Exam focus the pre-seen case study for the May 2011 2010 Strategic level exams

BPP subject specialists Daniel Clark, Dave Halford and Karen Hornett analyse the pre-seen case
study for the May 2011 Strategic level exams from the viewpoint of each of the three papers (P3, E3
and F3)
This is now the third sitting where CIMA have issued a pre-seen case study as the basis for the 50
mark Section A question in each of the three Strategic level papers.
In this article we will briefly discuss the purpose of the pre-seen case study before going on to review,
from the perspective of each of the Strategic level papers, how the pre-seen information has been
previously used and what the key issues are in the latest pre-seen.
Purpose of the pre-seen
It is very important that you understand that CIMA do not expect significant amounts of your time
to be tied up in researching the industry. This can wait until the next stage of your exams the T4
Part B Case Study exam.
Under the old syllabus the practical scenario was only revealed on the day of the real exam. By giving
you a pre-seen case study, CIMA aim to ensure that no candidate is put at an advantage or
disadvantage by their level of familiarity with the industry involved in the practical scenario. All
candidates will 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.
If CIMA had expected detailed analysis before the exam, they would have given you access to the
pre-seen material much earlier than 6 weeks before the exam, which deliberately restricts the amount
of time you have to research the pre-seen.
The latest pre-seen
In the latest pre-seen we are provided with details of F plc - a food manufacturer based in the UK with
three divisions, Meals, Snacks and Desserts. F is quoted, but the founding family still own 20% of the
shares.
F is a fictional company, but it would be worth building a general awareness of the issues facing
similar real-world companies such as Associated British Foods, Birds Eye Walls, Northern Foods and
The Real Good Food Company. All of these companies are grappling with intense international
competition and volatile commodity prices, and are keen to emphasise their CSR credentials.
The full text of the pre-seen can be found at www.cimaglobal.com/strategicpreseen ; you will
need to read the pre-seen before reading the remainder of this article.
Understanding the main issues from a P3 Performance Strategy Exam perspective
Previous P3 papers have varied in the extent to which they have picked up on clear preseen hints.
For example, the previous preseen described a potential new customer for the airport, and the
November unseen developed this into a business proposition. However, the March question covered
a range of issues, some of which were clearly flagged in the preseen and some less so. This is a
reminder that the questions can go in many directions and you should not stake too much on any one
prediction.
So where might the question go? As we review the preseen, we can see many areas relevant to P3:

Corporate governance F plcs corporate governance arrangements are described in detail.

There is emphasis on the fact that there are no ethnic minorities and only one woman
(perhaps predictably, the HR Director). This brings to mind one of the new provisions in the
UK Corporate Governance code, which recommends that appointments should be made with
regard to the benefits of diversity. This point is also highlighted in the examiners recent article

(http://www.cimaglobal.com/Students/2010-professional-qualification/Strategic-level/P3-studyresources/Examiners-articles/). We could be going into controversial (but highly topical) areas

here is Fs lack of boardroom diversity a problem and if so, what should they do about it? It
would be worth looking at some of comment on Lord Davies recent government-sponsored
report on this issue. If this is examined, it will be important to discuss all sides of the issue and
not allow any personal convictions to cloud your judgement. It also worth noting that the
independence of the non-executive directors from the Chairman can be challenged, and that
it is hard to see how much value the sports personality will add to the Board.
Food labelling and safety people are understandably sensitive about what they eat and
any food company is vulnerable to loss of sales and damaged reputation if they are
considered to have less than 100% record on food labelling and safety. Famous food scares
have included Cadburys, who in 2006 discovered salmonella at one of their manufacturing
plants. The subsequent product recall and changes to controls cost them 20m and they were
later fined 1m by the courts. F is under investigation for mis-labelling and possible food
poisoning. They operate on tight margins and payments of this order could pose serious
problems.
Financial risks we know that there will be an element of financial risk in Q1 and this could
be examined in a number of ways. F is an international business, importing ingredients from
Africa (and presumably other locations) and earning significant revenues outside the UK, so it
is vulnerable to economic and transaction risk. They also have high borrowings, so are
vulnerable to an increase in interest rates. A decline in profitability may also leave them
vulnerable to breaching lending covenants, triggering bank action. Their need for raw
materials supplies leaves them vulnerable to fluctuations in commodity prices, which are
notoriously volatile. There is no evidence how any of these risks are being managed, if at all.
Factory in West Africa F are considering building a factory in West Africa to freeze
vegetables. This would offer lots of scope for a P3 question, as it could lead to increased
political, translation, operational and reputational risks. Although F operates internationally, all
of its manufacturing and operations are currently in the UK. They do not have experience of
managing an overseas operation, which may make mistakes more likely.
Internal audit the internal audit function focuses on the Meals and Snacks divisions as they
generate less profit than Desserts. Not only does this betray a lack of understanding of
margin (at 25% the net margin at Snacks is much higher than the 13% at Desserts), it also
shows a very narrow view of risk. It suggests that Internal Audit focus on cost control rather
than taking a wider view of each divisions risk. You may be asked to recommend how their
work could be improved.
Inventory control and information management system Fs IT is described as
unreliable, which manifests itself in high wastage of inventory and late production of
management accounts. A question could focus on the importance of good information
systems, risks involved in Fs current state and benefits to be gained from improvements.

