistic approach)
  • Session 2: Using Digital Data Sources for Capital Investment Decisions:
  • Session 3: Pricing Strategies
  • Session 4: Business Models
  • Session 5: WACC

The following ‘I CAN’ questions are set by CIMA:

  • I can select appropriate capital investment appraisal techniques and apply them in order to support capital investment decisions, including product/ service development, digital transformation projects and acquisitions
  • I can identify and use relevant digital data sources to assist in capital investment decisions
  • I can explain which pricing strategies are appropriate
  • I can select and implement suitable business models that will create value for stakeholders, including business models in the context of digital ecosystems
  • I can analyse the impact of disruptive and digital operating business models in the context of digital ecosystems
  • I can explain the relevance of weighted average cost of capital

Session 1: Selecting Capital Investment Appraisal Techniques (A holistic approach)

Syllabus – CIMA P2

1.1 Framework for capital investment appraisal:

1. Understand the Objective

    • Define the purpose of the investment (e.g., product development, digital transformation, acquisition).
    • Ensure alignment with company's strategic goals.

2. Review Decision-making Process

    • Identify the steps involved in making the investment decision.
    • Recognize pertinent issues affecting the decision (e.g., risk factors, stakeholder interests).

3. Choose Appropriate Appraisal Techniques

    • Based on the nature and size of the project:
      • NPV (Net Present Value): Discount future cash flows to determine present value.
      • IRR (Internal Rate of Return): Identify the discount rate that gives an NPV of zero.
      • Payback Period: Calculate the time taken for the investment to be repaid by its cash inflows.
      • MIRR (Modified Internal Rate of Return): Adjust IRR for project-specific factors.
      • ROCE (Return on Capital Employed) or ARR (Accounting Rate of Return): Evaluate profitability in relation to the capital used.

4. Evaluate Cash Flows

    • Identify relevant cash flows.
    • Exclude sunk costs, non-cash, and notional items.
    • Consider incremental cash flows and opportunity costs.

5. Handle Capital Rationing Scenarios

    • If limited funds are available, prioritize projects based on their return on investment.
    • Ensure selected projects align with strategic objectives.

6. Consider Real Options in Appraisal

    • Account for flexibility options, like delaying, expanding, or abandoning a project.

7. Asset Replacement

    • When considering the replacement of an asset:
  • Evaluate the costs and benefits of the existing versus the new asset.
  • Apply the Equivalent Annual Cost (EAC) method to compare the two assets on an annualized basis.

8. Post completion audit

    • A systematic review of a project after its completion to determine if it met its initial objectives and to gather insights for future projects.
    • How to Do It:
  • Review the project's initial objectives and outcomes: Compare the project's actual outcomes with the initial expectations to identify any variances.
  • Analyze the processes and methodologies used: Examine the project's procedures, techniques, and decision-making methods to determine their effectiveness.
  • Gather feedback from stakeholders: Engage with team members, clients, and other relevant stakeholders to gain insights into the project's successes and areas for improvement.
    • Pros:
  • Continuous Improvement: Helps in refining the organization's project management practices, leading to better outcomes in future projects.
    • Cons:
  • Time-Consuming: Requires additional time and resources, which can be seen as a burden, especially for smaller projects or organizations with tight schedules.

1.2 Digital Transformation Projects

  • Digital transformation involves integrating digital technologies into all areas of a business, resulting in fundamental changes to how businesses operate and deliver value to their customers.
    • Consider the speed of technological change and the risk of obsolescence.

1.3 Acquisitions

    • Assess the strategic fit of the acquisition target.
    • Consider synergies, cultural fit, and integration challenges.

1.4 Exam Rehearsal Questions – with bullet points areas to be answered in the exam

Q1: Explain the challenges in determining NPV for a new project, particularly in quantifying future cash flows (May/Aug 2021 Trayyner variant 2 task 4)

  1. Estimation Uncertainty: Forecasting future cash flows accurately is challenging due to unpredictable market conditions, technological changes, and external factors like economic downturns.
  2. Discount Rate Determination: Selecting an appropriate discount rate can be subjective. A wrong choice can significantly alter the NPV.
  3. Project Life: Determining the exact duration of a project's cash inflows can be challenging. A longer or shorter project life affects the NPV.
  4. Capital Expenditure and Working Capital Needs: Estimating the initial outlay and additional working capital requirements can be uncertain, particularly for new ventures.
  5. Sunk Costs: Ensuring that only relevant future costs are included and not the costs already incurred.

