August 2013 Case Examination General Comments on Performance Cape Lane Port Authority (CLPA)

Case Background and Required Element
The August 2013 Case Examination focuses on a Canadian Crown Corporation, Cape Lane Port Authority (CLPA), charged with operating the industrial and commercial port at Cape Lane, British Columbia (BC). In May 2013, senior management met with the Board of Directors at a planning retreat to address declining sales and profit. Management assured the federal government that actions would be taken to avoid a loss for the 2014 fiscal year, and set a 5% net profit margin target to be met, within three years, as a corporate goal. This target was approved by both the Board members and the federal ministers, to whom they report. The following alternatives were identified for consideration: 1. Invest in renovations in order to proceed with the Bitumen Shipping Project. 2. Divest the Cruise Ship Terminal. 3. Operate a Passenger Ferry. Additionally, the following minor alternatives were identified: 1. Allow a local entrepreneur to build a reception centre in the cruise ship terminal and pay a royalty of 8% of revenue to CLPA. 2. Build a fitness facility in order to reduce sick time. As Kyle Wast, CMA, prepare a report for CLPA’s executive team advising them on the opportunities discussed and addressing any other organizational issues and concerns requiring their attention. Include details of your analysis, support for your recommendations, an action plan to implement those recommendations, and a financial forecast. In undertaking this task, you will need to take into consideration your background knowledge of the organization and industry as well as the additional information provided herein.

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August 2013 Case Examination – General Comments on Performance

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. 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. Weaker responses provided limited analysis and/or provided irrelevant points (i.e. restating Backgrounder points, stating specific pros/cons related to specific alternatives, listing specific alternatives within the identification of the external environment). Overall this attribute was reasonably well done by the candidates. 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 utilize 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 upon only a few specific points for each alternative.

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August 2013 Case Examination – General Comments on Performance

Additionally, the profit margin target and hurdle rate constraint were 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 profit margin target or hurdle rate. Weaker responses also had a tendency to provide integration that was concentrated either in one area (i.e. shareholder preferences) or within one alternative. Overall this attribute was reasonably well done by the candidates. Some examples of integrative linkages are noted below in attribute 4b). 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, and 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: 1. 2. 3. 4. What must be accomplished; Who will be responsible for the task; When the task will start and finish; and The costs associated with the task, whether costs that are 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. Weaker responses provided limited action items for the operational issues previously identified in the response. In addition, some responses included action items that were disconnected from the recommendations in the response. For example, some candidates recommended selling the cruise ship terminal and included a plan to remediate the environmental issue; this is not correct as the case states that the purchaser will assume the liability. Overall the responses by the candidates on this attribute were acceptable.

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August 2013 Case Examination – General Comments on Performance

2. APPLICATION OF QUANTITATIVE TOOLS 2a) Financial and Performance Analysis of CLPA: This attribute aligns with Step 2 of the Steps for Approaching Business and Corporate Strategy. The current financial assessment evaluates the internal (e.g. ratios, horizontal/vertical analysis) financial environment for the current state. Better responses provided meaningful interpretation of the most relevant ratios over a three- or four-year period and provided some vertical and horizontal analysis to assess/interpret revenue and expense trends supported with relevant interpretation. Average responses evaluated relevant ratios for three to four years and provided some interpretation, including the net profit margin, which is the most relevant ratio for CLPA, considering the Board’s target is to reach the 5% net profit margin within a three-year time horizon. Weaker responses did not include the most recent year (2013) within the current financial assessment, provided vague interpretation, contained errors in the calculations or emphasized irrelevant ratios. Overall this section was reasonably done by the candidates. 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 (i.e. the net profit margin of 5%; the Board’s 15% hurdle rate for evaluating capital projects; federal government funds earmarked for projects with a hurdle rate of at least 15%). 2. The type of alternative (e.g. capital investment, divestiture, profitability). Summary of the Alternatives and Appropriate Analysis Bitumen Shipping Project Alternative 1. Profitability analysis to test the contribution to the net profit margin target. 2. NPV analysis to assess the investment in assets and obtain the approval for a one-time grant of $10 million from the government. 3. Application of sensitivity analysis to evaluate both the expected volume from the contract and the guaranteed volume (contractual floor).

