February 2020 Scs Post Exam

February 2020 Strategic Case Study
2019 CIMA Professional Qualification
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February 2020 Strategic Case Study Examination
Pre-seen material
Contents
Page
Coffee 3
Shinepodd (S/D) 6
Extracts from S/D’s corporate published documents:
S/D’s social responsibility 9
S/D’s vision, mission and values, and SD’s strategy 10
S/D’s Board of Directors 11
Organisation charts 12
S/D’s principal risks 14
S/D’s internal audit charter 15
Financial statements 16
Extracts from a competitor’s financial statements 18
S/D’s Share price history 20
News stories 21
Recent posts from S/D CEO’s blog 25
1
©CIMA 2019. No reproduction without prior consent.
Shinepodd
You are a senior manager in the finance function at Shinepodd (“S/D”). You report directly to
the Board and advise on special projects and strategic matters.
S/D is based in Middland where the currency is the M$. Middland requires companies to
prepare their financial statements in accordance with IFRS.
S/D is quoted on the Middland Stock Exchange. This is an active and well-regulated exchange.
Companies that are quoted on the exchange are required to adhere to the Middland Code of
Corporate Governance, which sets out detailed regulations relating to the governance
arrangements for quoted companies.
2
Coffee
Coffee is one of the most popular drinks in the world. It is made
from the “beans” that develop inside the berries of a family of
shrubs or trees that are native to parts of Southern Africa and
Asia, although these plants are now cultivated in many countries
around the World. When the berries are ripe they are picked and
processed so that the beans can be extracted and dried. The
dried coffee beans are roasted. The roasted beans are ground,
after which they can be used to make coffee by brewing them in very hot water.
Coffee is a popular drink. It has a bitter taste, which some coffee drinkers enjoy, but it can be
sweetened by adding milk and/or sugar. There are many different varieties, with flavour being
affected by the species of the shrub from which the berries have been picked and by the
manner in which the berries are roasted. Different varieties can be blended to create an even
wider range of flavours.
Coffee contains caffeine, a stimulant that gives a cup of coffee a refreshing quality, which
makes it a popular breakfast drink. It is slightly acidic, which means that it aids digestion and
so it is frequently drunk after meals. It also gives its name to the mid-morning and mid-
afternoon “coffee breaks” that occur during the working day.
Coffee is a major commodity that is traded on international markets, usually priced in USD. It
is one of the top agricultural exports of many countries. It is one of the most valuable
commodities exported by developing countries. Coffee exports have the potential to keep a
significant proportion of the populations of some developing countries out of poverty. Green
(or unroasted) coffee is one of the most heavily traded commodities by value in the world.
Coffee shrubs are grown in tropical countries. They require special growing conditions, tending
to thrive on east-facing slopes that prevent them from excessive sunshine. It takes four to five
years from planting a seed to getting coffee berries. It is important to plant seeds annually to
ensure a continuous cycle of new shrubs starting to bear fruit to replace those that are at the
ends of their productive lives. The coffee plants will produce berries for approximately 25
years, a good plant will yield about a kilo a year.
3
Coffee has a significant environmental footprint. Coffee plantations require a great deal of
water to enable the shrubs to thrive and create a good crop of berries. Growers often use
chemicals as a protection from weeds and insects on plantations. Coffee growers have been
accused of clearing land and destroying important natural habitats. This is particularly true
when the “wet process” is used to remove the coffee beans from the coffee berries before the
berries have dried. Doing so improves the flavour of the beans, but it requires the use of
special equipment and large amounts of water.
There have also been concerns about the exploitation of
plantation workers, who may be forced to work long hours
for poor pay. There are also concerns that the owners of
small plantations are exposed to fluctuations in world coffee
prices that can result in them being unable to support their
families properly when prices fall and they are forced to sell
their crops for little or no profit.
There have been a number of initiatives to address these
sustainability issues. For example, there are organic coffee plantations, which use pest-
resistant shrubs and other strategies to avoid the use of chemicals. There are also “fair trade”
initiatives which involve paying farmers a price that is sufficient to enable them to support
themselves and their families, with the resulting price increase passed on to the consumer.
Coffee as a beverage
Coffee can be purchased for consumption in many different forms:
Coffee beans and Consumers can buy coffee in the form of roasted coffee beans,
ground coffee which they have to grind in order to make a drink. Alternatively,
they can buy ground coffee beans.
The ground coffee is made into a drink using a variety of different
methods, all of which involve mixing the ground coffee with very
hot water, ideally just below boiling, or trickling hot water through
ground coffee.
Many coffee drinkers enjoy the aroma and flavour that is released
when coffee is made in this way. It is, however, quite time-
consuming in comparison to other methods and leaves the
consumer with the need to dispose of the used coffee grounds,
which are liable to cause stains if spilled on furniture or floor
coverings.
Instant coffee Instant coffee is manufactured by brewing coffee in industrial

