Numbers tell you what happened. The operational and strategic analysis tells you why, and what the business should do next. In the Case Study it carries as much weight as the financial work, and it is tested in short, focused discussions, not long essays. This topic shows how the non-financial analysis fits into the whole paper and how to answer operational and strategic requirements with a method that examiners recognise.
In 30 seconds
The paper analyses a business from four angles: financial statements, financial data, sustainability and operational and strategic analysis, which includes business trust and ethical awareness. The two main requirements carry equal weight. Use PESTLE, SWOT and Porter’s five forces to structure your thinking, but write only the relevant points, not full frameworks.
Answer operational and strategic issues like an audit management letter: identify the issue, judge its effect, quantify the consequence and conclude with a decision, starting with the material matters. Show scepticism through your analysis and never as a heading.
How the analyses fit together
The Case Study examines a business from four perspectives: financial statements analysis, financial data analysis, sustainable business and sustainability reporting, and operational and strategic analysis. These form the basis for the two main requirements, which have equal weighting.
Although each topic can be studied alone, none should be treated alone. Financial statements analysis looks at the recent past. Financial data analysis usually looks at a current issue. Operational and strategic analysis looks from the present to the future and is informed by the other two. A strong answer uses all of them together.
What operational and strategic analysis involves
It is a broad review of all aspects of the business, now and in future, aimed at deciding the most suitable course of action. It involves three things:
- identifying and analysing the factors, statements and explanations offered about what the business does now and how it delivers its operations;
- considering the route the business might follow in future, taking account of all internal and external factors and how they may change; and
- analysing the full range of activity, from the overall business down to a single business unit, revenue stream or operation.
Business trust and ethical awareness
This area is shortened to business ethics. It needs the application of professional ethical standards to the behaviour, topics and scenarios in the case. Accountancy bodies issue guidance on ethical standards, but applying it to a real client in a changing situation is the hardest part, because it is subjective and needs a high level of awareness to spot concerns.
Having spotted an issue, you must analyse it, judge it and recommend how to resolve it, which needs even more skill and confidence.
Two points matter. An ethical issue will not be labelled as one, so you must find it. And both ethical and operational analysis need a thorough understanding of the business, built through logical, structured analysis, identification of issues and options, critical evaluation and judgement, including professional scepticism. The outcome must be an unambiguous conclusion and clear recommendations.
Structuring the analysis
The scenario gives the information for the structured analysis. Much of it is non-financial, but it connects with the financial information. Three tools help, and they are best used in this order.
| Tool | What it covers | How it relates |
|---|---|---|
| PESTLE | Political, economic, social, technological, legal and environmental factors | Forms part of a SWOT analysis |
| SWOT | Strengths, weaknesses, opportunities and threats | Developed further by Porter’s five forces |
| Porter’s five forces | New entrants, rivalry, substitutes, supplier power and buyer power | Describes the industry environment |
Together they cover the macro environment, the industry environment and the internal environment. You are very unlikely to be asked to write out a full PESTLE, SWOT and five forces. You are expected to bring the relevant points from them into a focused discussion of the issue in the requirement.
You will have studied the tools before, but you will not have applied them to this volume of information, so practise doing it quickly. The aim throughout is to identify the positive and negative aspects of operations, internal and external, and to build them into a focused answer.
Using industry awareness
You are not expected to know the industry in the case in detail, but it may be one you know. Keep three questions in mind. What are the current issues in this industry, for example a recession in retail? How does the wider economy affect it, for example a weaker naira helping exporters but raising import costs? What are the leading companies doing, for example investing in e-commerce?
Read business newspapers and quality press regularly so you know about government policy, exchange rates, inflation, industry issues and legal rulings, and about publicity, good or bad, affecting other organisations, because it can feed into a case. You need only a few sentences on the wider context.
Papers are written some time before the exam, so if a major real event affects the scenario, include it as part of the wider context.
Operational and strategic analysis in the exam
Operational analysis looks at an operational issue, such as a new opportunity or a limiting factor that affects current and future operations. It can also cover how the business deals with customers and suppliers, for example factors that threaten high-quality delivery. Strategic analysis usually deals with longer-term planning, often together with the wider context, and uses data from the scenario to give an answer its focus or its business setting.
The requirements usually ask you to consider the benefits and risks of a course of action, or what the business should do to reduce or improve a situation.
Answering like a management letter
Sometimes the exhibits point to the answer through criteria, numbered or bulleted areas of concern or a list of alternatives. You should then comment professionally on each criterion, deal with each concern as you would in an audit management letter on weaknesses, and choose or rank the alternatives with clear reasons.
- Identify the incident or issue.
- Consider the impact on the business: positive, harmful or hard to determine.
- Evaluate the consequences of each part, and quantify where you can, even if you can only call it significant.
- Decide, with a conclusion and recommendations.
As in a management letter, do not start with immaterial matters such as petty cash. Most businesses exist to make profit, so the financial effect within a sensible time frame is the overriding test, even in non-financial analysis.
The case usually gives a yardstick: the importance of the issue relative to a revenue stream, the effect on all or part of the business, an internal or external benchmark for a yes or no decision, and the likely financial effect of acting or not acting. Use business common sense as well as analytical skill.