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August 2013 Case Examination – General Comments on Performance

Divestiture of the Cruise Ship Terminal Alternative 1. Profitability analysis to test the effect to the net profit margin target. 2. PV analysis to assess the proceeds of the divestiture compared to the future income loss. Passenger Ferry Service Alternative 1. Profitability analysis to test the contribution to the net profit margin target. 2. NPV analysis to assess the investment in assets. 3. Application of sensitivity analysis to evaluate the investment in assets if CLPA purchased the ferry or if the City purchased the ferry. Better responses considered the decision criteria throughout the analyses of the alternatives and appropriately applied sensitivity analysis within the Bitumen Shipping Project alternative and the Passenger Ferry Service alternative. Average responses considered decision criteria for most of the alternatives and considered sensitivity within at least one of the alternatives. Weaker responses did not assess the net profit margin target and only focused on NPV analysis. As well, weaker responses: 1. Sometimes did not differentiate between cash flow and net income (e.g. interest and amortization were not considered); 2. Analyzed all alternatives quantitatively; or 3. Contained serious errors in logic or application of quantitative tools. Overall this attribute was not well done. 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 three-year forecasts for the final recommendations, assessing feasibility of alternatives (i.e. assessing the financing required versus financing available) and other relevant analysis, specifically, a valuation of the Cruise Ship Terminal and cost-benefit analysis for building a fitness facility. Pro Forma/Financial Forecast A pro forma income statement or financial forecast demonstrating the net profit margin for at least three years should be provided. The forecast should include: 1. The forecasted loss in 2014 of $250,000; 2. The recommended alternatives;

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August 2013 Case Examination – General Comments on Performance

3. Any other operational changes required in light of the recommendations (e.g. remediation of the land, fitness centre, interest on loans arising from financing required for investments, amortization of new assets acquired). Financing Financing required and available for each alternative and the recommendations as a whole should be assessed. The assessment of financing availability should recognize financing sources specific to each alternative (e.g. the $10 million grant from the federal government is only available to the Bitumen alternative; the financing available from the bank is 75% of the cost of the storage facility and equipment versus the total investment costs for the Bitumen alternative). Valuation Valuation techniques should be applied for the Cruise Ship Terminal alternative in order to compare to the purchase price for reasonableness and/or to evaluate the accounting gain on the sale. For example, the present value of the proceeds and savings related to remediation and property taxes and/or the purchase price of the sale could be compared to: 1. The book value of the assets; 2. The “7 x revenue” (per case facts); or 3. A recent sale of a terminal at a smaller port. Fitness Facility Cost-benefit analysis should be applied to the fitness facility analysis. In particular, the response should consider the expected value of savings related to reducing sick days and compare this to the cost of building the facility. 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 net profit margin target. The forecast included CLPA operating changes and recommendations. They also considered more than one valuation technique in order to assess the purchase price offer on the cruise ship terminal and provided some quantitative analysis for the fitness facility. 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 were provided for one year only. They also considered either valuation analysis or analysis for the fitness facility. Weaker responses did not provide a forecast or analyze financing, or the analysis contained serious errors (e.g. including the proceeds of the sale of the cruise ship

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August 2013 Case Examination – General Comments on Performance

terminal in net income). In addition, weaker responses did not attempt to evaluate the value of the terminal or apply cost-benefit analysis for the fitness facility. Overall this attribute was not well done. 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). 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 resolve other outstanding issues requiring attention. Average responses considered two to three internal and external risks (i.e. weaknesses and threats) within the analysis of the alternatives, or 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. Overall, this attribute was well done by the candidates. 3b) Performance Management, Performance Measurement, Financial Management and Financial Accounting Issues: Better responses used many performance and financial management issues within the analysis of the alternatives, and provided analysis and resolutions for operational and implementation issues. Average responses considered two to three relevant performance and financial management issues within the analysis of the alternatives, or attempted to analyze and provide two to three resolutions for operational issues or implementation issues.