quantities, filtering out the used grounds and drying the resulting
drink to leave a soluble powder or granulated product. The
consumer simply spoons this product into a cup or mug and adds
hot water to make a drink.
Instant coffee is more convenient because it is quicker to make
and does not leave the consumer to dispose of grounds. Some
consumers believe that instant coffee is inferior to coffee made
from ground coffee beans.
4
Coffee shop coffee Most towns and cities have large numbers of coffee shops.
These fulfil a number of functions, including providing a public
space in which customers can meet friends and socialise. They
also have equipment that can make coffees that would be difficult
to create at home.
Coffee shops have trained “baristas” who can use the steam-
powered machines to create coffees that have tastes and
textures that would be difficult to create at home. One popular
variation is espresso, which involves filling a metal container with
ground coffee and blowing steam through the coffee at high
pressure. A small quantity of very concentrated coffee is released
through the bottom of the container.
Coffee shop machines can also blow steam into a jug of milk to
create a froth. The froth is added to a cup of espresso to make
cappuccino or latte.
These drinks are very popular but are expensive and the
equipment needed to make them properly is too large to buy for
home use.
Coffee pods Coffee pods make it possible to create coffee in the home that is
almost as good as coffee from a coffee shop. Consumers buy an
electrical coffee machine that is compatible with their preferred
brand of coffee pod. These machines are small enough to fit on a
kitchen worktop without taking up too much space and could be
kept in a cupboard when not in use.
Consumers also require a supply of coffee pods, which are
usually sold online or may be available from supermarkets. The
pods are made out of plastic and aluminium, each pod containing
a measured quantity of ground coffee. The pods are airtight and
so keep the coffee fresh before consumption.
The consumer fills a tank in the machine with water, inserts a pod
into a chamber and places a cup below the machine’s spout. The
machine then automatically heats the water, punctures the pod
and blows steam through the coffee grounds, and allows coffee
to flow through the spout into the cup. The used grounds remain
within the pod, which has to be disposed of carefully because it
takes some time to cool down and is liable to drip some coffee
through the holes created by the machine.
Some coffee machines can create froth from milk to enable the
consumer to make cappuccino.
Some consumers find it more convenient to use coffee pods
rather than ground beans. Used coffee pods are also easier to
dispose of than loose coffee grounds, which can be messy.
5
Shinepodd (S/D)
S/D was established in the mid-1980s by an entrepreneur who believed that consumers were
willing to pay more for better quality coffee. Coffee drinkers were spending increasing amounts
in coffee shops in order to enjoy good quality coffee while shopping or while commuting to or
from work. These indulgent purchases were becoming so popular that the phrase “latte factor”
was used to describe the phenomenon of personal spending on frequent small treats, such as
coffee shop coffee, affecting individuals’ ability to save.
The founder’s vision was to develop a technology that
would enable consumers to create espresso-style coffees.
At that time, the only way to make espresso at home
involved the use of a complicated system that involved a
metal jug which could be broken down and allowed the
bottom half to be filled with water and a tray containing
ground coffee. Heating the jug on the stove created high
pressure steam in the bottom half, which rose through the
tray of coffee and filled the top half of the jug with espresso.
These machines were messy and time-consuming to use.
The founder developed a system that used the same principle as the metal jug but was easier
to operate. Consumers would buy an electrical appliance that would heat the water and pass
the resulting steam through coffee that was contained in a pod made out of plastic and
aluminium. This required much less effort than conventional espresso makers and produced
excellent coffee.
The concept proved successful and the S/D Pod System was
launched in the early 1990s. S/D grew rapidly and the company was
quoted on the Middland Stock Exchange in 1997. The founder sold
his shares shortly after and takes no further interest in the company.
S/D’s pods are made of plastic and aluminium. They are engineered
to withstand the pressure of the steam flowing through the coffee
grounds contained within. Each pod can be used only once because
the machine punctures the top and bottom in order to allow the steam
to enter and the coffee to escape.
S/D does not manufacture the machines. It has granted three
manufacturers of consumer electrical goods, Homewyre, Orpalast
and Zendiclam, the right to use its name in promoting and selling coffee machines that are
compatible with S/D pods. All three manufacturers are essentially in competition with one
another, although they also differentiate their products in terms of quality of finish and features.
There is sufficient demand for S/D-compatible machines to justify manufacture by three
different companies.
In addition to permitting all three companies to use S/D’s name on their machines and in their
advertising, S/D promotes the machines through its website without making a charge. S/D’s
consumer research indicates that consumers tend to be loyal customers once they have
invested in a machine.
There are competing manufacturers of coffee pods. Each manufacturer’s pods are designed
to fit exclusively in the machines that are designed for their own brand. Competitors’ pods do
not fit in S/D compatible machines and S/D pods will not fit in competitors’ machines. Several
manufacturers of electrical goods, including Homewyre, Orpalast and Zendiclam, make
machines that use competing brands of coffee pods.
Coffee pods are the most expensive way to make a coffee at home. Beans, ground coffee and
