EmRen Publishing May2013_Case ExamBook CMA

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CASE EXAMINATION

EmRen Publishing Incorporated

MAY 2013

May 2013 Case Examination

TABLE OF CONTENTS


Page Case Question: Backgrounder ................................................................................... 1 Additional Information ..................................................................... 15 General Comments on Performance ....................................................... 30 Steps for Approaching Business and Corporate Strategy ........................ 41 Marker Assessment Guide ....................................................................... 48 Solution Notes for Markers ....................................................................... 58 Sample Response Successful Attempt #1 ............................................ 79 Sample Response Successful Attempt #2 .......................................... 111 Sample Response Unsuccessful Attempt ........................................... 152


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Backgrounder

The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The Backgrounder contains information about both the fictitious company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the analysis that will be required during the Case Examination. Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with Additional Information about the organization and a supplement of formulae and tables, will be provided at the writing centre for the Case Examination. Only the following models of calculators are authorized for use during the Case Examination:

1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII+ (or HP 10bll) 3. Sharp EL-738C (or EL-738)

Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and the question paper (Additional Information). CICA and CMA Canada joined together January 1, 2013, to create CPA Canada as the national organization to support unification of the Canadian accounting profession under the CPA banner. The CMA Entrance Examination, CMA Case Examination and CMA Board Report are still being developed and provided under the direction of CMA Canada until the final offerings of the CMA program are completed.


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EmRen Publishing Incorporated Backgrounder

Overview

EmRen Publishing Incorporated (EmRen) is a magazine publishing company located in Toronto, Ontario. EmRen publishes and distributes both consumer and business magazines across Canada. Consumer magazines focus on fashion, health and beauty, and are sold from newsstands or by subscription. Business magazines offer industry-specific news and information, and are sold to industry professionals on a subscription basis only. EmRen employs over two hundred and fifty people, including part-time staff, in editing, publishing, sales and finance functions, and has a printing contract with an organization located in Quebec.

History

EmRen was founded more than thirty years ago by Emma Scott and Lauren McCormick. They met at a convention and the two became business partners.

Scott worked with several large magazine companies in the United States as a freelance writer specializing in womens fashion, beauty and fitness. She has a keen awareness of industry trends, and her passion is to create a brand of magazines focused on topics that matter most to women.

McCormick worked on the publishing side for several fashion and business magazines. She has a business degree and is known in the industry for both her technical expertise and her ability to capture readers interest with creative content and design. McCormick has a good understanding of business and a vast network of industry contacts.

As part of their business plan, Scott and McCormick developed the following vision and mission statements:

Our vision is to create a unique brand of magazines for our Canadian readers.

At EmRen, our mission is to be the first choice of Canadian readers, both consumers and industry professionals, for expert advice in the areas of fashion, health, beauty and professional industry. Uncompromising with respect to our high standards of excellence, we strive to inform, educate and entertain our readers with a vast selection of magazines.

When operations began in the 1980s, EmRen offered five consumer magazines aimed at women aged 18 to 40. These publications met with success and attracted a subscriber base of 200,000 in total in the first two years. Shortly thereafter, the company added two business magazines that caught the attention of industry experts. Currently,


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EmRen owns over 30 consumer magazines and 10 business magazines with a total subscriber base of 2 million.

EmRen publications are known for their literary excellence. They are also known for their content, which consistently reflects industry trends. The companys business magazines have a reputation among industry leaders and experts for bringing the latest industry news, expert discussions and the results of intensive research to professionals, such as physicians, cosmeticians, grocers and marketers.

The Magazine Publishing Industry in Canada

Canada has a vibrant magazine publishing industry, with over 2,300 titlesmore than 1,200 of these being consumer titlesand more than 750 million copies in circulation. The industry employs over 14,000 people as freelance writers, editors, photographers, designers and illustrators. It contributes significantly to Canadas economic growth and provides content that is relevant to Canadians.

Advertising revenue is generated by the advertisements placed in the magazine. It forms the largest part of a publishers revenue but is susceptible to fluctuations in the economy. In 2009, the economic recession led to the largest decline in profits as advertisers reduced discretionary spending. Since then, there has been a modest recovery; it is anticipated that the total value of the Canadian consumer magazine market, including both advertising and circulation, will grow from $1.1 billion in 2011 to $1.3 billion by 2015, and advertising is expected to grow steadily. Most magazine publishers are located in Ontario and Quebec, and these organizations account for the majority of the industrys operating revenues.

Advertisers try to maximize the efficiency of their spending by concentrating on magazines read by their target groups. Consumer magazines appeal to a variety of readers and therefore enable advertisers to reach a wide audience. Conversely, business magazines fall into narrow categories, such as engineering, dentistry, healthcare, architecture and retail; each publication has a highly focused subscriber base, and business leaders rely on these magazines for industry-specific information and research. When advertisers want to reach a niche group within a specific industry, they focus their spending on the appropriate business magazines. When they prefer to expand the reach of an advertisement, they focus on consumer magazines, and the variety of magazines available through a given publisher becomes an important selling point.

Other sources of revenue for publishers include sales of magazines by subscription and through newsstands (circulation), sales of articles produced in-house and the associated royalty payments (production revenue), and special events driven by business publications. Such events produce revenue in the form of ticket sales and, occasionally, event sponsorship. In the publishing industry, advertising revenue accounts for approximately 73% of the operating revenue, while approximately 26% of operating revenue is attributed to circulation.


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The major expenses for publishers are salaries, wages and benefits, commissions, printing, postage and distribution, and content costs.

Staff salaries, wages and benefits are major expenses, and commissions are based on the advertising revenue generated by the sales team. Printing costs vary according to the type of paper usedglossy, fine or regular grade. Postage and distribution expenses are mainly from Canada Post and other third-party courier services to deliver the magazines to retail outlets and subscribers across Canada. Postage costs per magazine are higher in Canada than in other countries, and those costs are increasing by 3% to 4% annually.

Content costs include payments to freelance writers and the cost of photography. Publishers often pay a premium for hot-topic or last-minute articles; this may have a material impact on operational expenses.

In recent years, digital media has emerged and helped create additional advertising revenue streams for the publishing industry. Digital media consists of websites, mobile applications, content for electronic readers and overall connectivity across different electronic platforms. In digital media, online advertising revenue is measured by the number of impressions made on a website, one impression being one view of a given web page by one person. The developmental costs associated with this revenue are the creation and management of websites, mobile applications and promotional programs.

Readers are willing to pay more for content that reflects their current interests; the high-end client group provides the highest profit margin but is underserved in the industry. Since reader preferences are constantly changing, creating content that is up-to-date and relevant is an ongoing challenge for publishers. In a traditional magazine, content means articles and photography. With respect to digital media, content means a given website, its associated articles and its availability through different electronic platforms.

Digital format has not been formally adopted for EmRen publications. Scott strongly believes that readers still prefer hard copy magazines.

Shareholders and Board of Directors

EmRens Board of Directors is composed of five individuals with a wealth of knowledge in various industries. Derek Woodsworth, Chair of the Board, holds a position of vice-president of the largest telecommunications organization in Canada. The other Board members are Patsy Deacon, an independent lawyer, Aadi Singh, owner of a management consulting firm, and the two founders, Scott and McCormick.

The Board meets every quarter to review EmRens financial results and provides recommendations regarding strategic directions. Every two years, the directors review the companys strategic plan and, at their last meeting, they conducted a high-level environmental scan (see Appendix 1).


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Senior Leadership Team

EmRens senior leadership team consists of the co-presidents, Scott and McCormick, and four directors, each overseeing one of the four main divisions: Consumer Publishing, Business Publishing, Operations and Logistics (see Appendix 2). Collectively, these six individuals have a vast amount of experience in different aspects of the publishing industry.

James Arnold, Director of Consumer Publishing, has ten years of experience in production and sales at EmRen. He began his career as a salesman and was promoted quickly, due to his aggressive nature and his ability to build strong networks.

Cathy Kareva, Director of Business Publishing, has twenty years of experience in various publishing companies in Canada. She is knowledgeable in all facets of the publishing process and has always been a valuable member of the senior leadership team.