Q2: Prepare briefing notes for investment appraisals under a capital rationing scenario (May/Aug 2020 Alpaca variant 1 task 1)

  1. Definition of Capital Rationing: Start by explaining that capital rationing involves selecting the best combination of projects when there's a limited budget.
  2. Use of Profitability Index (PI): Under capital rationing, PI (which is the ratio of the present value of cash inflows to initial investment) is more useful than NPV as it provides a measure of the "bang for the buck".
  3. Project Interdependencies: Some projects may be mutually exclusive, meaning if one is undertaken, another can't be. This adds complexity to decision-making.
  4. Multiple Periods Rationing: If rationing is expected over multiple periods, this requires a multi-period model which adds complexity.
  5. Non-Financial Factors: Emphasize that while financial metrics are crucial, non-financial factors such as strategic alignment, risk, and corporate social responsibility also play a role.

Q3: Discuss whether Frinta should have planned for the introduction of additional capacity as a real option in the capital investment appraisal for the acquisition and preparation of Dubblfile to provide this service (Nov 2020/Feb 2021 Frinta variant 6 task 4)

  1. Concept of Real Options: Begin by explaining that real options provide flexibility in decision-making by allowing for future decisions based on unfolding events.
  2. Value of Flexibility: The added capacity can act as a hedge against unexpected demand surges, ensuring Frinta capitalizes on all potential revenue streams.
  3. Cost Implication: While introducing additional capacity may increase initial investment, it could be more cost-effective than retrofitting or expanding capacity later.
  4. Market Volatility: If the market for Dubblfile's service is volatile, having the option to scale quickly can be a strategic advantage.
  5. Risk Management: Real options can be viewed as a risk management tool, allowing Frinta to adapt to changing circumstances without committing fully upfront.

Session 2: Using Digital Data Sources for Capital Investment Decisions

Syllabus – CIMA P2

2.1 Sources

1. Relevant Cash Flows and Opportunity Costs:

  • Digital Accounting Systems: These are software platforms like QuickBooks or Xero that automate financial tasks such as invoicing, tracking expenses, and generating financial reports.
  • Example: Using Xero to automatically categorize and forecast cash inflows and outflows, providing a clear picture of potential opportunity costs.

2. Sources of Management Information – Internal and External:

  • Internal Example: Accessing the company's ERP system to gather production data, aiding decisions about machinery investments.
  • External Example: Consulting industry-specific online databases to understand competitors' capital investments.

3. Collecting, Analysing, and Presenting High-Quality Data:

  • Example: Leveraging Microsoft Excel's advanced functions to consolidate, analyze, and visually present data to guide capital expenditure decisions.

4. Business Intelligence Systems:

  • Definition: These systems, like Microsoft Power BI or Tableau, help in visualizing, sharing, and analyzing data from various sources to make informed business decisions.
  • Example: Using Tableau to integrate sales and inventory data, aiding in decisions about warehouse capital expansions.

5. Data Analytics and Data Mining:

  • Definition: Data analytics involves examining datasets to draw conclusions, while data mining seeks to uncover hidden patterns or relationships within large datasets.
  • Example: Applying machine learning algorithms on past sales data to predict future trends, guiding capital allocation towards products expected to see growth.

2.2 Exam Rehearsal Questions – with bullet points areas to be answered in the exam

Q1: Identify and evaluate the potential advantages that a business intelligence system would bring to managing performance across the group (May/Aug 2021 Trayyner variant 6 task 1)

  1. Data Integration and Consolidation:
    • Discuss how BI systems allow for the integration of data from different departments or subsidiaries, providing a holistic view of the group's performance.
  2. Real-time Performance Monitoring:
    • Highlight the capability of BI systems to provide real-time dashboards and metrics, enabling timely decision-making.
  3. Predictive Analytics:
    • Describe how BI tools utilize historical data to forecast future performance trends, assisting in proactive management.
  4. Enhanced Reporting Capabilities:
    • Explain the flexibility and customization BI systems offer in report generation, allowing tailored insights for different stakeholders.
  5. Data-driven Decision Making:
    • Stress the importance of making decisions based on data rather than intuition, and how BI systems facilitate this shift towards a data-centric approach.