instant coffee can all be manufactured and packaged at a much lower cost than pods. Coffee
pods are also relatively bulkier and heavier than the alternatives and so it costs more to store
6
and distribute them. S/D addresses that problem by selling its pods exclusively online.
Customers can log into its website and can choose from a selection of different varieties of
coffee. S/D then despatches the pods using next-day third-party couriers.
Customers find online sales convenient because a box of pods would add bulk to their weekly
shopping. Supermarkets would also be somewhat reluctant to stock pods because they would
take up a lot of shelf space in comparison to ground and instant coffees.
The only places where S/D pods are sold over the counter are the “boutique” shops that S/D
has opened in prominent places such as upmarket city centre shopping streets and railway
stations. These permit customers to sample different varieties of S/D coffee, free of charge if
they are registered customers. They also sell machines and pods, although the main purpose
of the shops is to promote the product and increase brand recognition.
S/D also advertises its pods heavily on television,
in glossy magazines and on billboards, as well as
through its website. Its advertising always features
leading movie actors, in order to create the link
between S/D coffee and luxury. For several years,
S/D had paid actor Jorge Negrato to be the “face”
of S/D, appearing in adverts in which he drinks
coffee with one or more of his celebrity friends.
Feedback from customers show that these adverts
have been very successful in creating a sense of
brand recognition for S/D.
S/D also pays very close attention to the ground coffee that it uses in its pods. It promotes
itself as a luxury brand and so it insists on using only the best quality coffee in its pods. The
pods themselves are also made so that they look attractive and are pleasant to handle. They
are moulded from good quality plastic and aluminium and are constructed so that they feel
smooth.
S/D works closely with major coffee growers around the world. S/D uses mainly Arabica coffee
beans which are more expensive than other kinds but are very popular with coffee drinkers
worldwide. There are 37 different varieties of pod and S/D uses varieties of coffee from virtually
every coffee-growing country. Different climates affect the growth and so the flavour of the
resulting coffee.
Alanzo Perez, S/D’s Director of Overseas Operations travels constantly to liaise with plantation
owners. His staff conduct frequent visits to plantations to ensure that the coffee is being grown
and harvested in accordance with S/D’s preferences, so that the resulting coffee beans are of
a high quality. These visits seek to ensure that policies are in place to protect the welfare of
the plantation workers. Berries are picked by hand, so it is a labour-intensive process.
S/D is prepared to offer advice and even to invest in facilities to support the plantations. For
example, the beans extracted from the ripe, red berries have a better flavour than those from
berries that are still slightly green. S/D encourages plantations to use the “wet” process to
extract the beans from the berries because the beans from the better quality berries sink to
the bottom of the tanks and so can be gathered for sale to S/D, leaving the rest of the crop for
sale to other customers.
S/D has invested in large drying sheds close to some of
its major growers. These are used to permit the beans
to be dried indoors on racks that are protected from the
rain, which reduces the risk of the beans fermenting and
so tainting the flavour of the coffee. Otherwise, many
growers would dry their beans outdoors. Drying takes
approximately three weeks.
7
Once the beans are dried, they are “polished”, which essentially involves stirring the beans up
so that they rub against one another. This also sorts them by size. The beans are referred to
as “green” at this stage in the process.
S/D insists on receiving only very high-quality beans, so it pays up to 15% more than the
market price in order to encourage growers to provide it with only their very best quality beans.
The processed beans are shipped to S/D’s factory in Middland, where they are roasted and
ground. This is a crucial part of the process because coffee brewed from green beans would
taste very bitter and unpleasant. The roasting process gives coffee beans the characteristic
flavour that drinkers enjoy.
Roasting coffee is a skilled craft and S/D employs experts. Green beans are roasted in large
drums that heat them to a precisely controlled temperature for a specific duration. The heat
and time are varied in respect of the variety of bean and the type of drink that will be made
from it. For example, lightly roasting beans gives the final coffee a lighter colour and a more
subtle flavour, while a “dark roast” results in a brew that looks and tastes stronger. Most S/D
pods produce a variation of espresso coffee, which requires a dark roast, but some of S/D’s
beans are given a light roast to add a particular flavour to the darker roasts in the blend making
up a particular variety of pod.
The roasted beans must be ground to a very specific consistency. S/D requires coffee to be
ground so that the resulting grounds are fine, but if they are too fine then they will be carried
into the consumer’s cup and will taint the flavour. S/D has different grinding machines for each
variety of bean that it processes so that there is no cross-contamination of flavours.
S/D manufactures the pods on site and the ground coffee beans are blended into the different
varieties and used to fill the pods before the pods are sealed and packed.
The finished coffee pods are packaged in carboard
sleeves, each holding ten pods. The sleeves are stored in
S/D’s distribution centre, awaiting despatch to customers.
Customers are required to order in multiples of 100 pods,
which mean that it can use standardised cartons to
package products for delivery. Orders are placed online
and are fulfilled by third- party couriers.
8
Extracts from S/D’s corporate published documents
S/D’s social responsibility