Georges Manon, Director of Operations, is responsible for production, editing and design, project management, sales and marketing. Prior to joining EmRen in 2008, he oversaw a number of mergers involving small publishing firms in the United States.

Jinah Moon, Director of Logistics, joined EmRen two years ago. She was the owner of a small courier service in Montreal and decided to move to Toronto to start a career in publishing.

The Publishing Process

EmRens publishing process is similar to that used by most magazine publishers (see Appendix 3).

Content Development and Production

The Consumer Publishing and Business Publishing divisions have the greatest responsibility in developing magazine content and must coordinate efforts with the production team to finalize the content. The divisions solicit material from a network of freelance writers with whom relationships have been established over a period of years, and ensure that articles are readily available as needed. The strength of the network is reflected in the high quality of the articles in EmRens magazines. In order to complement the written material, the divisions either engage photographers to produce specific sets of photographs or purchase photographs from other organizations. Each division also tracks the inventory (articles and photographs) purchased, keeping unused items on hand and reviewing them quarterly with Accounting.


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The success in delivering the content of the magazines is determined by the skillful use of photographs, illustrations, captions and typography. The production team spends much time planning the layout, fonts and visuals for each article in order to better engage readers.

Discussions are held among the Consumer Publishing and Business Publishing divisions and the production team regarding advertising space, page layout and the costs of articles and photographs.

At EmRen, consumer magazines have always been the primary focus, because they are the main drivers of advertising revenue and sales, and business magazines are viewed as a lower priority. As a result, the Business Publishing Division has frequent disagreements with the production team. In addition, because of heavy workloads and lower wages, staff turnover is higher in the Business Publishing Division.

Editorial and Design

The Editorial and Design Department is responsible for the final layout of each magazine issue as well as the editing of the final product.

The design team is responsible for ensuring that the look and feel of the magazine are consistent with its brand and content. Each magazine has a cover design as well as department page designs. The department page designs are recurring sections found in a magazine and often have a similar format. In addition, each issue has from two to five feature stories that require different feature spread designs, depending on the nature of the article. More effort is invested in the designs for feature spreads because these play an important role in capturing the readers interest.

Once the design and layout have been approved, the content transferred from the production team is added. The editorial team then edits the completed issue and sends the approved version to the chief editor for a final review.

Before sending the magazine to the printer, the chief editor ensures that the format is within the printers specifications. The printer checks the specifications and produces printed proofs for editorial review and final sign-off.

Printing and Distribution

The printing company is responsible for printing, trimming, folding and binding the magazines. The Logistics Division communicates the printing volume, delivery schedule and timelines before the printer prints and prepares the magazines for shipping to various subscribers and newsstands across Canada.

EmRen has a printing contract with Pentagon Printing Incorporated (Pentagon), located in Quebec. EmRen is Pentagons largest customer; the contract is reviewed every three years and the price is fixed for the term regardless of fluctuations in commodity prices. Pentagon has over 1,800 square metres of warehouse space, has been in operation for


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more than 20 years and has serviced the nearby businesses well. Pentagon is responsible for printing and storing EmRen magazines until it is time to distribute them.

Over the years, EmRen has worked closely with Pentagon to ensure the responsible and sustainable use of raw materials. Pentagon is a major supporter of forest restoration programs and works to minimize its environmental footprint.

In the past few years, labour disputes at Pentagon have impacted services and have had a negative effect on customer experience. In addition, some inventory has been misplaced and some security issues have arisen.

Project Management

The project management team is responsible for coordinating and overseeing research activities, special events and special projects.

At EmRen, research activities are completed by both the Consumer Publishing and Business Publishing divisions either in-house or in partnership with other organizations; the purpose is to present thoroughly researched content. Research for business publications focuses on professional activities; for example, the medical magazines typically publish reports on new drugs available in the marketplace. Research for consumer publications focuses on consumer intelligence; for example, a fashion magazine may publish a study of the buying behaviour of a particular age group, information that can help advertisers reach a target audience.

The business publications rely heavily on special events held throughout the year in order to gain subscribers. Whether these events are organized entirely by EmRen or jointly with other sponsors, the project management team is responsible for securing a venue, guest speakers and other needed contractors. Over the years, the resources required to organize these events in the industry have increased due to their complexity.

The project management team is also responsible for special projects, which are usually driven by the Consumer Publishing Division. Such projects can range from covering a royal wedding to creating cookbooks as inserts in one of the womens magazines.

Finance and Accounting

The accounting team deals with accounts payable, accounts receivable and payroll, and is involved in the preparation of month-end statements, budgets and forecasts.

To ensure that EmRen does not pay for the same article twice, a clerk checks each invoice against the inventory for each magazine. In EmRens database, articles are listed in order by date, title, freelance writer and the name of the magazine in which the material will be published.


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Each magazine has a dedicated accountant as well as a business manager. The business manager acts as a liaison among the accounting, operations, consumer publishing and business publishing teams to ensure that each issue, special event and project is accounted for accurately and completely, and that the appropriate month-end statistics are recorded. These data, which include the number of advertising pages and issues sold in the month as well as the corresponding revenue and costs, help management monitor the profitability of each magazine on a monthly basis. Forecasts are prepared every two months, and budgets, once a year.

EmRens old accounting system did not integrate sales, billing and reporting functions. Two years ago, the system was upgraded so that it now contains modules for sales, billing and monthly reporting. However, due to difficulties with module integration and training, the accounting team still has reporting issues to resolve. For example, there are insufficient controls to prevent costs from being recorded in the wrong accounts or in multiple accounts, causing costs to appear in the wrong expense category. Once these problems have been resolved, the new system will be a useful tool in the decision-making process.

EmRen had early adopted Accounting Standards for Private Enterprises (ASPE) in 2009, and the audited financial statements are provided in appendices 4 and 5. The company pays income taxes at a rate of 30%.

Sales and Billing

EmRens sales team is well-trained. The sales representatives are paid a minimum base salary and must sell advertising space in order to be eligible for commissions. On a monthly basis, the report of sales generated is used to calculate the commissions paid.

When advertising space is sold, the sales representative enters the information in the accounting system. The billing team then validates the data by counting the number of advertisements in each magazine and generates invoices using the accounting system.

In addition to selling advertising space, the sales team negotiates the placement of EmRens magazines in retail outlets across Canada. Physical position on the racks of a newsstand is extremely important in driving sales, and EmRens sales team has done an excellent job of securing and maintaining good placement and visibility for the companys publications.


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Marketing

For each magazine, EmRen relies on marketing and promotions to attract more subscribers and increase sales. The marketing team is responsible for increasing awareness of the different magazines by using a variety of appropriate advertising media and effectively targeted messages that appeal to the distinct groups of readers for each magazine. For example, EmRen advertises its running magazine on transit shelters along popular running routes.

Facilities

McCormick firmly believes that the company should operate in an upscale location and be in close proximity to its clients. As a result, EmRens office is conveniently positioned near several main advertising clients, and this has helped the company build good relationships with those clients over the years. Currently, EmRen occupies two floors of a prestigious downtown building.

Assets included in property, plant and equipment are production machinery, computers, shelving and fixtures. These assets are amortized on a straight-line basis over their estimated useful lives.


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Appendix 1

EmRen Publishing Incorporated Environmental Scan

Strengths Weaknesses

1. EmRen publications are known for their literary excellence and their content reflecting industry trends.

2. The founders, Scott and McCormick, are industry experts. The senior leadership team is strong and experienced.

3. EmRen has a good working relationship with freelance writers who have up-to-date industry knowledge.

4. Long-term favorable contract with Pentagon.

5. EmRen is socially responsible and participates in environmental initiatives.

6. The company has good connections with advertising clients and suppliers in the industry.

7. Prestigious downtown location; close proximity to existing clients.

8. The accounting system is fairly new and was upgraded two years ago.

9. Well-trained sales team. 10. The sales team has maintained good

placement and visibility for the companys publications in retail outlets.

