Pre-seen case study for Strategic level examinations Papers E3, P3 and F3 For examinations in May 2014 and September 2014 PRE-SEEN MATERIAL, PROVIDED IN ADVANCE FOR PREPARATION AND STUDY FOR THE EXAMINATIONS IN MAY 2014 AND SEPTEMBER 2014. INSTRUCTIONS FOR POTENTIAL CANDIDATES This booklet contains the pre-seen material for the above examinations. It will provide you with the contextual information that will help you prepare yourself for the examinations. You may not take this copy of the pre-seen material into the examination hall. A fresh copy will be provided on each of the examination days as part of the examination paper. Section A of each of the three Strategic level papers (E3, P3 and F3) will be based on this material. Unseen material will be provided on the examination day; this will comprise further context and the examination question requirements (a maximum of four compulsory questions, totalling 50 marks). You will not be expected to have any knowledge of any other examination questions or unseen materials based on this pre-seen case study. Section B of each of the three Strategic level papers (E3, P3 and F3) will NOT be based on this material. The examination will last for three hours. You will be allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to either begin writing or to use your calculator during the reading time. Pre-seen case study for Strategic level examinations Contents of this booklet: Pre-seen material P plc Pre-seen appendix 1 Pre-seen appendix 2 Page 2 6 7 Strategic level pre-seen 1 May 2014 & September 2014
Pre-seen case study Introduction P plc is based in the UK. It is one of the world s leading distributors of plumbing, heating and building materials employing over 35,000 people. It operates its own retail outlets, some of which share a common trading name and are organised as separate business units. P plc also sells directly to building and plumbing contractors and merchants through its external direct sales units. P plc was founded in the early 20 th Century as a plumbing and buildings materials manufacturing business and enjoyed very rapid growth in the 1970 s and 1980 s. In 1985, P was listed on the UK stock exchange and at this time first ventured into the USA by acquiring a building materials distribution company based in New Jersey. In 1990, P plc acquired a building supplies business in the UK and, later in that decade, made acquisitions of other European based plumbing and heating and building materials distribution companies. In the early years of the 21 st Century, P plc sold off all its manufacturing business units and concentrated solely on being a distributor and retailer of plumbing, heating and building materials. Corporate values P plc is proud of its history and traditions of distributing and retailing good quality products in locations which are convenient to its customers. It has developed a series of core values which are: Trading fairly and honestly; Being responsive to customer needs and market changes and not being satisfied with standing still, but seeking to continuously improve; Employing committed people and providing training opportunities to develop their skills; Having respect for cultural diversity across all the company s stakeholders. Business operations P plc s head office is in the UK which also contains its centralised treasury. It has two operating divisions which are: Plumbing and heating Building materials Products: Baths, showers, toilets, sinks, heating systems, general plumbing parts such as water taps, pipes and drainage systems. Products: Concrete building blocks, bricks, tiles, flooring products, roofing materials and wooden roof beams and other timber, as well as upvc products, such as doors and window frames. Each division s operating arrangements are similar. Each division has two distribution warehouses, one each in Europe and the USA. Each division uses these warehouses to fulfil sales orders placed by its external direct sales units and retail outlets. The external direct sales units sell to building contractors, plumbing contractors and merchants who supply small building and plumbing companies with materials and parts. P plc s retail outlets sell directly to the public and to the building and plumbing trades. Some of these retail sales outlets were set up or acquired as chains of retail outlets each with a common trading name and these have been retained as separate business units. The retail outlets that have been acquired continue to operate under their own trading names so that P plc can retain the benefit of the goodwill the retail outlets developed. Each has a specific line of business, such as the sale of complete bathrooms and kitchens through chains of showrooms. Strategic level pre-seen 2 May 2014 & September 2014
The plumbing and heating division carries out its retail operations through established chains of showrooms. These showrooms sell products to local tradesmen and also directly to the public. The building materials division s retail activities are carried out through small-scale retail outlets which are usually located on industrial estates and those that have been acquired retain their local building supply trading names. Overall, P plc has well over 90,000 suppliers and sells to over 1.2 million customers across the world. Each of the two divisions operates its own large logistics and distribution network. They operate their own fleet of road transport vehicles to distribute products in Europe and the USA and use rail, sea and air networks for distribution to their external direct sales units and retail outlets in other parts of the world. Board of Directors and Executive Board composition The Board of Directors comprises a Non-executive Chair, a Chief Executive, the five directors covering the functions of Finance, Logistics, Procurement, Marketing and Information Systems, the Managing Directors of the two divisions, the Company Secretary and six non-executive directors. In addition, P plc has an Executive Board comprising the Chief Executive, the five functional executive directors, the Managing Directors of the two divisions and also the Chief Human Resources Officer, who is not a main board member. The Executive Board reports to the Board of Directors. Divisional Management Structure Each of the two divisions operates with a Divisional Executive Management Team (DEMT), based in the UK. These comprise chief divisional officers for the functions of finance, human resources, information systems, logistics, marketing and procurement. Each DEMT is led by the relevant Divisional Managing Director. In the USA, there is also a Senior Executive Team for each division which comprises chief officers covering the same functions as are represented on the DEMT and chaired by the company s divisional Vice President (Plumbing and Heating or Building Materials as appropriate) for US sales. The senior executive teams in the USA report to their appropriate DEMT in the UK. An organisational structure chart is presented at Appendix 1. Financial structure There are 500 million GBP 0.10 shares in issue. The ownership of the company is split in the following proportions: Financial institutions: 90% Individual investors: 9.5% Board members and employees: 0.5% The share price has ranged between GBP 9 and GBP 6 over the last year. The dividend in the last financial year was GBP 0.25 per share and represented an increase of 20% over the previous year. The Chairman commented on this improved dividend stating that the Board had strong confidence that the company would continue to grow. Strategic level pre-seen 3 May 2014 & September 2014
