Are you thinking like a CGMA?

Here is an example of strategically sound rationale used to back recommendations:

Proposal 1: Second distribution center

Your suggestion:

This proposal is not recommended based on two factors. Of primary concern is the speed of new products to the market. According to the report, new inventory items will be delayed by 3 days, which negatively affects the company in 2 major ways: 1) contradicts the fast-fashion business model and 2) increases cost of inventory. Secondarily the current distribution center will need to lay off almost half of its staff. Although NPV is estimated to be positive, the monetary gain is small compared to projected sales revenue, and does not outweigh the potential risk to reputation and employee morale of major layoffs.

Primary factors disallowing recommendation (fields that should be highlighted):

  • Inventory holdings: The added delay contradicts and could potentially damage the business model resulting in decrease in sales because La Vie will lose the edge of fast fashion and new trends, which has been key to success thus far.
  • Employees and staff costs: La Vie does not want to earn a reputation for being a cutthroat business. It values its staff and layoffs are always a concern to companies trying to maintain ethical practices.

Proposal 2: Franchise shops in Asia

Your suggestion:

Franchising shops across Asia is recommended primarily because it will enable faster growth for the company. Under this proposal, La Vie would have 900 shops operational by the end of 2019 versus the current agreed 5-year plan level of 800 shops, with a forecasted operating profit of €235 million. Also La Vie’s expansion with company-owned shops is limited in countries like China where foreign companies are required to joint venture with Chinese companies. And in that case capital expenditure would be risky for La Vie because of their lack of experience in the foreign market. This proposal overcomes those constraints and saves La Vie approximately €4.4 million in capital costs per store.

Primary factors supporting recommendation (fields that should be highlighted):

  • Objective: Speed up growth in Asia with 100 more shops more than the original 5-year plan.
  • Franchisee’s responsibilities: Franchisees carry the risk of capital expenditure and have local knowledge.
  • Profit potential: Operating profit forecast to total €235 million over the next 4 years.

Proposal 3: Appoint famous designer

Your suggestion:

Yes, the strategy to hire a famous designer makes good business sense. With a well-known designer name on the label, increased brand awareness and publicity will lead to increased sales. The extra sales revenue from the small designer collection will generate millions per year and it is likely to bump up sales of the shop’s own brand line due to increased customer volume. Although La Vie will have to accept 100% of the financial risk associated with this proposal, the likelihood of losing the entire amount invested is low. The company can be confident that loss will be minimal and they’ll have opportunity to adjust.

Primary factors supporting recommendation (fields that should be highlighted):

  • Proven strategy: Other competitors have used this strategy with good results.
  • Forecasted sales revenue: €30 (average cost per piece) x 4 collections a year at 0.5 million items in total to be manufactured in each of the collections = €60 million annually
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