1. Decline in net income. 2. Disagreement between the Business

Publishing Division and the production team because business magazines are viewed as a lower priority.

3. Problems retaining staff in the Business Publishing Division.

4. Module integration and training issues of the accounting system are causing inaccurate reporting.

5. Labour disputes at the current printer (Pentagon) have impacted services and have had a negative effect on customer experience.

Opportunities Threats 1. The Canadian consumer magazine market

is expected to grow. 2. Advertising is expected to grow steadily. 3. Readers are willing to pay a premium price

for content that reflects their current interests. The high-end clients provide the highest profit margin.

1. Commodity prices are subject to fluctuation. 2. Printing, postage and distribution costs are

increasing. 3. Competition in the industry is intense. 4. Readers preferences are constantly

changing. 5. The resources required to organize the

special events have increased. 6. Advertising revenue is susceptible to

economic fluctuations.


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Appendix 2

EmRen Publishing Incorporated Organizational Chart

Lauren McCormick

Co-president

James Arnold

Director of Consumer Publishing

Cathy Kareva

Director of Business Publishing

Jinah Moon

Director of Logistics

Administration

Editorial and Design

Business Managers Sales

Production

Business Managers

Project Management

Billing

Finance

Accounting

Georges Manon

Director of Operations

Emma Scott

Co-president

Marketing

Board of Directors

Derek Woodsworth Chair Patsy Deacon Aadi Singh Emma Scott Lauren McCormick


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Appendix 3

Publishing Process Flow Chart

Authors and freelance writers submit articles to EmRen for review

Articles are reviewed by Consumer and Business Publishing divisions

Accepted? Rejection letters are sent

Production schedule and timelines are discussed and communicated

Content is reviewed and finalized

Content sent to Editorial and Design

Editorial and Design Department works on cover design, departmental designs and feature spread designs, and edits the completed magazine issue

Pre-press review is completed and magazine is sent to the chief editor for a final review

Magazine is sent to the printer

Printer sends an electronic version for final editing and sign-off

Magazines are printed and distributed

Production team works on content layout, font and visuals

NO YES

Project Management Finance Marketing

Supporting Departments

Consumer and Business Publishing divisions solicit authors on specific topics

Sales

Logistics Division sets the printing volume, the delivery schedule and timelines


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Appendix 4

EmRen Publishing Incorporated Income Statement

For the Years Ended December 31 (Audited) (in 000s)

2011 2010 2009

Revenue Advertising $17,716 $16,820 $14,813Subscription 10,005 10,295 8,240Newsstand 3,808 2,823 1,384Production 677 603 409Events 649 950 468

Total Revenue 32,855 31,491 25,314 Expenses

Salaries, wages and benefits 11,079 9,585 9,003Commissions 886 841 741Printing 10,375 10,013 7,484Postage and distribution 2,572 2,482 1,856Content 1,827 1,706 1,678Rent 2,200 2,200 2,200General and administrative 514 415 367Marketing and promotion 848 679 462Amortization 247 233 227Interest 126 187 129

Total Expenses 30,674 28,341 24,147 Income before taxes 2,181 3,150 1,167Income taxes (30%) 654 945 350

Net Income $ 1,527 $ 2,205 $ 817 Opening retained earnings $3,172 $ 967 $150Net income 1,527 2,205 817

Closing Retained Earnings $4,699 $3,172 $967


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Appendix 5

EmRen Publishing Incorporated Balance Sheet

As at December 31 (Audited) (in 000s)

2011 2010 2009

Assets Current Assets

Cash and cash equivalents $ 2,413 $ 1,847 $1,360 Accounts receivable 3,405 2,912 1,363 Inventory 3,430 2,858 1,893 Other current assets 1,148 1,396 1,399

10,396 9,013 6,015

Property, plant and equipment (net) 2,514 2,352 2,243

Total Assets $12,910 $11,365 $8,258

Liabilities and Shareholders Equity Current Liabilities

Accounts payable $ 1,779 $ 1,353 $1,313 Accrued liabilities 1,248 1,056 1,196 Income tax payable 268 638 534 Current portion of long-term debt 192 192 192 Unearned revenue 1,025 638 578

4,512 3,877 3,813

Long-term debt 1,699 2,316 1,478 Total Liabilities 6,211 6,193 5,291

Shareholders Equity Common stock 2,000 2,000 2,000 Retained earnings 4,699 3,172 967

Total Liabilities and Shareholders Equity $12,910 $11,365 $8,258


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Additional Information

(Time Allowed: 4 hours) Notes: i) Candidates must not identify themselves in answering the question. ii) All answers must be written on official answer sheets or in the approved

electronic file. Work done on the Additional Information or on the Backgrounder will NOT be marked.

iii) Included in the examination envelope is a standard supplement consisting of formulae and tables that may be useful for answering the question.

iv) Examination materials MUST NOT BE REMOVED from the examination writing centre, except for the Instruction Sheet to Electronic Exam Writers, if applicable. All used and unused answer sheets, working papers, the Backgrounder, the Additional Information, the supplement and, if applicable, a USB key containing the electronic answer file must be sealed in the examination envelope and submitted to the presiding officer before the candidate leaves the examination room. Candidates writing the examination electronically must keep the Instruction Sheet to Electronic Exam Writers, which provides instructions for uploading their responses following the examination.

v) Only the following models of calculators are authorized for use on the Case Examination: 1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII+ (or HP 10bll) 3. Sharp EL-738C (or EL-738)

CICA and CMA Canada joined together January 1, 2013, to create CPA Canada as the national organization to support unification of the Canadian accounting profession under the CPA banner. The CMA Entrance Examination, CMA Case Examination and CMA Board Report are still being developed and provided under the direction of CMA Canada until the final offerings of the CMA program are completed.


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EmRen Publishing Incorporated Additional Information

Update

Traditional print advertising, although successful in reaching targeted audiences, is now seen as being too restrictive. Advertisers are eager to reach a broader spectrum of customers through online advertising.

Readers want content to be available anywhere and at any time, and publishers must deliver what consumers need in a timely and innovative manner. Consumers are spending more time online, and publishers information technology systems must be up-to-date and integrative in order to deliver online content seamlessly. As a result, the competitive landscape has shifted, and companies are looking for more ways to differentiate themselves in the online world.

For traditional publishing companies, profitability has declined in recent years as costs have increased for paper, printing and postage.

Board Meeting

At the Board meeting on January 15, 2013, the audited financial statements for 2012 were presented (see appendices 1 and 2). Following are excerpts from the meeting.

Derek Woodsworth: As you all know, our net income has been declining over the last two years. We need to find ways to increase revenues or reduce costs. Any ideas?

Lauren McCormick: Many of the large publishing houses are starting to go digital. The readers are definitely moving in this direction, since they can go online and easily find the articles that appeal to them. As I see it, all of EmRens existing magazines could benefit from having online versions that would reach larger groups of subscribers.

Patsy Deacon: But right now we dont have the capacity and up-to-date information technology to go digital for all of our publications. Although some of our magazines have websites and traffic is increasing, our online presence is still in its infancy. Our in-house website developers have the knowledge they need to create online content, but they are not as experienced in doing so as their counterparts in companies that specialize in this area. Website development skill combined with magazine publishing knowledge is difficult to find these days.

McCormick: I understand that we dont have enough capability and experience at present, but I found an innovative Toronto company that could give us a foothold in the digital media sector. LDMedia Incorporated has a group of websites focused on wellness, health and sports with a solid subscriber base. Ive had some discussions with the owners, and they are interested in selling the company.


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Woodsworth: Thats a great idea. From my point of view, we need the capabilities that LDMedia has, and we need to establish a strong foundation right from the start.

Aadi Singh: On another note, our contract with Pentagon will expire at the end of next month. Jinah has proposed that we purchase the necessary equipment and print magazines in-house. I think this will benefit us in the long term, given the rising costs and the issues we had with Pentagon.

Woodsworth: I want to discuss another opportunity that has come up. Deir Trail Incorporated is a niche tourism company that specializes in providing tour packages to high-end customers and is looking to publish a magazine six times a year for its customers and travel professionals. Lauren and I think this is an excellent opportunity to reach a different set of readers.