Sustainability
Our success is inextricably linked to the improvement in the lives of the farmers and
suppliers who grow and produce our products.
S/D ensures that its use of premium Arabica coffee is sustainable in the long term.
• We are committed to offering ethically purchased and responsibly produced sustainable

products of the highest quality. Making coffee the world’s first sustainable product to
improve the lives of at least one million people in coffee communities around the world.
• Our holistic approach to ethically sourcing the highest quality coffee helps foster a better
future for farmers and their communities.
S/D uses the wet process for separating coffee beans from coffee berries. This process uses
a lot of water.
• In areas where clean, fresh water is in short supply, S/D creates deep bore holes and
pumps water to the surface so that the farmers who supply us are self-sufficient in terms
of water. These facilities supply many local communities with clean water to augment local
sources.
• S/D has built drying sheds that are open at the sides so that they use the natural flow of
air to dry the coffee beans and do not use any fuel.
S/D Third Party Code of Conduct in Employment

This Code applies to all third-party entities which do business with S/D.
S/D expects all such entities to maintain working conditions that meet internationally declared
human rights and standards.
1. Third parties shall not discriminate against any individual. All appointments will be based
on merit, regardless of factors including (but not restricted to) age, race, gender or
political beliefs.
2. Third parties shall pay all employees at least the applicable minimum wage.
3. Third parties shall not require employees to work excessive overtime.
4. Third parties shall provide a safe and healthy working environment.
5. Third parties shall ensure that employees are not subject to abusive or bullying
behaviour.
9
S/D’s vision, mission and values
Vision
A cup of joy in every household.
Mission
S/D’s mission is to succeed by meeting our customers’ needs for excellent coffee and our
shareholders’ needs for a strong return on their investment.
Values
S/D will:
1. deliver the highest possible coffee experience to customers
2. maintain high standards of ethics and professionalism in all our work
3. improve the welfare of all our coffee growers
4. treat our planet with respect
S/D’s strategy
S/D is focussed on continuing global expansion.
• S/D has grown organically and has adopted a differentiation strategy. Its premium coffee
pods contain the very best quality Arabica coffee.
• S/D works with coffee growers to ensure the coffee they purchase is grown in good
conditions and only the best ripe coffee berries are used in its products.
• S/D monitors the growers whom it uses to ensure they pay living wages and provide good
working conditions.
• S/D sells almost exclusively online and delivers its pods quickly to its customers. 70% of
deliveries are made within 24 hours of ordering.
• S/D is a premium brand and its products are expensive. Despite this, the demand for its
pods has grown steadily.
10
Shinepodd’s Board of Directors
Matteo Lund, Non-Executive Chairman

Matteo is a retired business executive who worked for many years in a large tea producing
company. Matteo was appointed in 2016.
Anders Lunt, Chief Executive Officer

Anders worked in coffee agriculture in Beeland for 8 years before moving to be production
director at a major coffee roasting company. Anders was appointed in 2016.
Liela Dorcas, Chief Financial Officer

Liela was a senior accountant with a large retailer before she was appointed to S/D’s Board.
She is a qualified accountant. Liela was appointed in 2013.
Alanzo Perez, Director of Overseas Operations

Alanzo is a qualified horticulturist, specialising in coffee. He has worked in several countries
that grow coffee. He trains the coffee growers and advises them on getting high yields and
quality coffee berries. Alanzo was appointed Director in 2015.
Helena Moreno, Commercial Director

Helena has held a number of senior positions in major quoted companies, including a period
as Director of Human Resources at Croowe Coffee, one of S/D’ s competitors. Helena joined
S/D’s Board in 2017.
Johan List, Human Resource Director

Johan trained and practised as a human resource manager in a large production company
before joining S/D as a senior HR Manager in 2012. He was promoted to HR Director in 2017.
Marcus Unst, Independent Non-Executive Director

Marcus is a qualified accountant who was a partner in one of Middland’s most prestigious
accountancy firms. Marcus was appointed to S/D’s Board in 2017.
Julia Henderson, Independent Non-Executive Director

Julia ran a very successful small coffee roasting company. She retired in 2012 and was
appointed to S/D’s Board in 2015.
Johanna Fria, Independent Non-Executive Director