Q2: Recommend three sources of data to forecast demand (May/Aug 2020 Alpaca variant 3 task 2)

  1. Historical Sales Data:
    • Emphasize the importance of analyzing past sales trends and patterns as a primary indicator of future demand.
  2. Market Research and Surveys:
    • Discuss how targeted surveys and research can provide insights into customer preferences and potential shifts in demand.
  3. External Economic Indicators:
    • Highlight the correlation between broader economic trends (e.g., GDP growth, unemployment rates) and product/service demand in certain industries.
  4. Competitor Analysis:
    • Explain the value of monitoring competitor activities, product launches, and pricing strategies to anticipate market demand changes.
  5. Digital Analytics:
    • Discuss the use of digital tools, like website traffic analytics or social media sentiment analysis, as indicators of interest and potential demand.

Q3: Explain the concerns about using data from a research report as a basis for investment appraisal calculations (May/Aug 2020 Alpaca variant 5 task 1)

  1. Data Reliability:
    • Question the source and credibility of the research report. Is the data from a reputable and unbiased source?
  2. Timeliness of Data:
    • Highlight the concern that data might be outdated, and the business landscape could have changed since the research was conducted.
  3. Relevance to Specific Context:
    • Discuss the possibility that the research report's data might not be entirely applicable to the company's specific situation or industry.
  4. Assumptions and Limitations:
    • Stress the need to understand the underlying assumptions made in the research report and any potential biases or limitations.
  5. Risk of Misinterpretation:
    • Emphasize the danger of drawing conclusions without fully understanding the methodology or context behind the research data. Misinterpretation can lead to incorrect investment decisions.

Session 3: Pricing Strategies

Syllabus – CIMA P2

3.1 Price Elasticity of Demand

  • Use when gauging market's sensitivity to price alterations.
  • Example: Luxury goods often have elastic demand; staple goods like bread are often inelastic.

3.2 Profit-Maximisation Pricing

  • Use when aiming for the highest profit margin.
  • Example: Tech companies with unique innovations may use this to capitalize on early adopters.

3.3 Cost-Plus Pricing

  • Ideal for industries with stable, predictable demand.
  • Example: Construction contracts often use cost-plus pricing to ensure all costs are covered with a profit margin.

3.4 Marketing-Based Pricing Strategies

Premium Pricing:

  • Best for luxury, unique, or high-brand-reputation products.
  • Example: Brands like Rolex or Louis Vuitton.

Market Skimming:

  • Use for innovative products with initially high demand.
  • Example: New technology gadgets like VR headsets at launch.

Penetration Pricing:

  • Suitable for markets with stiff competition and aiming for rapid market capture.
  • Example: Streaming services offering initial low prices.

Price Differentiation:

  • Effective in diverse markets with varying consumer willingness to pay.
  • Example: Airline seats – economy vs. business class.

Loss Leader:

  • Use to attract customers to store or service, expecting them to make additional purchases.
  • Example: Supermarkets pricing milk or bread below cost.

Discount Pricing:

  • Useful during stock clearance or festive seasons.
  • Example: Black Friday sales.

Controlled Pricing:

  • Applied in essential services or goods, often to protect consumers.
  • Example: Government-regulated electricity tariffs.

Product Bundling:

  • Ideal for increasing sales of less popular items or clearing stock.
  • Example: Fast-food meals combining burgers, fries, and a drink at a reduced total price.

3.5 Pricing Over the Product Life Cycle

  • Introduction: Use skimming or penetration based on market research.
  • Growth: Stabilize or slightly reduce prices to gain more market share.
  • Maturity: Apply discounts or bundling to maintain interest.
  • Decline: Clearance or discounts to move remaining stock.
  • Example: Smartphones often start with skimming, reduce prices during maturity, and offer significant discounts in the decline phase.