Emma Scott: Deir Trail uses grade A paper, which is more expensive than the grade B paper that we currently use for our magazines. Not all printing companies carry multiple grades, for cost reasons, and Pentagon does not have grade A paper. Should we proceed with Deir Trail, we would need to ensure that grade A paper is available.

Deacon: Regardless of what we decide to do, we need to return to a pre-tax profit margin of 10% or greater by 2015.

Woodsworth: Youre right, we also need to consider our financing options and do a thorough analysis on all the current opportunities.

EmRen is eligible for a maximum bank loan of $3 million payable over 15 years with an 8% interest rate, and a discount rate of 13% should be applied when evaluating the options.

LDMedia Incorporated (LDMedia)

The four wealthy entrepreneurs who founded LDMedia are now looking to sell their company to a more experienced management team. LDMedias proprietary information technology platform is extremely user-friendly and allows advertisers to customize advertising space; different advertising banners run across the websites depending on the target audience and website accessed. In contrast, its competitors do not offer such customization and flexibility. Given the unique capability of LDMedias platform, the company is well positioned for future growth as advertisers continue to look for more customized ways to reach their target audiences.

The company has enjoyed strong profits over the years. However, the billing and administrative functions are handled by a team that is prone to make errors.

LDMedias organizational structure is decentralized, and its employees have multiple responsibilities. For example, the developer of a website would also be in charge of


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selling the website to a client. This decentralized structure has enabled the company to respond quickly to changing market conditions and evolving customer preferences.

After the Board meeting, McCormick and Scott continued to discuss the purchase option as follows:

McCormick: We could utilize LDMedias capabilities and experience to develop online versions of our magazines and formally go digital. I think this opportunity would benefit EmRen by increasing our subscriber base and advertising revenues. Advertisers could choose to advertise online or in print.

Scott: Im concerned about how this would affect our employees. LDMedias structure is so different from ours. There are already rumours about possible layoffs at EmRen, and this purchase would definitely not help the situation.

McCormick: If the numbers show that this opportunity would help us meet our targets, I would like to see EmRen head in this direction. The only thing Im concerned about is the security of customers information; LDMedia used to have negative press on information confidentiality breaches, which would need to be addressed.

Scott: I think we should consider building the websites for all our magazines in-house, rather than via LDMedia. I would rather focus on providing creative content and utilizing the resources within our company. One of our magazines recently won the Readers Choice Award for Best Magazine of the Year, confirming that our content is great. We can just hire talented people to develop the websites.

McCormick: I agree, but LDMedias unique information technology platform and the experience to manage websites would be great additions to our company if we want to go digital. We need to see some numbers and a detailed report before we can make the decision. Here are LDMedias 2012 financial data and some other details about the potential acquisition (see Appendix 3).

Printing In-house Proposal

Half of a floor inside EmRens office building became available for lease recently, and Jinah Moon believes it is time for the company to take control of the printing and distribution services. The office space available will be enough to fit the printers, storage shelves and additional employees; the entire office building was upgraded last year and is secured with an alarm system and motion sensor, and the working environment is excellent. EmRen would be able to negotiate a favourable fixed rate of $500,000 per year, with a lease renewal every 5 years.

After the Board meeting, McCormick and Scott met with Moon to discuss the proposal:


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Moon: Personally, I strongly prefer printing our magazines in-house, which would give us access to the lowest printing price and the maximum control of quality. The commodity price has been increasing rapidly, and Pentagon has already increased its price on the new draft contract. In addition, we would be able to provide grade A paper that Deir Trail requested if we handled printing internally.

McCormick: My concern is the durability of this proposal. As you know, we may gradually move towards digital media, and the demand for print magazines will decrease as online versions mature. For us to fully handle printing and distribution, we need to purchase equipment, hire additional employees and provide training, and Im not sure whether this would be worthwhile.

Scott: The demand for our traditional magazines is still steady, even with digital media emerging, as some customers still prefer hard copies. However, I recently read a market report forecasting that the demand for print magazines will decline.

Moon: It isnt difficult to find qualified employees, as the skill set required isnt high. If we decided to get rid of some printers in the future, we could always use the extra space for possible expansion, as it isnt easy to find office space at such a good price in the downtown core. Also, our current office space is tight and will be tighter if we acquire LDMedia.

McCormick: True, but we do not have any experience in managing printing. Im concerned that, at least in the short term, an inexperienced team would harm our quality of services.

Scott: On another note, I just had a telephone conversation with a manager at Pentagon; she confirmed that Pentagon would be able to provide grade A paper as well. Lets look at the numbers before we make the decision.

Costs and the other details associated with this proposal are outlined in Appendix 4.

Deir Trail Incorporated (Deir Trail)

Deir Trails travel packages are among the most expensive in North America. The planned magazine would be available by subscription only and would emphasize travel destinations, the companys tour packages, and the Deir Trail rewards program. The proposed contract has a three-year term, with a renewal option, and contains no requirements for a digital version of the magazine.

McCormick met with Scott and Cathy Kareva to discuss the contract terms outlined in Appendix 5.

McCormick: This opportunity would allow EmRen to tap into the high-end market, but I need to see more financial analysis before making up my mind.


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Kareva: I agree. As part of the contract, we would participate in four business shows per year to promote Deir Trails travel packages. With our expertise in handling business events and Deir Trails marketing efforts, it would be a win-win situation. Our brand would be highly visible to the wealthiest people in Toronto. In addition, our marketing people would have access to Deir Trails distribution list of industry professionals, which could benefit our Business Publishing Division.

Scott: We do have the expertise for business shows, but we recently experienced high turnover in the event planning group, and the new hires are not as good at budgeting and keeping track of costs.

McCormick: In order to determine the ultimate impact of the Deir Trail opportunity on our bottom line, we have to consider the new printing costs. We would need the grade A paper whether we stay with Pentagon or print the magazines in-house.

Other Information

Kareva is looking into a proposal to co-sponsor a business event with a local company (see Appendix 6) and has requested a break-even analysis. This opportunity to share best practices with one of the most experienced vendors in Canada could result in an increased subscriber base for EmRen and would emphasize the companys position as a leader in the business magazine sector. The lead events coordinator, who would handle the arrangements, has asked for an incentive payment.

A group of freelance writers is suing EmRen for $1 million for publishing their articles without permission. It is very likely that the court would approve the settlement with the current portion being $0.2 million. The accounting team needs to determine how to disclose this pending lawsuit in the financial statements in accordance with Accounting Standards for Private Enterprises (ASPE).

James Arnold has approached McCormick to discuss a telephone conversation between Kareva and a Deir Trail executive. It was discovered that they were close friends, and Kareva agreed to share EmRens subscriber database with Deir Trail regardless of acceptance of the contract. This is against industry practice and is very concerning to McCormick. For the next three years, advertising revenue at EmRen is expected to grow by 5% per year; subscription and newsstand projections are provided in Appendix 4. Assume production and events revenues remain unchanged. Unless otherwise specified, expenses are expected to increase annually at the estimated inflation rate of 2%.


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Required:

As Ethan Vu, CMA, EmRens accounting manager, develop an integrated report addressing the alternatives discussed at the Board meeting as well as any other organizational issues and concerns requiring attention. Include details of your analysis, supported recommendations, an implementation plan and a financial forecast. In undertaking this task, you will need to take into consideration your background knowledge of the company as well as the additional information provided above.


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Appendix 1

EmRen Publishing Incorporated Income Statement

For the Year Ended December 31, 2012 (Audited) (in 000s)

Revenue

Advertising $18,732Subscription 11,557Newsstand 4,570Production 598Events 560

Total Revenue 36,017 Expenses

Salaries, wages and benefits 12,349Commissions 937Printing 12,088Postage and distribution 2,997Content 1,627Rent 2,200General and administrative 578Marketing and promotion 974Amortization 251Interest 110

Total Expenses 34,111 Income before taxes 1,906Income taxes (30%) 572

Net Income $ 1,334 Opening retained earnings $4,699Net income 1,334

Closing Retained Earnings $6,033


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Notes: 1. For all of EmRens magazines, the annual subscription price is $7.50 per copy and

the newsstand price, $10 per copy.