Johanna was a senior manager in a laboratory specialising in plant health. She still does some
part time work in a tropical house in a botanic garden in Middland. Johanna was appointed to
S/D’s Board in 2017.
11
Organisation chart
Executive directors
Anders Lunt,
Chief Executive
Officer
Alanzo Perez,
Liela Dorcas, Johan List, Helena Moreno,
Director of
Chief Financial Human Resource Commercial
Overseas
Officer Director Director
Operations
• Recruitment • Coffee
• Internal and • Promotion
and induction sourcing
external and
• Retention and • Liaison with
reporting advertising
discipline external
• Systems • Product
• Training and suppliers of
• Tax development
career goods and
management • Distribution
progression services
12
Non-executive directors
Matteo Lund,
Non-Executive
Chairman
Audit Commitee
Marcus Unst, Julia Henderson, Johanna Fria,

Independent Independent Independent
Non-Executive Non-Executive Non-Executive
Director Director Director Risk Committee
Remuneration
Committee
13
S/D’s principal risks
Risk theme Risk impact Risk mitigation
Economic A rise in coffee prices could There is a huge market for coffee
environment place significant financial strain and S/Ds senior management
on S/D and is one of the key risk monitors prices closely to inform
factors affecting the company. purchasing strategy.
S/D purchases coffee from S/D uses internal and external

many countries and sells coffee hedging to minimise the effect of
worldwide. A change in the currency fluctuations.
value of M$ could have a
significant effect on the financial
statements.
Environmental There is a risk to reputation if S/D hopes to introduce a better

the pods are not recycled. They recycling policy and collection
cannot be recycled by system for used pods.
conventional means and
consumers are reluctant to
return their used pods to S/D for
specialist processing.
There is a risk to reputation if S/D has a code of conduct which is

the welfare of coffee growers is enforced to ensure the coffee
not looked after. growers are treated well.
IT Most sales are made online so S/D has excellent cyber security in
any systems outage could have place.
a significant effect on profits and
reputation.
S/D is vulnerable to cyber-attack S/D also has a strong internal audit

as so much of their business is department which monitors all risks
online. closely.
Other The weather could affect the S/D buys from a variety of countries
availability of quality coffee to try and mitigate this risk.
beans, which in turn affects
price.
14
S/D internal audit charter
The Internal Audit Department’s responsibilities are defined by S/D’s Board. Internal Audit is
overseen by the Audit Committee.
The Chief Internal Auditor will ensure that internal audit staff apply appropriate professional
standards in the pursuit of their duties. The Chief Internal Auditor will report to the Convener
of S/D’s Audit Committee.
The members of the Internal Audit Department are granted unrestricted access to any records,
locations and assets in order to discharge their duties. They are also free to interview all staff
and have a right to receive full cooperation whenever they do so.
A written report will be submitted to the Chief Internal Auditor at the conclusion of each internal
audit engagement. The Chief Internal Auditor will communicate internal audit findings to the
Convener of the Audit Committee, who is free to request access to internal audit reports.
Internal audit reports will be used to provide feedback to managers who are responsible for
the areas subject to audit. Where exceptions are noted, the managers responsible will agree
a plan for rectification and the internal audit staff will ensure that agreed changes are
implemented.
An internal audit plan will be developed each year and approved by the Audit Committee. The
plan will focus on areas identified using a risk-based approach. The Chief Internal Auditor will
seek authorisation from the Convener of the Audit Committee before deviating from the plan.
The Audit Committee has the authority to require revisions to the plan or to request special
investigations that are deemed necessary.
15
Financial statements
The following information has been extracted from S/D’s financial statements for the
year ended 31 December 2019
S/D
Consolidated statement of profit or loss
for the year ended 31 December
2019 2018
M$ million M$ million
Revenue 3,048 2,986
Cost of goods sold (1,536) (1,519)
Distribution expenses (282) (267)
Marketing and administration expenses (667) (661)
Operating profit 563 539
Finance cost (34) (28)
Profit before tax 529 511
Tax (138) (133)
Profit for the year 391 378
S/D
Consolidated statement of changes in equity
for the year ended 31 December 2019
Share Translation Retained