So the examiner has given you plenty to go on and made it hard to question-spot, probably
deliberately (we havent even gone into CSR issues, losing the pie recipe, supply chain disruption
etc.). However, it is important that you know the preseen, so that you can tailor your answer as
specifically as possible to F and to the new information you are given. Be specific in your answers
why is something a risk to F, and maybe not to other organisations? What controls would work in the
context of Fs business, culture and way of operating?
Understanding the main issues from an E3 Enterprise Strategy Exam perspective
In recent sittings the section A questions have leant quite heavily on the preseen provided in advance
of the exam. As such it is clear that in order to be able to frame your answers to this question in the
correct context you will need to have an understanding of the issues that affect F plc. Additionally you
will need to know where relevant information is located in the preseen so that you can refer to it if
required.
In the latest pre-seen we are told the following about F plc that is relevant to the E3 syllabus:

It trades in a dynamic environment, especially in relation to legislation

The company has a published mission statement, supported by 4 objectives
F takes CSR seriously, albeit it does not publish targets externally
Strategic planning is approached via the Rational Model
A traditional divisional structure operates under a strategically controlling head office
Each division operates both in the UK and overseas
The Desserts division is considering relocation
A proposal to provide freezers is under consideration
IT is unreliable, management accounts are often late
A proposal to open a factory in West Africa is under consideration

Areas of the E3 syllabus that could be examined within the context of the pre-seen include:

Strategy generation appraising the relevance of the rational model given the dynamic
environment that F operates in. Perhaps emergent strategies may be more appropriate?
Dynamic environments how the company and its strategic planning may be affected by
the rapidly changing environment, advising the company as to how techniques such as
scenario planning and real options could assist in managing uncertainty.
Ethics and CSR relocating the Desserts factory, or moving production to Africa will cause
massive job losses and will impact upon local communities.
Strategic choices and evaluation applying the Suitable, Acceptable and Feasible
framework to options including changing the companys structure, relocating factories, or
setting up the African venture.
Information Systems Strategy evaluating the importance of better quality management
information such as detailed product profitability analysis in light of the limited and patchy
management information provided by Fs current systems.
Strategic implementation the structure of the company could change to a divisional
structure with the abolition of the head office. Each SBU would then manage its own affairs
independently under a much smaller parent company.
Change management any attempts to impose a change of structure or relocate production
will meet a lot of resistance. Part of this may be the very different cultures within each
division. The 7S model will be useful in helping management understand these cultures and
hence to devise a model to manage change.
Strategic control currently the head office uses Goold and Campbells Strategic Planning
style, it may be that a change towards a more autonomous method is suggested. Additionally
performance management questions seem possible via either a comparison of the ROI / RI of
each division or maybe the implementation of a Balanced Scorecard approach given the
importance of innovation in this industry.

From an E3 perspective, its always worth remembering that the examiner is more interested in what
you can do, not what you know. By this we mean you must be able to apply any relevant
theories to F plc and its particular circumstances as outlined on the day of the real exam. Any
generic lists of the advantages and disadvantages of a strategy focused on relocating production
overseas, without reference to Fs business model specifically will score well under half marks.
Equally, ensure that you understand and apply the CIMA verbs correctly. Discuss / explain / evaluate
etc, does not mean produce a list of poorly explained observations unrelated to the scenario at hand!
Understanding the main issues from an F3 Financial Strategy perspective
Novembers pre-seen played a bigger role in both the November and March papers than did its
predecessor. The November exam used some data from the pre-seen which was actually repeated in
the unseen, but additionally, it required use of balances from the financial statements in the pre-seen
for calculations of interest and for a valuation on an assets basis.
March required an assessment of whether the stated pre-seen objectives were achieved. This seems
to indicate that whilst much of the question will be based upon the unseen material, students should
now expect to have to link in to the pre-seen in order to answer some elements of question 1. The

number of instances they need to do this will probably still be relatively small this sitting, but it is likely
that this trend will continue in a bid to prepare students for T4.
This preseen includes a five year forecast of sales and operating profit. This shows some ambitious
growth targets across the five years and profit conversion almost doubling (from a low 4.9% to 9.4%)
during the same period.
Unlike previous sittings, financial objectives are not stipulated in the pre-seen, but these could easily
be brought into the unseen material and achievement or otherwise of these objectives may need to be
measured.
The scenario is full of areas that question 1 could explore. Possible topics include:

International investment appraisal this could be through the West African factory or other
markets that havent been specifically mentioned.
Investment appraisal assessment of new products, freezer deals or relocation of the
Desserts Division. Under either of these investment appraisal options you should be
prepared to also talk about risks or other factors that should be considered before making an
investment.
Business valuation expansion could be achieved by acquisition of another company and
so a range of values may need to be calculated.
Sources of finance funding an acquisition or expansion. Questions could explore debt
versus equity, differing forms of debt finance as well as domestic versus overseas currency
issues.
F plc currently has two sources of debt finance; a loan repayable in 8 years and a facility
which allows it to obtain loans up to a value of 80m which expires in 3 years. Currently it is
using 74m of this 80m. Sources of finance questions may require understanding as to
whether there is sufficient funding available through the facility or whether further finance will
need to be acquired. Impacts on gearing (currently high at 49%) and interest cover (3 times)
are likely to be needed as part of this.
Working capital management not only does F plc have a fairly substantial level of long
term debt finance but it also appears to have a high level of trade credit (212 compared with
receivables of 112. Quick ratio is 0.62). Questions could therefore look at improving working
capital management or the short-term financing situation could also be mentioned as part of a
source of finance requirement.
Forecasting a forecast of earnings or cash could be required, which could again then be
followed by an evaluation of various sources of finance available.

Good luck in your final preparations. Remember that your preparation should focus on preparing
for the whole exam, and should not be dominated by over-researching the pre-seen case
material.
Daniel Clark, Dave Halford and Karen Hornett are subject specialists working at BPP.