2. Commissions at EmRen are paid at 5% of the advertising revenue. 3. Printing, postage and distribution expenses are variable depending on production

volume. In 2012, the average printing cost per page was $0.11, and the average postage and distribution cost per copy was $1.50.

4. EmRen has a favourable long-term lease contract with the current office building,

and the rent expense will remain unchanged for another three years.


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Appendix 2

EmRen Publishing Incorporated Balance Sheet

As at December 31, 2012 (Audited) (in 000s)

Assets Current Assets

Cash and cash equivalents $ 2,687Accounts receivable 3,280Inventory 3,719Other current assets 1,228

10,914 Property, plant and equipment (net) 2,263

Total Assets $13,177 Liabilities and Shareholders Equity Current Liabilities

Accounts payable $ 1,402Accrued liabilities 1,045Income tax payable 173Current portion of long-term debt 160Unearned revenue 986

3,766 Long-term debt 1,378Total Liabilities 5,144 Shareholders Equity

Common stock 2,000Retained earnings 6,033

Total Liabilities and Shareholders Equity $13,177


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Appendix 3

LDMedia Incorporated 2012 Financial Data

(in 000s)

Revenue Advertising banner $5,950Advertising microsite/web video 1,329

Total Revenue $7,279 Expenses

Salaries, wages and benefits $2,824Commissions 364Information and communications 45Programming and production 1,507Content 450Rent 400General and administrative 143Marketing and promotion 249Amortization 238Other miscellaneous 26

Total Expenses $6,246 Notes: 1. The purchase price is $5 million for all of the assets of LDMedia. 2. On analysis of LDMedias equipment, it was determined that the market value is

$3.5 million and the remaining life is 10 years, after which the salvage value will be $150,000. Amortization is calculated using the straight-line method over the estimated useful life of the related asset.

3. If the acquisition is completed, LDMedias employees would assist EmRen in

developing online versions of magazines and going digital, and it is expected that EmRens online advertising revenue would increase by $600,000 by the end of 2013 and by $200,000 every year for the next two years.

4. LDMedia currently employs 46 employees who would all be relocated to EmRens

office building should the acquisition happen. Instead of renting extra office space, EmRen would rearrange the existing space, which would cost $230,000 and could be completed by the end of June 2013. The relocation expense and lease termination fee for LDMedia would be $180,000 in total.


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5. There would be duplicated job positions should the acquisition happen; headcount would be reduced, and consequently the salaries, wages and benefits expenses would decrease by $350,000 in 2013.

6. Commissions at LDMedia are paid at 5% of the total advertising revenue. 7. For the next three years, advertising revenues at LDMedia are expected to grow by

5.5% per year. Unless otherwise specified, all other expenses are expected to increase annually at the estimated inflation rate of 2%.


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Appendix 4

Printing In-house Proposal

Number of Pages Paper Grade

Average Cost per Page Pentagon (External)*

EmRen (In-house)**

200M B $0.10 $0.09

2M A $0.37 $0.31

Other Costs OccurrencePentagon (External)

EmRen (In-house)

Initial investment on equipment One-time $1,200,000 Relocation expense One-time $230,000 Training expense One-time $25,000 Equipment setup One-time $38,000 Rent Yearly $500,000 Salaries, wages and benefits Yearly $780,000

* New rates stated on the draft contract for 2013. ** Rates are projected for 2013 and do not include Other Costs.

Projected 2012 2013 2014 2015

Number of magazines in circulation

Subscription 1,540,942 1,571,761 1,556,043 1,540,483 Newsstand 457,008 466,148 461,487 456,872

Total number of magazines in circulation 1,997,950 2,037,909 2,017,530 1,997,355 Number of pages per magazine 55 55 55 55 Number of pages printed in one year 109,887,250 112,084,995 110,964,150 109,854,525

Note: 1. All equipment purchased would have an estimated useful life of 20 years, after which

the salvage value will be $50,000. Amortization is calculated using the straight-line method over the estimated useful life of the related asset.


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Appendix 5

Internal Memorandum Regarding Deir Trail Incorporated

To: Lauren McCormick From: Cathy Kareva Re: Deir Trail Proposal Review Objective: The information below contains the contract details for Deir Trail. In light of the costs associated with this contract, I would like to further discuss the operational implications. Contract Price Deir Trail will pay EmRen a fixed contract price of

$1,600,000 per year, including the price for the magazines and the business shows.

Production Volume (Number of Copies)

50,000 to 60,000, depending on the subscription rate.

Number of Pages per Copy 35 Printing Costs Vary. Comparative analysis should be completed on

in-house printers and Pentagon to determine the impact on printing costs.

Average Postage and Distribution Cost per Copy

$1.50

Contractor Compensation $260,000 per year in total. Two contractors who specialize in the tourism industry would need to be hired to prepare the magazine content and to communicate with Deir Trail.

Expenses for the Business Shows

One-time purchase of promotional materials of $420,000 in 2013 (useful life is 10 years, salvage value will be nil); ongoing administrative and marketing costs of $250,000 per year from 2013 to 2015.

Contract Duration 2013 to 2015 Paper Grade Required A


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Appendix 6

Business Event

To: Cathy Kareva From: Avanthi Jayaran, co-sponsor Subject: June 26 Sponsorship Event Hello Cathy, It is anticipated that 900 to 1,100 people will attend the June 26 event. The ticket price and estimated costs are as follows: Ticket Price $20 per person

(includes a copy of the magazine) Costs Include: Advertising $15,000 Venue $90,000 Food, drinks and staff $25,000 Guest speaker $12,000 Packaging and gifts $4,500 Other fixed costs $2,000 Incentive payment to the lead

events coordinator $5,000 Variable cost per magazine $6.75 per copy Sponsorship Details: As discussed, EmRen will collect 100% of the ticket sales revenue, and the following costs will be reimbursed at 100% to EmRen: advertising, venue, food, drinks and staff. The payment for the guest speaker will be reimbursed at 50%, and all other fixed costs will be reimbursed at 75%. However, EmRen will not be reimbursed at all for the incentive payment for the lead events coordinator and the variable cost for magazines. Let me know if you have any questions.


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May 2013 Case Examination General Comments on Performance

EmRen Publishing Inc. (EPI)

Case Background and Required Element

The May 2013 Case Examination focuses on a private company, EmRen Publishing Incorporated (EmRen), a magazine company that publishes both consumer and business magazines across Canada in the areas of fashion, health, beauty and professional industries. The co-presidents, Emma Scott and Lauren McCormick, are the founders of EmRen.

In January 2013, Scott and McCormick met with the Board of Directors in order to address concerns about emerging digital media, the companys declining net income and their desire to see the pre-tax profit margin return to 10% or greater by 2015.

The following alternatives were identified for consideration:

1. Acquire LDMedia Incorporated (LDMedia). LDMedia has unique information technology platforms that are extremely user-friendly and allow advertisers to customize advertising space.

2. Handle printing in-house instead of renewing the printing contract with the current printer, Pentagon Printing Incorporated (Pentagon).

3. Accept a three-year magazine publishing contract offered by Deir Trail, a high-end tourism company.

As Ethan Vu, CMA, EmRens accounting manager, develop an integrated report addressing the alternatives discussed at the Board meeting as well as any other organizational issues and concerns requiring attention. Include details of your analysis, supported recommendations, an implementation plan and a financial forecast. In undertaking this task, you will need to take into consideration your background knowledge of the company as well as the additional information provided above.

General Approach and Expectations

Throughout Year 1 of the SLP, candidates have been taught to apply the Steps for Approaching Business and Corporate Strategy. They have completed several practice case exams using these Steps, have received written feedback on their performance, and have revisited the approach many times during their Interactive Sessions. As a result, expectations related to candidates general approach and performance are high.

The following comments on performance highlight how each attribute aligns to the Steps for Approaching Business and Corporate Strategy.