capital reserve earnings Total
M$ million M$ million M$ million M$ million
Opening balance 27 (648) 2,716 2,095
Profit for year 391 391
Dividend (286) (286)
Exchange translation loss (33) (33)
Closing balance 27 (681) 2,821 2,167
16
S/D
Consolidated statement of financial position
as at 31 December
2019 2018
Non-current assets
Property, plant and equipment 1,233 1,026
Goodwill 1,057 1,057
Intangible assets 721 687
3,011 2,770
Current assets
Inventories 304 306
Trade receivables 254 249
Cash and cash equivalents 260 265
818 820
Total assets 3,829 3,590
Equity
Share capital 27 27
Translation reserve (681) (648)
Retained earnings 2,821 2,716
2,167 2,095
Non-current liabilities
Loans 857 619
Deferred tax 85 116
942 735
Current liabilities
Trade payables 593 629
Current tax 127 131
720 760
Total equity and liabilities 3,829 3,590
17
Extracts from a competitor’s financial statements
Caffham
Consolidated statement of profit or loss
for the year ended 31 December
2019 2018
Revenue 2,596 2,544
Cost of goods sold (1,326) (1,312)
Distribution expenses (252) (239)
Marketing and administration expenses (586) (580)
Operating profit 432 413
Finance cost (32) (26)
Profit before tax 400 387
Tax (104) (101)
Profit for the year 296 286
18
Caffham
Consolidated statement of financial position
as at 31 December
2019 2018
Non-current assets
Property, plant and equipment 1,069 893
Goodwill 920 920
Intangible assets 632 603
2,621 2,416
Current assets
Inventories 271 273
Trade receivables 227 223
Cash and cash equivalents 233 237
731 733
Total assets 3,352 3,149
Equity
Share capital 75 75
Translation reserve (598) (569)
Retained earnings 2,407 2,319
1,884 1,825
Non-current liabilities
Loans 749 544
Deferred tax 78 105
827 649
Current liabilities
Trade payables 526 556
Current tax 115 119
641 675
Total equity and liabilities 3,352 3,149
19
Share price history
S/D’s geared beta is 0.51. Its ungeared beta is 0.45.
20
News stories
Good Gardening
Coffee Grounds Work
James’s Gardening Column
Don’t throw out your used coffee pods!
Over the years I have discovered that coffee grounds added to my other recycled vegetable
peelings makes great compost. The coffee grounds can also be used to keep snails and slugs
at bay as they dislike the texture.
I go around all my friends and collect their coffee pods and use them for compost. It’s a bit
of work as you need lots of pods and have to open the pod and scrape the coffee grounds out
but it’s great. People can’t be bothered doing it themselves as it takes time, so I get lots of
pods. Most people I know drink S/D coffee and it’s a pity the company doesn’t do more to
recycle the pods. S/D could make it easier I’m sure. It’s a pity the pods have plastic around
them as well as aluminium.
Battle of the Machines