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August 2013 Case Examination – General Comments on Performance

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. Overall, this attribute was moderately well done. 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 alternatives (Bitumen Shipping Project, Divestiture of the Cruise Ship Terminal, Passenger Ferry Service) and the minor alternatives (local entrepreneur’s offer in the cruise ship terminal and the fitness facility), and analyzed more than five minor issues. Average responses analyzed the major alternatives, one minor alternative and three to five minor issues. Weaker responses did not analyze all the major alternatives and the minor alternatives, or analyzed few minor issues. Overall this attribute was reasonably well done. 4b) Analysis of Issues and Alternatives: This attribute aligns with steps 2, 4 and 5 of the Steps for Approaching Business and Corporate Strategy. These steps include analyses of the alternatives, which encompass both the quantitative and qualitative analysis. Better responses provided excellent breadth, depth and balance of analysis in order to assess both the major qualitative impacts 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). 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.

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August 2013 Case Examination – General Comments on Performance

Qualitative analyses that generate greater value are those which connect alternatives to the current situational analysis or the current state of the organization. These include the main decision measures related to: the mission/vision and the main targets; any relevant constraints, KSFs that can be leveraged, stakeholder preferences and both existing and current SWOT. Other qualitative analysis that provides some value would be related to the specific alternatives, or relevant and accurate 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 alternative’s outcomes to the main decision metrics, namely the net profit margin target and hurdle targets. Other quantitative results are subordinate and of less value. Major Alternatives Bitumen Shipping Project CLPA has been approached by a large bitumen extraction company with an offer to transport bitumen. The contract is for seven years, would bring steady revenue and includes a guarantee of a contractual floor. This alternative requires a large capital investment for facility modifications. Qualitative impacts: 1. Supports CLPA’s mission to act as a key transshipment point of trade (link to the mission). 2. North American demand for Bitumen is increasing (link to an opportunity). 3. Mitigates threat of revenue levels that are sensitive to commodity prices because contractual floor is included in contract (link to a threat and utilization of a 3a) risk). 4. Is supported by senior management – Sundar Ming and Feng Mu (link to preferences). 5. There is a risk that other ports further south in BC and in the state of Washington are also in a position to develop the bitumen export business (link to a threat and utilization of a 3a) risk). 6. The offer is conditional on CLPA successfully completing the needed construction work within one year, which is a tight timeline considering that CLPA has problems related to delays caused by red tape in order to get formal federal government approval to borrow funds (link to a weakness and utilization of a 3a) risk). 7. Not supported by CEO – Milt Rockner (link to a preference). Quantitative impacts: 1. Testing the net profit margin target. 2. Testing the target of avoiding a loss.

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August 2013 Case Examination – General Comments on Performance

3. Providing assessment of the capital investment in order to test the hurdle rate. 4. Assessing the ability to finance the transaction. Divestiture of the Cruise Ship Terminal A local bus and resort operator has approached CLPA with an offer to purchase the cruise ship terminal. This alternative considers receiving cash proceeds for the cruise ship terminal. Qualitative impacts: 1. CLPA will not have to remediate the land adjacent to the terminal (presence of a toxic chemical on the land) because the purchaser will assume responsibility (link to a weakness and utilization of a 3a) risk). 2. Is supported by one member of management (Sundar Ming) as he finds running the cruise ship operation to be a distraction and would rather focus on the core business (link to a preference). 3. The cruise ship industry continues to evolve and grow; if the terminal is sold, CLPA would not benefit from the industry (link to an opportunity). 4. The cruise ship terminal generates regular cash flow (link to a strength). Quantitative impacts: 1. 2. 3. 4. Testing the net profit margin target. Testing the target of avoiding a loss. Evaluating the purchase price compared to the value of the terminal. Evaluating the present value of the lost income stream compared to the proceeds of sale.

