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April 2014

Analysis of pre-seen material for the May and September 2014
CIMA Strategic level exams
BPP subject specialists Doug Haste, Steve Whittenbury & Jonathan Rugg analyse the pre-seen case
study for the May 2014 & Sept 2014 Strategic level exam.
This article outlines the purpose of the pre-seen Strategic level case study before going on to
examine some aspects of the current pre-seen case study and how these could be applied to your
forthcoming Strategic level exams.
Purpose of the pre-seen
CIMA does not expect students to spend significant amounts of time researching the industry
described in the pre-seen; this can wait until you get to T4. CIMAs intention is that by providing a pre-
seen case study, no candidate is put at an advantage or disadvantage by their level of familiarity with
the industry involved. All candidates now have time to ensure that they have a basic understanding of
the main issues involved in the case study before walking into the exam.
The latest pre-seen
The latest CIMA Strategic level pre-seen is based on a world leading retailer and distributer of
plumbing and heating products and building materials. The company, P plc, is similar (but not
identical) to real companies such as Wolseley plc.
The Wolseley plc website and annual report contains excellent information that will allow you to
familiarise yourself with the KPIs, strategies and CSR that reputable companies have successfully
followed in this sector. This by itself will be an excellent and sufficient resource for your research.
We will now look at the pre-seen from the viewpoint each of the three Strategic level papers. Before
reading this analysis, it is important that you have read the pre-seen case study, this can be
found at www.cimaglobal.com/strategicpreseen.
Understanding the main issues from an F3 perspective
Some of the challenges facing P plc are highlighted in the pre-seen, and are reviewed below.
However, for F3 you should bear in mind that occasionally the real exam question has introduced a
completely new business, which has links with the company in the case study. This happened twice in
the 2013 exam sittings.
Lets look at some broad areas of syllabus coverage to consider what issues P plc might face.
Formulation of financial strategy
Dividend policy
P plc had a significant amount of cash as at 31 December 2013 (418m). You may be asked
to discuss whether this cash surplus (if it still exists in May 2014) should be retained or paid
back to shareholders. This could lead to a discussion of dividend policy or the desirability of a
share buy-back programme.
Forecasting & ratio analysis
This could include analysis of any of P plcs operations to assess their performance and
whether they are performing well enough to be retained by P.
Financing decisions
Capital structure
P plc currently has 1,000m of bank loans and 3,471m of equity (using book values). You
could be asked to discuss the merits of increasing or decreasing gearing this could link into
a discussion of key ratios such as interest cover and gearing.

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April 2014


Cost of capital
The pre-seen provides details of the dividend growth rate and a range of share prices (which
will probably be updated on the day of the exam). This hints at the possibility of the dividend
growth model being used to calculate the cost of equity. Make sure that you are comfortable
with this model and with its limitations.
Treasury function
The pre-seen mentions that P plc has a centralised Treasury function. Be prepared to discuss
the function and structure of a Treasury function.
Overseas finance
The pros and cons of using overseas finance for overseas investments may be relevant for P
plc (see overseas investment appraisal below).
Investment decisions and project control
Investment appraisal
This is could include diversifying into a new business area e.g. large stores offering a full
range of DIY products
Overseas investment appraisal
This is a commonly tested area and could include:
- a new country within which to establish retail outlets
- construction of a new warehouse to serve Ps African / and or Asian markets
Acquisitions
P plc has made acquisitions in the past, and again this is a commonly examined area. This
could include evaluation of a UK or overseas acquisition and discussion of integration issues.
You could also be asked to discuss how to finance an acquisition.
Disposals
One of Ps strategic objectives is to dispose of parts of the business where, for example, P plc
is not the market leader. This may be a hint that you may be asked to value a part of P plc for
disposal, and also to discuss the potential exit routes that P plc could select (e.g. MBO, sale
etc).
Cost of capital calculations:
To support either investment appraisal or business acquisition / disposal decisions a cost of
capital calculation may be required.
Understanding the main issues from a P3 perspective
P plc operates within an industry recovering after several lean years, during which construction work
fell and home improvements became less of a priority. Lets look at some broad areas of syllabus
coverage to consider what issues P plc might face.
Risk management
Candidates could be asked to examine risks faced by P such as:
Faulty or dangerous products (either old, like asbestos, or new, like under-floor heating systems)
and any resultant threat of litigation or reputational damage
New technology (e.g. using renewable sources of energy such as biomass boilers & solar panels)
Changes in structure or operation (such as acquiring a new trading name or changes to the supply
chain across its own and other networks)
Supplying new housing developments
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April 2014