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1. QUALITATIVE ANALYSIS AND STRATEGY FORMULATION

1a) Situational Analysis Quality of Qualitative Analysis:

This attribute aligns with Step 2 of the Steps for Approaching Business and Corporate Strategy. This is the step that builds the foundation for all other analyses in order to facilitate the decision-making process in developing business strategy.

Better responses provided a comprehensive current situational analysis (i.e. identification of the mission, the major targets, any relevant constraints, major stakeholder preferences, key success factors, and SWOT points), with a clear delineation of the external industry KSFs from the internal KSFs, and many relevant SWOT points applicable to the alternatives being evaluated.

Average responses provided most elements within the current situational analysis; however, they generally had some minor weaknesses such as limited depth of analysis or miscategorization of internal and external SWOT points.

Weak responses provided limited analysis and/or provided irrelevant points (e.g. restating Backgrounder points, stating specific pros/cons related to specific alternatives, listing specific alternatives within the identification of the external environment).

1b) Issue Analysis and Integration:

This attribute aligns with Step 4 of the Steps for Approaching Business and Corporate Strategy. Integration demonstrates the ability to use relevant facts in order to develop a cogent argument for or against an alternative.

Better responses provided many integrative linkages between alternatives and the current situational analysis. There was an effective use of many elements within the current situation rather than reliance on only a few specific points for each alternative. Additionally, the pre-tax profit margin target was integrated throughout the analyses.

Average responses provided some integration between alternatives and situational analysis points, whereas weaker responses provided few deliberate clear integration linkages within the analysis and rarely connected to the pre-tax profit margin target.

1c) Implementation/Action Plan Overall Quality:

This attribute aligns with Step 7 of the Steps for Approaching Business and Corporate Strategy. The implementation plan clearly articulates both the strategic and operational tasks that are required to execute the recommendations, includes plans to address risk exposure previously indicated in the analysis of the recommended alternative(s) (i.e. mitigation of cons) and any related operational issues.

Better responses separated strategic implementation tasks from operational implementation tasks in the action plan. As well, all tasks were supported with the following:


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1. What must be accomplished; 2. Who will be responsible for the task; 3. When the task will start and finish; and 4. The costs associated with the task, whether directly related to the alternative, or

additional incidental costs specific to the task.

Additionally, better responses provided specific plans to mitigate major cons related to the recommended alternatives.

Average and weaker responses provided an implementation plan with limited depth and generally did not address risks associated with the recommendations.

2. APPLICATION OF QUANTITATIVE TOOLS

2a) Financial and Performance Analysis of EmRen:

This attribute aligns with Step 2 of the Steps for Approaching Business and Corporate Strategy. The current financial assessment evaluates both the external (e.g. benchmarking) and internal (e.g. ratios, horizontal/vertical analysis) financial environments for the current state.

Better responses provided more meaningful interpretation of the most relevant ratios over a three- or four-year trend, provided some vertical and horizontal analysis to assess/interpret internal efficiency, quantified the pre-tax target, and benchmarked EmRens advertising and circulation revenue performance against industry averages supported by relevant interpretation.

Average responses evaluated relevant ratios for three to four years and provided some interpretation.

Weaker responses did not include the most current year within the current financial assessment, provided vague interpretation, or emphasized irrelevant ratios.

2b) Quantitative Decision Analysis of Strategic Alternatives:

This attribute aligns with Step 4 of the Steps for Approaching Business and Corporate Strategy. This step includes quantitative analysis for the three major alternatives. The type of analysis required is determined by two factors:

1. The decision criteria (e.g. pre-tax profit margin target); 2. The type of alternative (e.g. capital investment, acquisition, profitability).

Summary of the Alternatives and Appropriate Analysis:

LDMedia Alternative Profitability analysis to test the pre-tax profit margin for EmRen by 2015. NPV analysis to assess the investment in assets.


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In-house Printing Alternative Profitability analysis to test the pre-tax profit margin for EmRen by 2015. NPV analysis to assess the investment in assets.

Deir Trail Alternative Profitability analysis to test the pre-tax profit margin for EmRen by 2015. Sensitivity analysis in order to evaluate the profitability of the fixed revenue

contract with different production volumes; or, to evaluate the profitability between this alternative and printing in-house versus outsourced printing.

Better responses considered the decision criteria (10% pre-tax profit margin) throughout the analyses of the alternatives and appropriately applied sensitivity analysis within the Deir Trail alternative. Additionally, present value tools were applied where appropriate.

Average responses considered the pre-tax profit margin targets for some of the alternatives, considered sensitivity, and attempted to evaluate investments in assets.

Weaker responses did not assess pre-tax profit margin; instead, they focused solely on NPV analysis, which was not overly relevant for some of the alternatives. For example, applying a net present value to the Deir Trail alternative is not overly relevant because the implication that a capital investment is being made for promotional material is ambiguous, as the asset is listed in a category labelled Expenses for Business Shows.

2c) Other Quantitative Tools:

This attribute aligns with steps 5 and 8 of the Steps for Approaching Business and Corporate Strategy. These steps include developing forecasts for the final recommendations, assessing feasibility of alternatives (i.e. assessing the financing required versus financing available), and other analysis requested by EmRen, specifically the breakeven analysis related to the business event.

Pro Forma/Financial Forecast

A pro forma income statement or financial forecast demonstrating the pre-tax profit margin for at least 3 years to 2015 should be provided. The forecast should include:

1. EmRens operations, including operational changes noted in case facts related to the 5.5% increase in revenues for specific revenue streams, 2% increase in expenses, and accounting for the lawsuit;

2. The recommended alternatives; 3. Any other operational changes required in light of the recommendations.

Financing

Financing required and available for each alternative and the recommendations as a whole should be assessed. The uniqueness of the recommendation (i.e. online versus traditional print) is inherent in the financing decision because both LDMedia and In-


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house Printing cannot be simultaneously financed, requiring a refocusing of EmRen based on the outcome.

Co-sponsored Business Event

A break-even analysis for the co-sponsored business event should be provided, per a direct request from management.

Better responses evaluated financing capability for each alternative and for the final recommendations, and provided a pro forma income statement for three years in order to demonstrate the achievement of the pre-tax profit margin target. The forecast included EmRens operating changes and recommendations. Better responses also calculated the breakeven outcome for the co-sponsored business event.

Average responses evaluated financing for the final recommendations and attempted to provide a financial forecast; however, the forecast usually did not include all of the recommendations and/or operational changes and/or demonstrate the pre-tax profit margin target. Average responses considered the breakeven request through the method of trial and error as opposed to the expected cost-volume-profit (CVP) methodology.

Weaker responses did not provide a forecast or analyze financing; or, the analysis had major errors (e.g. identifying retained earnings as a source of financing). As well, weaker responses did not attempt to assess the business event beyond the estimated net income of the event.

3. APPLICATION OF QUALITATIVE FUNCTIONAL CONCEPTS

This component aligns with steps 4, 5 and 7 of the Steps for Approaching Business and Corporate Strategy. These steps include analysis of minor issues within the analysis of alternatives (e.g. using a current issue or risk as a pro or a con within the analyses of the alternatives), or analysis done separately (e.g. within the discussion of operational issues or the implementation plan). In Step 4 there is the use of external and internal risks and issues developed to support arguments being made; these are an integral part of the overall recommendations when the outstanding operational issue is resolved. The resolutions form an essential part of the overall implementation plan; the implementation plan, when executed, substantially supports the recommended strategic changes.

3a) Strategic Management, Risk Management, Governance, Environmental and Ethical Issues:

Better responses used many internal and external risks (i.e. weaknesses and threats) within the analysis of the alternatives, and provided resolutions related to operational issues or mitigation strategies for internal and external risks in order to implement the recommended alternative(s) and other outstanding issues requiring attention.


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Average responses considered two to three internal and external risks (i.e. weaknesses and threats) within the analysis of the alternatives, and attempted to analyze and provide resolutions for operational issues or mitigation strategies for two to three internal and external risks in order to implement the recommended alternative(s) and resolve other outstanding issues requiring attention.