3.6 Exam Rehearsal Questions – with bullet points areas to be answered in the exam

Q1: Discuss the factors to consider when setting the selling price and recommend with reasons the strategy to adopt (Feb 2020 Trevel variant 1 task 3)

  1. Costs: Analyze both fixed and variable costs to ensure prices cover expenses and generate a profit.
  2. Demand Elasticity: Understand how price changes impact demand to determine if a higher or lower price would maximize revenue.
  3. Competitor Pricing: Survey the market to understand the price range of similar products or services.
  4. Target Audience: Understand the demographic and psychographic profile of the target market and their willingness to pay.
  5. Value Proposition: Evaluate the unique benefits or value your product offers and price accordingly.

Q2: Recommend a retail pricing strategy, with a justification that takes into account the product nature (Nov 2020/Feb 2021 Prybloxx variant 1 task 3)

  1. Product Life Cycle Stage: Determine if the product is new, mature, or in decline to select a suitable strategy (e.g., skimming for new products).
  2. Brand Image: For premium brands, a higher price can reinforce the perception of quality.
  3. Market Saturation: In a crowded market, penetration pricing might be effective to gain a foothold.
  4. Product Differentiation: If the product has unique features, value-based pricing could be justified.
  5. Cost Structure: For commodities or products with thin margins, cost-plus pricing might be most appropriate.

Q3: Explain how the costing schedule and competitor pricing info would help to set an appropriate retail price for a new product (May/Aug 2020 Alpaca variant 3 task 4)

  1. Establishing a Baseline: Costing schedules provide the minimum price point needed to break even or achieve a desired profit margin.
  2. Market Positioning: Competitor pricing info helps position the new product as a value buy, a premium option, or somewhere in between.
  3. Margin Analysis: Knowing the costs allows for the determination of the markup and profit margins at different potential price points.
  4. Demand Forecasting: By comparing with competitor prices, one can estimate potential demand at various price points.
  5. Strategic Adjustments: Continuous monitoring of both costs and competitor prices can inform timely adjustments to the retail price.

Session 4: Business Models

Syllabus: E2

4.1 Business Ecosystems and Their Participants

  • A business ecosystem is akin to a biological ecosystem where various entities interact in a shared environment, mutually benefiting from these interactions.
  • Features:
  1. Dynamic and Evolving Relationships: Ecosystems involve a complex web of relationships that are often non-linear and can evolve rapidly. Example: App developers might shift their focus between different smartphone platforms based on user adoption rates.
  1. Interdependence: Entities within an ecosystem are often more interdependent. The success or failure of one can ripple through and impact others. Example: If a major online marketplace (like Amazon) faces issues, sellers on that platform might see immediate impacts on their revenue.
  1. Broad Range of Participants: Beyond traditional suppliers and distributors, ecosystems may include third-party developers, platform providers, and even competitors in some collaborative scenarios. Example: Apple's iOS ecosystem includes not just device users and app developers, but also accessory makers and service integrators.
  1. Value Co-Creation: Multiple participants collaborate to create and deliver value, often in innovative ways. Example: Open-source software communities where multiple contributors enhance software capabilities.
  1. Rapid Adaptation: Ecosystems often adapt quickly to technological changes or shifts in consumer behavior. Example: The rapid shift of media ecosystems from physical DVDs to streaming services.

4.2 Elements of Business Models

Define Value:

  1. Identify Target Audience: Determine the specific customer segments the firm aims to serve.
  2. Understand Customer Needs: Conduct market research or surveys to understand what customers truly value.
  3. Align with Company Vision: Ensure that the perceived value aligns with the company's mission and long-term goals.

Create Value:

  1. Resource Allocation: Efficiently allocate resources to areas that generate the most value.
  2. Innovate and Develop: Continuously invest in R&D to create products/services that fulfill customer needs.
  3. Optimize Operations: Streamline processes to enhance product quality and reduce wastage.

Deliver Value:

  1. Effective Distribution: Establish reliable distribution channels to ensure products/services reach the target audience.
  2. Engage and Educate: Use marketing and communication strategies to inform customers about the value the product/service offers.
  3. Adapt to Feedback: Regularly gather customer feedback and make necessary adjustments to better deliver value.