Passenger Ferry Service The City has asked CLPA to offer a passenger harbour shuttle service, due to congestion and traffic within the city. This alternative requires some capital investment, including a variable if CLPA buys the ferry or if the City buys the ferry. Qualitative impacts: 1. Opportunity to improve the relationship with municipal government (link to a weakness and utilization of a 3a) risk). 2. City council willing to negotiate a reduced property tax for land allocated to the ferry terminal (link to a weakness and utilization of a 3b) issue). 3. Would require utilizing existing space and moving equipment and storage facilities into smaller areas; this could result in more accidents and tarnish the work done to improve work space and work flow, and tarnish the safety record (link to a strength).

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August 2013 Case Examination – General Comments on Performance

4. One member of management, Brad Frost, does not like the idea of using existing space for a harbour ferry (link to a preference). Quantitative impacts: 1. 2. 3. 4. Testing the net profit margin target. Testing the target of avoiding a loss. Providing assessment of the capital investment in order to test the hurdle rate. Assessing the ability to finance the transaction.

Minor Alternatives Local Entrepreneur’s Offer to Build a Reception Area in the Cruise Ship Terminal Qualitative impacts: For this minor alternative, it is important to realize that CLPA cannot sell the terminal and pursue this alternative (i.e. they are mutually exclusive). As well, by keeping the terminal: 1. The increasing complaints about the lack of a reception area in the terminal will be resolved (link to a weakness and utilization of a 3b) issue). 2. CLPA can continue to be involved in the cruise ship industry, which is continually evolving (link to an opportunity). Quantitative impacts: 1. The calculation of the expected annual royalties. Fitness Facility This minor alternative has been proposed by a member of management in order to address union issues related to negotiating more frequent breaks and increased sick time to better meet the needs of an aging workforce. The analysis should be mainly quantitative and focus on evaluating the overall cost-benefit to CLPA. Overall, this attribute was moderately well done. 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 utilized this information throughout the analyses (e.g. assessed the impact to the net profit margin target within the analysis of each alternative). The proper inputs and assumptions were

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August 2013 Case Examination – General Comments on Performance

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 utilized 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 be misstated or overlooked, but the decision-making process and application of proper tools to analyze the issues and alternatives are consistent in generating the overall conclusions. Weaker responses generally failed to recognize the important targets or apply the proper analytical tools within the analyses, and often did not identify or integrate the current situation within the analyses of alternatives or current issues. Overall, this attribute was not well done by the candidates. 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 provided definitive recommendations for the alternatives accepted and for those alternatives rejected. The recommendations were 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). Average responses provided nominal qualitative support and explicit support for meeting the net profit margin target and financing ability. Weaker reports were not well supported. For example, the net profit margin target of 5% within three years was not considered, important qualitative points were not considered, or the recommendations were not shown to be financially feasible. Overall, this attribute was not well done by the candidates. 6. PROFESSIONALISM AND COMMUNICATION 6a) Report Format and Organization: This attribute aligns with Step 10 of the Steps for Approaching Business and Corporate Strategy.

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August 2013 Case Examination – General Comments on Performance

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: 1. Headings and subheadings were not used effectively. 2. Weak organization (e.g. complex financial information was not kept in the appendices). 3. Poor sequence (e.g. recommendations for minor issues or the implementation plan were provided before the recommendations for the major alternatives). 4. Executive summary, introduction or conclusion had minor weaknesses. Weaker reports omitted some components (e.g. executive summary, introduction, conclusion) or contained many other formatting problems (e.g. organization, sequence, ineffective headings). Overall this attribute was reasonably well done by the candidates. 6b) Professional Tone, Tact, Language, Style and Flow: This attribute aligns with Step 8 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: 1. Clarity problems (e.g. analysis points were not always clear and concise). 2. Problems with flow (e.g. not effectively integrating the financial information seamlessly into the flow of the narrative). 3. Audit trails (e.g. the source of quantitative inputs was not always clear in the calculations within the financial analyses). Weaker reports had many problems with language and grammar, as well as an array of other weaknesses (e.g. clarity, flow, audit trails). Overall this attribute was reasonably well done by the candidates.

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