Weaker responses generally did not consider internal and external risks within the analysis of the alternatives, or did not provide any analysis or resolutions for minor issues.

3b) Performance Management, Performance Measurement, Financial Management and Financial Accounting Issues:

Better responses used performance and financial management issues within the analysis of the alternatives, and provided analysis and resolutions for operational and implementation issues. The minor alternative to co-sponsor a business event was also qualitatively evaluated.

Average responses considered one or two relevant performance and financial management issues within the analysis of the alternatives, and attempted to analyze and provide one to two resolutions for operational issues or implementation issues.

Weaker responses generally did not consider relevant performance or financial management issues within the analysis of the alternatives, or provided limited or no analysis or resolutions for minor issues.

4. APPLICATION OF A SYSTEMATIC APPROACH FOR ISSUE ANALYSIS

4a) Issue Identification and Prioritization:

This attribute aligns with Step 3 of the Steps for Approaching Business and Corporate Strategy. This step includes identification and prioritization of the main issues, the strategic alternatives for addressing those issues, and the major operational issues.

Better responses analyzed the major and minor alternatives (i.e. LDMedia, In-house Printing, Deir Trail) and the Co-sponsored Business Event, and analyzed five or more minor issues.

Average responses analyzed the major alternatives (LDMedia, In-house Printing, Deir Trail), the Co-Sponsored Business Event, and at least three minor issues.

Weaker responses did not analyze all the major alternatives or the minor alternative, or analyzed few minor issues.


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4b) Analysis of Issues and Alternatives:

This attribute aligns with steps 2, 4 and 5 of the Steps for Approaching Business and Corporate Strategy. This step includes analyses of the alternatives, which encompass both the quantitative and qualitative analysis.

Qualitative analyses that generate greater value are those which connect alternatives to the current situational analysis or the current state to the organization. These include the main decision measures related to the mission/vision, the main targets, any relevant constraints, KSFs that can be leveraged, stakeholder preferences, and both existing and new SWOT. Other qualitative analysis that provides some value would be related to the specific alternatives, or relevant and accurate case facts, which add limited or nominal value to the persuasiveness of the argument.

Quantitative analysis includes the most significant results from the analysis of an alternative, which by default would be the result that allows the clear comparison of the alternatives outcomes to the main decision metric, namely the pre-tax profit margin target. Other quantitative results other than this are subordinate and of less value.

Major Alternatives

LDMedia

Since EmRen already has some, but not enough, online presence, this alternative allows EmRen the option to accelerate its position into the digital media marketplace.

Some qualitative factors: LDMedia has the web development resources that EmRen requires, which would

address the current issue related to the expertise at EmRen. Is supported by Board membersMcCormick and Woodsworth. LDMedias ability to accelerate EmRens presence online would:

o Close the gap between EmRens capabilities and external KSFs, such as the ability to provide relevant and timely content through up-to-date integrated IT;

o Be seen as a more socially responsible venue for delivering magazine content as less paper and ink are consumed and disposed of;

o Capitalize on the increasing demand for online content by consumers, and the increasing demand from advertisers for access to online media and unique and customizable formats;

o Avoid the ongoing fluctuations in raw materials pricing, and rising print and postal costs;

o Provide an ability to quickly address changing consumer preferences; o Provide advertisers with a venue less restrictive than paper to reach

consumers. Downside considerations include the following:

o Integration of LDMedia into EmRen could further aggravate an existing morale problem and employee concern over job security.


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Quantitative impacts: Testing the pre-tax profit margin target of 10%. Assessing the capital investment. Assessing the ability to finance the transaction.

In-House Printing

EmRen currently outsources the printing of its magazines; the option to bring this process in-house will reduce the costs to print.

Qualitative impacts: The inclusion of printing in-house could conceivably require a revision to the

mission, as EmRen currently does not provide that portion of the value chain. One Board member and senior manager are supportive of this option as a means

to minimize exposure to a single supplier. Moving the printing process in-house would result in:

o Eliminating the dependence on a single supplier for printing; o Eliminating the inventory and security issues at Pentagon that EmRen is

currently exposed to; o Eliminating the requirement of a fixed contract with rising costs.

Downside considerations include the following: o Demand for print is falling; o Advertisers see print as too restrictive to their needs; o EmRens competition has already transitioned into digital media.

Quantitative impacts: Testing the pre-tax profit margin target of 10%. Assessing the capital investment. Assessing the ability to finance the transaction.

Deir Trail

This alternative is a business opportunity that diverges from EmRens normal focus by including the Travel genre in its portfolio. The analysis is predominantly a profitability-focused assessment with a longer-term view toward access to the high-end clientele that Deir Trail serves and the potential to acquire them as both subscribers and possibly advertisers.

Qualitative impacts: Engaging in this contract could be a problem, given the high turnover that

currently persists within the events group. The contract represents a good means to access the high-end clientele that is

currently underserved. The potential of acquiring Deir Trails client database would provide EmRen with

a rich resource to market product to both subscribers and advertisers.


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This relationship could help the business division to become more elevated as a targeted source for advertisers, thus improving its standing within EmRen and promoting more balance between EmRens consumer and business divisions.

Quantitative impacts: Testing the pre-tax profit margin target of 10%. Applying sensitivity analysis in order to: i) determine profitability at various levels

of copies; and ii) determine the profitability based on the source of printing (i.e. in-house versus Pentagon).

Assessing the ability to finance the transaction.

Better responses provided excellent breadth, depth and balance of analysis in order to assess both the major qualitative and quantitative impacts for the alternatives. As well, they used a global view within qualitative analysis (e.g. considered the mission, targets, preferences, key success factors, strengths, weaknesses, opportunities and threats), and considered the pre-tax profit margin target within each alternative, thereby demonstrating objectivity.

Average responses provided some depth of qualitative and quantitative analysis for most of the alternatives; however, the global view was generally weaker (e.g. all elements of the current situation were not incorporated into the analyses).

Weaker responses provided limited qualitative analysis and limited quantitative analysis. Many weaker responses did not quantitatively analyze all of the alternatives.

Minor Alternative

Co-sponsored Business Event

Qualitative impacts:

The current event experience can be leveraged as a reason to undertake the business, just as the high turnover in the events group might be a reason not to engage in this contract. For the most part, the qualitative discussion points are specific to the alternative and integrate the results of the quantitative analysis.

Quantitative impacts: The quantitative result of the analysis for the breakeven point. Expected net income.

Better and average responses provided some qualitative and quantitative analysis for this minor alternative.

Weak responses did not evaluate this minor alternative.


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4c) Relevancy: Use of Case Facts and Assumptions:

This attribute aligns with steps 2, 3, 4, 5, 7 and 8 of the Steps for Approaching Business and Corporate Strategy.

Better responses provided a clear understanding of the current situation and used this information throughout the analyses (e.g. assessed the impact on the 2015 target within the analysis of each alternative). The proper inputs and assumptions were used throughout the decision-making process, and the proper tools were applied in order to analyze the issues and alternatives to generate conclusions.

Average responses used a sufficient amount of qualitative and quantitative case facts in order to address the issues. They included adequate analysis for the major alternatives and some analysis for the minor issues. Some relevant, but immaterial, inputs may have been misstated or overlooked.

Weaker responses generally failed to recognize the important target or apply the proper analytical tools within the analyses (e.g. incorporating quantitative inputs), and often did not identify or integrate the current situation within the analyses of alternatives or current issues.

5. RECOMMENDATIONS AND CONCLUSIONS (JUDGMENT/LEADERSHIP)

This attribute aligns with steps 2, 4 and 5 of the Steps for Approaching Business and Corporate Strategy. These steps support robust recommendations (i.e. recommendations that are well articulated, well supported, logical and feasible).

Better responses provide definitive recommendations for the alternatives accepted and for the alternatives rejected. The recommendations are supported both qualitatively and quantitatively, and the main decision criteria were effectively addressed (e.g. alignment to the mission, the targets, any relevant constraints, stakeholder preferences, KSFs and financial capacity).