4.3 Capture Residual Value

4.3.1 Introduction:

  • A pivotal phase in the business value creation journey.
  • Ensures value generated is effectively harnessed and distributed.
  • Recognizes and rewards all contributors to a firm's success.
  • Involves distributing dividends, allocating staff bonuses, and reinvesting in growth.
  • Essential for sustaining growth, strengthening stakeholder relationships, and fostering future innovations.

4.3.2 Cost Model:

  1. Assess Value Proposition: Determine the unique benefits your product or service offers to customers. Example: A premium organic skincare brand promises high-quality, chemical-free products.
  2. Determine Partnerships: Identify and establish partnerships that can aid in value creation and delivery. Example: An e-commerce company partners with a reliable courier service to ensure timely delivery of products.
  3. Allocate Budget: Based on the value proposition and partnerships, allocate costs appropriately. Example: A tech startup might invest heavily in R&D to develop a groundbreaking app, considering its value proposition of innovation.

4.3.3 Revenue Model:

  1. Identify Customer Segments: Clearly define the different customer groups the firm aims to serve. Example: A fitness brand might target both casual gym-goers and professional athletes with different product lines.
  2. Set Pricing Strategy: Price products/services based on customer segments, market conditions, and any regulatory constraints. Example: A SaaS (Software as a Service) company might offer tiered subscription models catering to freelancers, SMEs, and large corporations.
  3. Continuously Monitor & Adjust: Regularly review revenue streams and adjust based on changing market conditions or customer feedback. Example: An online course platform might offer discounts during a pandemic when more people are looking to learn online.

4.3.4 Sharing Residual Value:

  1. Determine Shareholder Returns: Decide on dividends or stock buybacks to reward shareholders.
    • Example: A profitable company might distribute quarterly dividends to its shareholders.
  2. Allocate Value to Stakeholders: Ensure employees, partners, and other stakeholders benefit from the firm's success.
    • Example: A thriving cafe might share a percentage of profits as bonuses to its staff.
  3. Reinvest in Growth: Allocate a portion of the residual value back into the business for R&D, marketing, and other growth activities.
    • Example: A tech firm reinvesting profits into research for new product development.

4.4 Digital Customers

  • Customers who predominantly use digital platforms for their buying journey.
    • Attributes include:
      1. Research Online: Before making purchases, they extensively research products/services online.
        • Example: A user checking reviews on Amazon before buying a laptop.
      2. Preference for Digital Interactions: Opt for chatbots, emails, or apps over traditional communication means.
        • Example: A customer using a bank's app for transactions instead of visiting a branch.
      3. Feedback Loop: They actively give feedback and reviews online.
        • Example: TripAdvisor users reviewing hotels or attractions.
      4. High Adaptability: Quickly adapt to new technologies and platforms.
        • Example: Swift adoption of new social media platforms like TikTok.
      5. Expect Instant Gratification: Seek rapid responses and services.
        • Example: Expecting same-day deliveries when shopping online.

4.5 Digital Disruption / Disruptive Technology

  • Technologies that redefine industries, creating new ways of operating and often making traditional methods obsolete.
    1. Streaming Services: Platforms like Netflix and Spotify have disrupted the television and music industries, respectively.
    2. Ride-Sharing Platforms: Uber and Lyft have redefined traditional taxi services.
    3. E-commerce Platforms: Amazon has transformed retail, affecting brick-and-mortar stores.
    4. Digital Payment Systems: PayPal, Venmo, and other digital wallets have altered traditional banking transactions.
    5. Cloud Computing: Services like AWS and Google Cloud have transformed IT infrastructure management.

4.6 Strategies to Build Disruptive Business Models and Navigate Changes

  1. Build:
    • Action: Create a new business model from scratch, focusing on innovation and differentiation.
    • Explanation: By building, companies can introduce fresh perspectives and solutions tailored to unmet market needs.
    • Example: Apple introducing the iPhone, which redefined the smartphone market.
  1. Buy:
    • Action: Acquire an existing company that has already made a mark in the desired market.
    • Explanation: This fast-tracks entry into a market and capitalizes on established brand equity.
    • Example: Facebook's acquisition of Instagram to expand its social media portfolio.
  1. Partner:
    • Action: Form strategic alliances with companies that are already disrupting the market.
    • Explanation: Partnerships can combine strengths, share risks, and accelerate market reach.
    • Example: Spotify partnering with Samsung to be the default music service on their devices.
  1. Invest:
    • Action: Inject capital into promising start-ups that align with the company's vision.
    • Explanation: Investment provides both financial returns and a stake in potential disruptive innovations.
    • Example: Google's parent company, Alphabet, investing in various tech startups through its venture arm, GV.
  1. Incubate/Accelerate:
    • Action: Foster young companies by providing resources, guidance, and support.
    • Explanation: Incubation and acceleration help nurture potential game-changers under the company's guidance.
    • Example: Microsoft's ScaleUp program, which supports startups by providing co-selling opportunities, technical support, and access to Microsoft's partner ecosystem.