Chairman s statement on P plc s strategic objectives P plc s Chairman has declared three strategic objectives for the company which all combine with the aim of improving shareholder value. These three strategic objectives of P plc are: 1. To be the market leader in the regions of the world in which it operates; 2. To deleverage the company by disposing of business units or individual retail outlets which do not contribute sufficiently to the aim of P plc becoming market leader or are failing to meet minimum performance targets; 3. To continuously strive to improve its products and customer services. The business acquisition strategy employed by P plc has led to high levels of goodwill. In some cases, newly acquired businesses have underperformed and not met profit expectations. Some impairment of goodwill has been necessary in respect of certain business units. Those which have seriously underperformed have been disposed of. The net value of goodwill, after impairment, is shown in the company s statement of financial position in Appendix 2. Comparative performance and assets employed by the divisions The divisions measure performance at external direct sales unit and individual retail outlet level. Where retail outlets are organised into business units under a common trading name, then the performance of the retail units are consolidated enabling performance to be measured at the business unit level. The performance of the divisions for the financial year 2013 and the assets they employed as at 31 December 2013 are as follows: Performance: Plumbing and heating Building materials Revenue 7,040 6,837 Operating profit 234 213 Assets employed: Plumbing and heating Building materials Non-current assets: Intangible assets 781 967 Property, plant and equipment 597 729 Trade and other receivables 65 70 Current assets: Inventories 930 854 Trade and other receivables 1,075 1,052 Non-current assets employed by P plc at its head office were GBP 40 million at book value. Source of products P plc prides itself on operating an efficient supply chain and developing strong relationships with a wide range of suppliers across the world which offer quality products. It grants preferred supplier status to most of its suppliers and enters into long-term supply contracts. All P plc s external direct sales units and retail outlets are supplied from its warehouses in Europe or the USA. This means that some of its products which are sourced from Asia and Africa are shipped to the company s warehouses in Europe and the USA. direct sales units and retail outlets in Asia and Africa then receive shipments from the company s warehouses. This means that some products, which P plc sources from suppliers located in Asia and Africa, cross the world, are stored in warehouses and then cross the world again to be delivered to their destinations in Asia and Africa. Strategic level pre-seen 4 May 2014 & September 2014
Corporate Responsibility Aims P plc aims to provide excellent customer service across its two divisions. This excellence in customer service is underpinned by its: provision of high levels of staff training and development, with strong concentration on safety management; adherence to the highest ethical standards both internally and with respect to supplier relationships; concern to cause the least environmental damage possible within its operations in terms of emissions, waste management and recycling activities by employing environmental performance management methods; promotion of product integrity through selling only safe and reliable products which are of the required standard of quality and partnering with key suppliers. Strategic developments P plc aims to increase its market share by making repeat sales through its external direct sales units and retail outlets to existing customers and attracting new customers away from competitors. It places customer service as its key critical success factor. The Board is constantly seeking improvements in the company s logistics particularly in sourcing products and their delivery to its external direct sales units and retail outlets wherever they are in the world. It is actively considering acquiring logistic resources in parts of the world where it does not own warehousing and distribution facilities at present and also pursuing the concept of virtual warehousing by which its external direct sales units and retail outlets will still place their orders with P plc but will obtain their supplies directly from the manufacturer. Other areas of strategic development concern reviewing the life expectancy of its products so as to give greater value for money to final customers and benchmarking its performance in different countries in order to improve operating efficiency. Strategic level pre-seen 5 May 2014 & September 2014
Appendix 1 P plc ORGANISATION STRUCTURE P plc Board of Directors Executive Board Plumbing and Heating Division Divisional Executive Management Team Building Materials Division Divisional Executive Management Team USA Plumbing and Heating Division Senior Executive Team USA Building Materials Division Senior Executive Team USA Warehouses Europe Warehouses Europe Warehouses USA Warehouses Note: Some of the retail outlets were established, or were acquired as chains of retail outlets, operating as business units with a common trading name. The remaining retail outlets are individual business units in their own right comprising a single outlet. Strategic level pre-seen 6 May 2014 & September 2014
Appendix 2 Extracts from P plc s statement of profit or loss and statement of financial position Statement of profit or loss for the year ended 31 December 2013 Revenue 13,877 Cost of sales 10,128 Gross profit 3,749 Operating costs 3,302 Operating profit 447 Net finance costs 68 Profit before tax 379 Tax PROFIT FOR THE YEAR 116 263 Statement of financial position as at 31 December 2013 ASSETS Non-current assets Intangible assets: goodwill (net) 1,748 Property, plant and equipment 1,366 Trade and other receivables 135 Total non-current assets 3,249 Current assets Inventories 1,784 Trade and other receivables 2,127 Cash and cash equivalents 418 Total current assets 4,329 Total assets 7,578 EQUITY AND LIABILITIES Equity Share capital (GBP 0.10 shares) 50 Share premium 25 Retained earnings Total equity 3,396 3,471 Non-current liabilities Bank loans 1,000 Current liabilities Trade and other payables 2,905 Bank loans and overdrafts 202 Total current liabilities 3,107 Total liabilities 4,107 Total equity and liabilities 7,578 End of Pre-seen Material Strategic level pre-seen 7 May 2014 & September 2014 Strategic level pre-seen 7 May 2014 & September 2014