Better and average responses provided sufficient qualitative and quantitative support for meeting the pre-tax profit margin target and demonstrating financing ability.

Weaker reports were not well supported. For example, the pre-tax profit margin target was not considered, important qualitative points were not considered, or the recommendations were not shown to be financially feasible.


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6. PROFESSIONALISM AND COMMUNICATION

6a) Report Format and Organization:

This attribute aligns with Step 10 of the Steps for Approaching Business and Corporate Strategy.

Better responses provided a professional report with the proper format and organization.

Average reports provided an adequate format; however, some weaknesses were generally present, for example:

Headings and subheadings were not used effectively; Weak organization (e.g. complex financial information was not kept in the

appendices); Poor sequence (e.g. recommendations for minor issues or implementation plan

provided before the recommendations for the major alternatives); Executive summary, introduction or conclusion contained weaknesses.

Weaker reports omitted some components (e.g. executive summary, introduction, conclusion) or contained many other formatting problems (e.g. organization, sequence, ineffective headings).

6b) Professional Tone, Tact, Language, Style and Flow:

This attribute aligns with Step 10 of the Steps for Approaching Business and Corporate Strategy.

Better reports demonstrated good use of language and grammar, and good overall style and flow. The report was easy to read, and financial results were effortlessly conveyed with minimal guidance in the appendices.

Average reports demonstrated an adequate use of language; however, they generally contained some weaknesses, such as:

Clarity problems (e.g. analysis points were not always clear and concise; instances of weak grammar/sentence structure);

Problems with flow (e.g. not effectively integrating the financial information seamlessly into the flow of the narrative);

Audit trails (e.g. the source of quantitative inputs was not always clear in the calculations within the financial analyses).

Weak reports had many problems with language and grammar as well as an array of other weaknesses (e.g. clarity, flow, audit trails).


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Steps for Approaching Business and Corporate Strategy Note: For the Case Examination and assignments that prepare candidates for the

Case Examination (the Development Phase), steps 6 and 9 do not apply; for the Board Report and assignments that prepare candidates for the Board Report (the Application Phase), all 10 steps apply (see Appendix A).

This document provides an overview of the case writing approach. Candidates should review the GR Hotels storyboard video (accessible from the Professional Programs website Home Page) and the related materials. Please also review the General Assessment Guide, Business Report Guidelines, and Format Specifications available in the Reference Material section of the Professional Programs website. 1. Overview

Quickly read through the case material to develop an understanding of the following: a) Organization on which the case is based; b) Industry in which it operates; c) Major issues and specific opportunities/alternatives that need to be addressed; d) Information included in the exhibits (e.g. quantitative data, organizational charts,

etc.); e) Role that you are required to assume; f) Actions that you are required to perform; and g) Audience of your report (e.g. senior management, board of directors).

2. Situational Analysis1

Read through the case in detail and begin developing a situational analysis. As you read, you may categorize and document the information directly in the response. Alternatively, you may find it helpful to highlight or make notes on key information first, then categorize and document the information in the response. For example, you may use a system such as code letters and words in the margins to categorize the information (e.g. S for strength, KSF for key success factor, TX for tax rate, MI for major issue, O for external opportunity, etc.). Within the situational analysis, be sure to do the following: a) Identify the stated or implied mission and vision. b) Identify the strategic goals of the organization that need to be achieved and/or

targets that need to be met.

1 For more details, please refer to the document Situational Analysis Tools available in the Reference

Material section of the website.


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c) Determine whether there are any constraints (capacity, people, skills, financial, regulations, etc.) that require consideration in achieving the goals and/or targets. Constraints are limitations that cannot be exceeded, such as a debt-to-equity ratio imposed by a bank, other bank covenants, capacity limits, etc.

d) Determine the key stakeholders preferences. e) Identify the organizational and industry-related key success factors (KSFs) that

must be maintained or enhanced in any suggested recommendations. f) Include an assessment of the organizations current financial situation. g) Scan the organizations internal and external environments, and identify the

strengths, weaknesses, general opportunities, and threats (SWOT). Identify any SWOT points related to the current financial situation. Some tools that will help in identifying SWOT points include Porters Five Forces and PESTEL, as well as analyses of ratios, trends, profitability, target customers, target markets, variances, etc. For the Case Examination and assignments that prepare candidates for the Case Examination, if the case material provides a high-level SWOT, it is not necessary to repeat or audit these points in the report. Focus on identifying new SWOT points and the results of the financial assessment. Candidates are expected to use case facts only, and the situational analysis (e.g. SWOT, PESTEL tool) should be limited to the case facts. For the Board Report and assignments that prepare candidates for the Board Report, the SWOT is not provided in the case. Candidates are expected to perform external research and identify SWOT points based on both the case facts and the external research.

3. Identification and Prioritization of Issues and Alternatives

a) Identify the major strategic issues that need to be addressed (e.g. overall strategic direction, specific business opportunities that should be considered, critical weaknesses and threats that must be eliminated or mitigated if the organization is going to be successful) and list them in order of importance.

b) Identify and prioritize the alternatives.

Note: In some cases, there will be both strategic and minor alternatives, and candidates are expected to properly identify and prioritize them. Some of the criteria that could be used to prioritize the alternatives are:

1. Monetary value of the alternative; 2. Risk of the alternative; and 3. Impact of the alternative (e.g. how many divisions and/or departments of the

organization will be involved in implementing the alternative).


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4. Analyses of Alternatives

Analyze each alternative both quantitatively and qualitatively, identify the pros and cons, and consider both internal and external factors (i.e. demonstrate appropriate depth and breadth, and provide a balanced analysis). Minor alternatives, if any, should be analyzed similarly to the strategic alternatives but may demonstrate less depth and breadth. Demonstrate integrative thinking by considering the cause-and-effect relationships among the various factors, issues and alternatives. Within the analyses, be sure to do the following: Note: Requirements of external research apply only to the Board Report and assignments that prepare candidates for the Board Report. a) Perform any external research that may be required. b) Deal with ambiguous or uncertain information by making reasonable

assumptions based on case facts and/or on external research, applying decision analysis under uncertainty concepts and tools, or performing sensitivity analysis. Clearly state and, if necessary, justify all assumptions made.

c) In the quantitative analyses, apply appropriate tools and concepts to analyze the relevant information (e.g. profitability analysis, net present value, return on investment, sensitivity analysis, etc.). Depending on the goals, constraints and/or other factors, the quantitative tools and concepts used may be different among cases and even alternatives. Interpret the results of the calculations in the body of the report.

d) In the qualitative analyses, provide a balanced discussion of the pros and cons of each alternative using case facts and/or information obtained from the external research, and the results of the quantitative analyses. Identify any key risks associated with each alternative.

e) Demonstrate integrative thinking: in the qualitative analyses (usually in the pros and cons), consider and utilize the points made in the situational analysis (e.g. mission and vision, goals/targets, constraints, stakeholders' preferences, KSFs, SWOT, including the SWOT points provided in the appendix of the case material but not repeated in the report, if applicable). For example, discuss how the alternative uses the strengths, takes advantage of the opportunities, mitigates or eliminates the weaknesses and threats, and meets the imposed constraints; consider each alternative from the points of view of the various stakeholders, and how it aligns with the organizations mission, vision, goals and/or strategic direction; as well, consider the effects of one alternative on another, or on other issues.


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5. Recommendations

This step provides the rationale for the Why. a) Rank each alternative in terms of important decision criteria (e.g. goals/targets,

constraints, key stakeholders preferences, KSFs, profitability, how easily the cons and key risks can be resolved, etc.). Consider whether the alternative sufficiently addresses the major strategic issues, is aligned with the organizations overriding objective, is a good fit with the internal and external environments, and makes good economic sense.

b) Clearly state your recommendation(s) for resolving the major strategic issues. Briefly support your choice of alternative(s) based on the most important criteria; ensure that your recommendations collectively form a cohesive package that: i) meets the goals/targets, and ii) does not breach the constraints and is feasible and viable. Provide proof in

Documents

EmRen Publishing May2013_Case ExamBook CMA