4.7 Digital Operating Models

  1. Cloud-First Model: Prioritizing cloud solutions for scalability, flexibility, and efficiency.
    • Example: New startups relying primarily on cloud services for their IT needs.
  2. Data-Centric Model: Making decisions based on data analytics and insights.
    • Example: E-commerce platforms using data analytics to personalize user experiences.
  3. Agile Model: Adapting quickly to changes using agile methodologies.
    • Example: Software companies adopting agile development for rapid iteration.
  4. Customer-Centric Digital Model: Prioritizing digital touchpoints that enhance customer experience.
    • Example: Banks offering comprehensive app-based solutions.
  5. Platform Model: Creating platforms that allow third-party entities to create value.
    • Example: App stores allowing third-party developers to offer apps, benefiting both the developer and platform provider.

4.8 Surviving Digital Disruption

1. Inspirational Leadership:

  • Leaders must embrace and champion digital transformation, setting the tone for the entire organization. Example: A CEO regularly attending tech conferences and advocating for the adoption of emerging digital tools within the company.
  • Leaders should inspire teams by highlighting the potential benefits and opportunities digital disruption brings. Example: Organizing monthly showcases where teams present how they've leveraged new digital tools for success.

2. Competitive Edge:

  • Continuously analyze competitors' digital strategies to identify gaps and opportunities. Example: A retail store enhancing its mobile app features upon noticing competitors lacking robust online platforms.
  • Leverage data analytics to gain actionable insights and refine business strategies. Example: Using consumer behavior data to personalize online shopping experiences and increase sales.

3. Establish a Strategic Direction:

  • Clearly define the company's digital vision, ensuring alignment with overall business objectives. Example: A magazine pivoting to a digital subscription model to cater to the changing reading habits of its audience.
  • Regularly revisit and adapt the digital strategy based on technological advancements and market changes. Example: An e-commerce business integrating new payment methods as they become popular.

4. Influence External Parties:

  • Engage with key stakeholders, including customers and partners, to gather feedback on digital initiatives. Example: Hosting focus groups to understand customer preferences for a new app.
  • Collaborate with industry influencers and thought leaders to amplify the company's digital presence. Example: Partnering with a popular tech blogger to review and promote a new digital product.

5. Collaboration:

  • Foster a culture of inter-departmental collaboration to ensure seamless digital integration across functions. Example: Marketing and IT departments working together to optimize an online ad campaign.
  • Use collaborative digital tools to enhance communication and productivity. Example: Adopting platforms like Slack or Teams for efficient team communication.

6. Business Judgement:

  • Make informed decisions by leveraging data analytics, but also consider the qualitative aspects. Example: While data might suggest a product feature is unpopular, qualitative feedback might reveal its significance to a loyal user base.
  • Continuously assess the ROI of digital investments to ensure they align with business goals. Example: Regularly reviewing the performance of a new chatbot to ensure it's enhancing customer service.

7. Execution:

  • Prioritize and implement digital initiatives in phases, ensuring each phase aligns with the overall strategy. Example: Rolling out an e-commerce website first, followed by a mobile app, based on customer usage patterns.
  • Monitor and optimize digital initiatives post-launch to ensure they meet desired objectives. Example: Tweaking the user interface of a new app based on user feedback.

8. Building Talent:

  • Invest in regular training and upskilling programs to ensure the workforce stays updated with digital trends. Example: Organizing quarterly workshops on the latest digital marketing techniques.
  • Attract and retain talent that brings digital expertise and a forward-thinking mindset. Example: Offering competitive benefits and creating a culture of innovation to appeal to top tech talent.