Show professional scepticism by building it into your analysis, and never write a heading called professional scepticism.
Worked example
Scenario (fictitious figures). An exhibit lists four concerns at Jos Foods Ltd. Annual revenue is ₦2,000 million and materials cost ₦800 million. (1) A supplier providing 30% of materials may close, and the alternative charges 10% more. (2) A delayed delivery to a key customer carries a penalty of ₦45 million. (3) Staff turnover has risen from 8% to 15%. (4) ₦20,000 is missing from petty cash. Advise the board.
- Quantify. The supplier supplies 30% of ₦800 million, that is ₦240 million. A 10% price rise costs ₦24 million a year. The penalty is ₦45 million once, if the delay is not resolved.
- Rank by materiality. The supplier risk is the largest on a continuing basis, and it threatens supply as well as cost. The penalty is the largest single amount. Staff turnover is probably important but has no figure, so you should ask what it costs in recruitment and lost output. Petty cash is immaterial.
- Recommend. Secure a second supplier now and negotiate prices. Resolve the delivery quickly and ask the customer to waive or reduce the penalty. Investigate the reasons for staff leaving. Mention petty cash briefly as a control point, in one line.
- Conclusion. Total quantified exposure is about ₦69 million in the first year (24 + 45), which is about 3.5% of revenue, so the matters deserve board attention but do not threaten the business if they are dealt with promptly.
Answering a benefits and risks requirement
The commonest wording is to consider the benefits and risks of a proposal. Give each side its own short section, tie each point to a fact in the case and finish with a view. For a proposal to open a new branch, a good answer might be set out like this.
| Benefits | Risks |
|---|---|
| New customers in an area where sales are growing, with an estimated sales gain from the figures given | High fixed costs that raise the breakeven point if sales are slower than forecast |
| Lower delivery costs to existing customers nearby | Management stretched across two sites, which may affect quality |
| A stronger position against a competitor already in the area | Financing cost and the effect on gearing and liquidity |
Then give a conclusion, such as proceeding in stages, with a test of sales after six months before the full commitment.
Spotting ethical issues
Because ethical issues are not labelled, train yourself to notice the usual triggers. Look for pressure to present the figures in a better light, or to meet a target that triggers a bonus. Look for dealings with directors or their relatives that are not at arm’s length, and for conflicts of interest.
Look for gifts or payments that could influence a decision, confidential information that might be misused and unusual transactions near the year end. Each trigger touches one or more of the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
Name the issue, say which principle it affects, say what it could cost the business in reputation or money and recommend what to do, such as disclosure, refusal or escalation.
Common mistakes
- Writing out a full PESTLE, SWOT or five forces and not linking it to the requirement.
- Treating all issues alike, instead of ranking by materiality.
- Describing an issue without quantifying it or giving a conclusion.
- Missing an ethical issue because it is not labelled as one.
- Using a heading called professional scepticism, when it should appear in the analysis.
- Writing long passages about the wider context, when a few sentences are enough.
Quick revision
- Four perspectives, two equally weighted requirements, all linked.
- Tools in order: PESTLE, SWOT, five forces. Use relevant points only.
- Management letter method: identify, impact, consequence (quantified), decision.
- Start with material issues and give a financial yardstick.
- Find ethical issues yourself and give clear recommendations.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria exam. Try each one before you open the answer.
Question 1. In the exam, you should normally use PESTLE, SWOT and five forces:
- Written out in full for every case
- Not at all
- To select relevant points for a focused answer
- Only for financial analysis
Show the answer
C. A full write-up is very unlikely to be required.
Question 2. In a management letter style answer, the first issue to deal with is:
- The smallest one
- The most material one
- Petty cash
- The one with no figures
Show the answer
B. Start with the matters of greatest financial importance.
Question 3. A heading of professional scepticism should:
- Always appear in the report
- Never appear, because scepticism must be shown in the analysis
- Appear in the appendix only
- Appear in the executive summary
Show the answer
B. It is demonstrated through your evaluation, not labelled.
Question 4. Ethical issues in a case are usually:
- Clearly labelled
- Not labelled, so you must identify them
- Never present
- Only about tax
Show the answer
B. Spotting them is part of the test.
Question 5 (6 marks). Describe the four steps for answering an operational or strategic issue in a Case Study.
Model answer
Show the model answer to Question 5
Identify (1.5 marks). State the incident or issue clearly, starting with the most material.
Impact (1.5 marks). Say whether the effect on the business is positive, harmful or hard to determine.
Consequences (1.5 marks). Evaluate each aspect and quantify it where possible, even if only to call it significant.
Decision (1.5 marks). Give a conclusion and clear recommendations, as in a management letter.
The next topic covers the strategic tools in detail, starting with PESTLE analysis.
Pathfinder on Operational and strategic analysis in the Case Study, including business trust and ethics
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The requirement asks for a SWOT of three initiatives, alternatives and the risks of each. Select relevant points and rank them by materiality, as in this topic.
Revise first: Answering like a management letter
The requirement asks for strengths, weaknesses, opportunities and threats and strategies to build on core competencies. Link each strategy to a point in your analysis.
Revise first: Structuring the analysis
Source: ICAN Pathfinder, Case Study. Diets covered: May 2016 and May 2018.
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