Gadget tested several coffee makers and also an older espresso maker. Which came out on
top?
We looked at several different facets of the machines and the espresso they made: ease of
use, price, taste, easy access to quality coffee, time taken to make the coffee, crema on top
of the coffee, ease of cleaning.
In spite of the coffee machines that use pods being very expensive they came out on top.
Ease of cleaning was one of the biggest differences with the traditional espresso machines
being bottom of the heap. Taste, crema, ease of purchase and cleaning were all rated more
highly by Gadget’s testing panel for the pod machines. Even the price didn’t seem to be a
barrier; the taste was worth it apparently.
An easy victory for the pod machines.
21
Middland Daily News
Happy Jorge signed up for another three
years with S/D!
Jorge Negrato was looking very happy today when he posed for the press outside S/D’s
head office.
It was announced that he has been signed up for
another three years as the star of S/Ds coffee pod
adverts.
Rumour has it he makes more from the adverts than
he does from Hollywood and filming a series of
coffee commercials is far easier than making a movie.
Nice work if you can get it!
Middland Telegraph
Valyoumart, the discount supermarket chain, announced a further round of discounts and
price reductions in its store. That is great news for the
chain’s customers, who already enjoy low prices and
value for money. Valyoumart’s suppliers are less likely to
welcome the cuts.
Many suppliers are already claiming that underpaying
suppliers is a significant element of the retail giant’s
success. They order in very large quantities but demand
the keenest prices for doing so. That can leave suppliers in
difficulty if their own costs increase because Valyoumart is notoriously reluctant to
renegotiate contracts.
Some major brands have disappeared from Valyoumart’s shelves because the retailer
leaves them with insufficient margin. Valyoumart’s spokesperson dismissed such claims as
“greed” on the part of food manufacturers and argued that it always has a good variety of
items at excellent prices.
22
Middland Telegraph
Legal threat to food manufacturers averted
Middland’s Minister of Consumer
Affairs announced yesterday that
the proposed law to force food
manufacturers to absorb costs
associated with the price volatility
of the underlying commodities used
in production had been defeated. It
is now 18 months since the
Government had announced that it
intended to ban the practice of
increasing prices when underlying
costs rose on world markets, then
leaving the increased prices in place
when commodity prices fell. The Minister cited difficulties in developing effective
definitions and also the need to balance the conflicting interests of manufacturers against
consumers.
Share prices of manufacturers who rely on such commodities, including wheat, rice, tea and
coffee, increased immediately after the announcement.
Consumer protection groups criticised the Government for this. A spokesperson for
Affordable Food stated that the defeat of the proposed law was very regrettable, but it was
also expected. Large companies often influence the drafting of new laws. It is, for example,
well known that companies frequently engage lobbyists who can persuade politicians to use
their influence in support of the lobbyists’ clients. The lobbyists can offer favours, such as
political support, or can threaten to relocate production to foreign countries and so blame the
politicians for the loss of jobs.
23
Middland Daily News
Stick it in the bin
A recent survey by Middland University
indicated that most consumers are lazy when it
comes to recycling food packaging. They are
generally willing to put packages in the correct
bin but tend not to put any great effort in when
they are confused. For example, milk cartons
are frequently thrown in the general waste
because householders are often unsure whether
they are made out of plastic or cardboard.
Owners of coffee machines admitted that they were reluctant to store used coffee pods for
return to the manufacturers for recycling. The pods tend to leak small quantities of coffee,
which can be messy. It is easier to throw the pods away rather than to store them for handing
back to the courier when they make the next delivery, even though the makers provide
sealable plastic bags and pay for the return courier fees.
24
Recent posts from CEO’s blog
Don’t amount to a hill of beans?
One of Humphrey Bogart’s most famous movie quotes likened something insignificant to a
“hill of beans”. That struck a chord with me last week when I returned from a visit to some of
the plantations from which we buy some very large “hills” of the world’s finest Arabica coffee
beans.
Our customers seem to appreciate the effort that we invest. More than 450,000 people visit
our online store every day. They are clearly attracted by the quality.
That quality comes at a cost, we pay our growers a very good price for our beans, more than
15% over the market rate. We do that to ensure that we get the best quality beans and so our
growers can live well and afford to treat their workers accordingly, with good wages for all their
hard work.
Anders
Comments
How many plantation workers did you talk to during your trip to the coffee plantations?
Do you really believe that plantation owners pay their workers well just because they
can?
Young Sam
Taste test
As you can imagine, I drink a lot of coffee. People ask if I ever get bored, but it just doesn’t
happen because one of the benefits of my job is that I get to taste all of the new varieties
before they are launched.
I sampled our new Latin American range of coffees this morning. These blend coffees from
Central and South America to give varieties that have strong, smooth flavours. They could be
enjoyed at any time of day, but I prefer to drink strong coffee after dinner.
Don’t worry, my “taste test” has nothing to do with the final blend. We have master coffee
blenders who are experts in checking that our coffee is the most delicious on the market.
Blending coffee is very much an art that requires a huge amount of skill.
When we launch these new varieties we will have more than 40 varieties of pods to choose
from.
25
Return to sender
Returning from a business trip last week, I wondered how much of the airliner I was sitting in
was made out of recycled S/D pods. The chances are that the aluminium used to make the
body and wings of the plane had been recycled from other items, including the lids of our pods.
Recycled aluminium is just as safe and strong as newly smelted metal and so it can be used
for any purpose.
I have a plea to all of our customers. Every delivery of S/D pods contains a plastic recycling
bag. If you use it to store used pods, you can seal it up just before your next delivery, using
the self-seal strip. The courier who delivers your fresh pods will then collect the bag and return
it to us for recycling, at no additional cost to you. The bag is already addressed and carries an
account code that charges the collection directly to us.
It is a shame to waste the resources that go into our lovely pods. If we could achieve a 100%
recycling rate then one day I might get to fly in a plane made entirely out of recycled pods!
Comments
Sorry, but I buy pods once every four or five weeks. That is a long time to store a plastic
bag full of damp plastic pods. I did recycle the first few batches, but they started to
smell slightly of stale coffee after a few days and we had an accident once when the
bag spilled and left a coffee stain on my kitchen floor.
I would recycle the pods if it was easier, but it just isn’t convenient.
Proud Homeowner
You need to take time for a reality check.