Sources of government funding that may require regulatory compliance for P and its customers.
For all of these and more, there could be a need to consider appropriate ways of managing these
risks in line with Ps core values and objectives found within the pre-seen.
Governance, ethics and fraud
The pre-seen scenario discusses the structure of the P plc boards as well as the divisional
management teams in both the UK and USA this could be explored in the unseen case on the day
of the exam by considering strengths and weaknesses of such arrangements. Similarly, there could
be questions that concern the following:
The percentage of institutional shareholders is consistent with a listed entity, but may still lead to
disagreement over Ps risk appetite
The companys core values and corporate responsibility aims are ambitious and may be challenged
by an event that candidates may need to appraise and resolve (such as a case of discrimination
against an employee or supplier)
A new ethical code may be required to maintain the standards demanded by the P boards
The companys supply chain is currently at odds with its standpoint on environmental responsibility,
meaning some form of assessment or improvement could be required
Fraud and bribery may present risks to be addressed (e.g. when awarding supply contracts or
investigating theft from sites owned or operated by P) as well as suitable controls to manage risks.
Control systems
The complexity of a business such as P makes the need for robust systems of internal control
essential (and not just because it is listed). Areas of control that could be explored include:
Organisational controls for managing retail outlets and business units
Non-financial controls for levels of service (such as the balanced scorecard)
Performance management controls for parts of the business
Acquisition, expansion or divestment controls (such as due diligence and net present value)
Discrete costing for kitchen and bathroom installation services to assist cost control.
Financial risk
No unseen case can exist without some form of financial risk element and P presents a number of
areas where the syllabus could be tested:
From the limited information in the pre-seen, we can conclude that Ps gross margin is 27% but its
operating margin is only 3% - we dont know if P is a budget or premium supplier, but this could be
explored in the context of change (similar UK companies report operating profits of 6-7%)
The amount of inventory carried at the reporting date suggests just over two months supply is held
in Ps warehouses and retail outlets while this is consistent with others in the same industry, there
may be some scope to explore reducing this level of holding, especially in the context of the virtual
warehousing initiative discussed towards the end of the pre-seen
The economic risks faced by P are well documented in the pre-seen (supplies going all round the
globe for example) so we must expect something that draws on this
The use of hedging techniques for items, such as copper piping for plumbing and fuel used by P plc
in its supply chain, must be expected remember that for all forms of financial risk, there are more
marks available for discussing such risks than there are for any supporting calculations, so dont be
put off if the numbers scare you!
Monitoring
The various risk issues discussed above could also be examined in a P3 context by considering the
underpinning monitoring controls necessary for successful risk management both audit and
information needs are present in general terms and could also be seen in the following cases:
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April 2014

The introduction of more eCommerce across Ps business
The move towards a single information platform replacing existing legacy systems from businesses
acquired by P
Internal audit assessment of individual retail outlets or business units
Environmental audit to ensure compliance with a desired external accreditation such as ISO 14001.
Understanding the main issues from an E3 perspective
Market leadership provides P with an absolute size advantage over its competitors which allows it to
maintain a broad and fragmented supplier base of over 90,000 vendors. This ensures Ps relative
importance to its suppliers allowing it to develop deep and long term relationships with them, helping
to drive input costs down and supplier performance up.
Success also rests on the ability to effectively serve local national markets, branding is important
here, as is understanding the needs of the local market and operating in a socially responsible way. In
respect of this, P operates a number of acquired chains under their original trading names and
defines customer service as its key critical success factor. Ps overarching business objective is to
achieve market leadership in each of its markets, this is driven by improved customer retention
alongside being able to attract new customers away from competitors. Any strategy you discuss in the
exam must ensure that it maintains and supports these themes.
You may find that you are required to discuss new market entry in the exam. Any extension of Ps
customer reach must sit logically within its current operational strengths. Ideally P should be able to
serve that market from its current supply chain. Industry leading firms have found that making
selective in-fill acquisitions in existing geographies highly effective, as they are quickly able to
integrate these business into their own supply chains. You may, in the exam, be required to frame this
discussion within the context of the Value Chain.
Analysis of a market itself could require a discussion structured around Porters Five Forces.
Despite the importance of local national branding and the ability of incumbent firms to deliver an
attractive service proposition, Ps scale advantages are likely to enable it to gain market entry with
relative ease. Supplier power is typically low, again afforded by Ps absolute size and its fragmented
supplier base. Although buyers are able to freely switch between firms, their retention is heavily
influenced by good customer service, which P has embraced as its key critical success factor.
We are presented with evidence that P has historically made a number of unsatisfactory acquisitions,
necessitating a programme of rationalisation. The exam may ask you to review one or a number of
acquisition targets, evaluate a disposal or discuss the logic of acquisitive against organic growth,
perhaps structured around the Lynch Matrix. P has stated that it wishes to acquire logistic resources
in parts of the world where it does not own warehouse or distribution resources; it is important
however that new ventures retain access to its current supplier network to be able to leverage its core
competencies. Synergistic gains must be present and such an acquisition would need to be integrated
into current operations rather than simply stand alone.
Reviewing the life expectancy of products is also cited by P as an area of strategic development.
Across its range, products will often be superseded due to the arrival of new technologies, for
example in product areas ranging from glazing products to adhesives. In order to deliver value to
customers, P must ensure it continually reviews and updates its product ranges. This may open up a
discussion on the Product Life Cycle, the BCG Matrix or require Direct Product Profitability
calculations.
Attempting to embed common processes would appear to be logical approach to managing a
business with fragmented supplier and customer bases operating over a range of individual brands
across different regions. The exam may require a discussion of benchmarking, supported with some
empirical analysis of financial and non-financial performance; you may be asked to discuss
approaches to performance management such as balanced scorecard reporting.
A move into virtual warehousing is suggested in the pre-seen, this would see P connecting its
customers directly with its suppliers. Such a move would seem to require a review of their current
information systems and technology infrastructure and probably necessitate some level of further
investment, which could perhaps be examined numerically. However P would also need to ascertain
the impact on the customer experience, considering the impact on delivery times, quality control and
customer interaction.
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April 2014

Conclusion
The analysis presented here will have helped to identify some key areas that may be tackled in
question 1 of the exam.
However, there are also 50 marks available in section B and you need to make sure that you have
revised all key syllabus areas to ensure that you are in a good position to score well in this section of
the exam.
Remember that although analysis of the Pre-seen is an important activity, it forms just one dimension
of exam preparation and should not be over-emphasised at the cost of question practice and revision
of the key syllabus areas for each of your Strategic level papers.
Good luck in your exams!

Doug Haste, Steve Whittenbury and Jonathan Rugg are subject specialists working at BPP.