4.9 Exam Rehearsal Questions – with bullet points areas to be answered in the exam

Q1: Identify and explain the impact that providing online products could have on the business model (May/Aug 2021 Trayyner variant 1 task 1)

  1. Revenue Stream Alteration:
    • Shifting to online might diversify revenue streams, introducing subscription models, digital sales, or online advertising.
  2. Cost Structure:
    • Potential reduction in physical infrastructure costs but an increase in digital infrastructure and cybersecurity costs.
  3. Customer Reach:
    • Access to a global customer base, but also facing global competition.
  4. Value Proposition:
    • Need to ensure digital products offer unique value, such as convenience, customization, or instant access.
  5. Supply Chain and Distribution:
    • A shift from traditional distribution channels to digital delivery methods, potentially streamlining and speeding up product delivery.

Q2: Discuss the suggestion that adding components from another business will be consistent with the business model (Nov 2020/Feb 2021 Prybloxx variant 3 task 1)

  1. Core Competency Alignment:
    • Assess if the new components align with the company's core competencies and strengths.
  2. Cultural and Operational Fit:
    • Determine if the operations and culture of the added business components mesh well with the existing model.
  3. Financial Impact:
    • Analyze potential changes in revenue, costs, and profit margins with the integration of new components.
  4. Value Proposition Enhancement:
    • Evaluate if the added components bolster the company's value proposition to its customers.
  5. Strategic Direction:
    • Consider if the addition aligns with the company's long-term vision and strategic objectives.

Q3: Advise the Board on whether acquisition of competing companies is compatible with the existing business model (Nov 2020/Feb 2021 Prybloxx variant 6 task 1)

  1. Market Share Growth:
    • Analyze if acquiring competitors would significantly boost market share and positioning.
  2. Operational Synergies:
    • Examine potential efficiencies in operations, distribution, or production post-acquisition.
  3. Diversification vs. Focus:
    • Determine if the acquisition would diversify the product/service portfolio or strengthen the focus on core offerings.
  4. Cultural Compatibility:
    • Evaluate potential challenges in integrating company cultures, values, and operational philosophies.
  5. Financial Implications:
    • Consider the financial health of the competitor, the acquisition costs, and the potential return on investment.

Q4: Evaluate the impact that a new disruptive product range will have on the business model (Nov 2020/Feb 2021 Prybloxx variant 1 task 1)

  1. Analyze Revenue Streams:
    • Determine how the new product range could diversify or alter the company's current revenue streams.
  2. Assess Cost Structures:
    • Understand the investment needed for the disruptive product range, including R&D, marketing, and manufacturing.
  3. Evaluate Market Positioning:
    • Determine if the new product range repositions the company in its market or opens it up to new market segments.
  4. Understand Customer Dynamics:
    • Gauge how the disruptive product might change the company's customer base or alter its relationship with existing customers.
  5. Review Supply Chain Impacts:
    • Identify any changes or expansions needed in the supply chain to support the new product range.

Q5: Evaluate the implications that new product features could become disruptive technology (Nov 2020/Feb 2021 Prybloxx variant 3 task 4)

  1. Identify Potential Market Disruption:
    • Understand how the new features could redefine the market or make existing solutions obsolete.
  2. Assess Competitive Landscape:
    • Gauge how the disruptive features might give the company a significant edge over competitors.
  3. Understand Regulatory Impacts:
    • Determine if the disruptive features introduce new regulatory challenges or requirements.
  4. Analyze Adoption Challenges:
    • Identify potential barriers to customer adoption of the new features.
  5. Gauge Impact on Company Reputation:
    • Understand how successfully launching (or failing to launch) a disruptive technology can affect the company's brand and reputation.

Session 5: WACC

Syllabus: F2

  • DVM: initial share price = $10, Dividend per share = $1, Ke = $1/$10 = 10%.
  • CAPM: explicitly consider risks. Ke=Rf+(Rm-Rf)*Beta (systematic risks) = 1%+(4%-1%)*1.2=0.046
  • Systematic risks and unsystematic risks: macro economy risks; company specific risks.
  • Hold well diversified portfolio

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Categories: : CIMA/CGMA Management Case Study (MCS)