The BUSS3 case study often features a change in plan by a new management team. You can understand why. The case study business has usually experienced some problems and a new management team has been brought in to identify potential "strategies for success"!
A common approach in the 34 marker question is to ask students to evaluate whether the new plan should be adopted (or not), or assess the likelihood that the plan will be successful.
A potential issue that management may face is a weak financial position which, in turn, might make it harder for the business to finance the investment required to give the plan a greater chance of success.
We saw this in the SunTravel case study we used during the BUSS3 exam coaching workshops. A turnaround plan had been devised designed to achieve annual cost savings of £100m in return for an investment of £150m. On the face of it, the turnaround plan looked attractive since it generated a high accounting rate of return (much higher than the ROCE that SunTravel was currently earning) and might enable SunTravel to close the gap on the market leader GoSTAY in terms of operating profitability. However, the plan had a relatively long payback period (2.5 years) and the weak liquidity position of SunTravel and its high gearing suggested the firm might struggle to afford (fund) the £150m investment.
Which leads us on to a key evaluation opportunity for BUSS3 students...
Take a look at the proposed strategy outlined in the case study. How attractive is it overall? Is it likely that the shareholders (or other owners) of the business might be prepared to invest further equity into the business to support the strategy? Would an injection of additional, significant equity finance help improve the financial position of the business (think short-term liquidity, long-term stability) to give the proposed strategy a greater chance of success?
Remember that raising finance is an important part of BUSS3. The case study might not explicitly refer to a proposed finance-raising. However, the smart A* student will consider whether additional finance (or a change in the mix between debt and equity) might benefit the business. Shareholders are usually looking for good investments to back and it may be that the identification of a credible new strategy is a great time to ask shareholders to put their hands in their pockets!
Have you seen the tutor2u YouTube channel? Subscribe now and never miss a revision video!