• Two large jars of instant coffee last as long as a delivery of your coffee pods.
• The jars don’t take up a huge amount of space when they are shipped, unlike the
huge cardboard boxes that you use to send your coffee pods in.
• Customers can easily slip a jar of instant coffee into their weekly shop and so don’t
have to request a courier delivery just to bring their coffee.
• An empty glass coffee jar can be recycled easily, unlike your pods that require
transportation back to you …
• … except that very few of the pods are ever returned because it is inconvenient to
do so
You clearly don’t care about the environment. How many business flights do you take
in a year?
Planetluvverr
26
Strategic level integrated case study – Examiner’s report February 2020 exam session (2019 syllabus)
This document should be read in conjunction with the examiner’s suggested answers and marking guidance.
General comments
The Strategic Case Study (SCS) examinations for February 2020 were based on the company Shinepodd (“S/D”). S/D manufactures
pods that contain ground coffee and are used to make individual cups of coffee when inserted in compatible coffee machines.
S/D occupies a segment of the coffee market. Its products are relatively expensive but are prized for their high quality. The company
sells its pods online, directly to consumers. The pre-seen provided sufficient background for candidates to understand the business
and the market for its products. Candidates should have appreciated that S/D sells a luxury product in the sense that there are far
cheaper ways to make a cup of coffee, although not necessarily of the same high quality. The company is also dependent on the
continuing availability of the coffee machines that are compatible with S/D pods. Those machines are manufactured and sold by third
parties.
There were three variants based on S/D. Each contained additional unseen material that complemented the information in the pre-
seen, as well as the tasks that were set for candidates. The focus for each variant was as follows:
• Variant 1: S/D faces a change in the law that could make it responsible for the recycling of used coffee pods.
• Variant 2: the retailers who sell the electrical coffee machines that consumers require to make coffee from S/D pods are
threatening to rationalise their product lines and may stop selling S/D compatible machines.
• Variant 3: a supermarket has launched its own range of S/D compatible pods under its own brand name.
This case study was the first to be based on the new 2019 syllabus. As such, it complied with the published blueprint and covered the
core activities in the prescribed weightings. Each variant consisted of three tasks and each task was further subdivided into separate
sub tasks. The weighting attached to each sub task was stated and candidates were advised to allocate the time available for each
sub-task on the basis of those weightings. Markers were instructed to adopt a holistic approach to marking, which meant that the
answer to each sub-task was read and judged on its merits. Markers were provided with specific guidance as to the characteristics of
level 1, level 2 and level 3 answers for each separate sub task.
As always, the key to achieving a passing mark or better is to answer the question as set. Higher marks are awarded to fuller answers
that are relevant and correct.
Strategic level integrated case study – Examiner’s report – February 2020 exam session (2019 syllabus) 1
To achieve a level 3 in most sub tasks it was expected that a candidate would demonstrate the ability to resolve strategic problems
faced by S/D, using the technical material covered in the syllabus in order to justify and support arguments and recommendations. At
the Strategic level, the technical evaluation of most issues requires professional judgement and there can often be room for
disagreement. Candidates must be able to demonstrate an understanding of the technical issues and to reflect the scenario when
selecting and applying relevant models in response to each task. Candidates who scored at a level 1 on a sub task probably did one
or all of the following:
• Failed to answer the question that was asked.
• Demonstrated limited technical understanding of the syllabus content, possibly overlooking or misinterpreting the assumptions
upon which the technical models rely.
• Provided insufficient justification for recommendations, bearing in mind that decision makers generally need to know why a
particular course of action has been proposed.
• Failed to reflect the scenario or the specifics of S/D in their answer.
Candidates generally demonstrated a good technical grasp of the syllabus content that was being examined across the three variants.
Candidates were clearly familiar with content such as ethics, sources of finance and the identification of risk.
Candidates tended to demonstrate a lesser technical understanding of the management of currency risk, the design of internal control
and internal audit. These are topics that often result in extensive answers that simply list currency management techniques, types of
internal control and possible roles for internal audit. Such answers demonstrate recall of study materials and so a familiarity with the
syllabus content, but they rarely answer the question because they either overlook the scenario completely or they make a
recommendation that is unsuited to the circumstances.
It should be stressed that the Strategic Case Study continues to be a test of candidates’ ability to deal with strategic challenges in a
realistic context. Candidates should accept that much of the technical content in the syllabus require professional judgement in its
application. It is generally necessary to explain why a particular model or technique is relevant and to identify areas where assumptions
are being made. For example, the efficient markets hypothesis (EMH) may be a helpful basis for explaining share price movements to
a shareholder or company director, but it is unlikely that a detailed description of the differences between weak form, semi-strong form
and strong form efficiency will be of much interest to a decision maker. Answers that scored few marks, comprise technical content
with little or no application to the context.
Candidates were generally stronger in core activity A (develop business strategy) and C (recommend financing strategies) and weaker
in core activity E (recommend and maintain a sound control environment). The ability to apply and relate to the scenario was generally
the key difference.
Variant 1
Task 1
Sub-task 1 required candidates to evaluate whether the reputational risk associated with its environmental impact should have been
identified and managed before the online petition was created. This sub task tested core activity B and it was answered reasonably
well by most candidates, with a lot of them achieving a level 2 mark. The level 3 answers, of which there were a good number,
demonstrated that they had analysed the pre-seen material well and had already identified and considered the measures that S/D
had already undertaken, due to being aware of the risks to reputation. Many of the level 3 answers referred to S/D’s principal risks
register document, the CEO’s blog and the recycling plea, which were all given as relevant evidence of S/D’s identification and
management of its recycling risks.
Candidates who merely wrote about environmental matters and concerns without keeping in mind the focus of the actual question
being specifically on reputational risk, achieved a level 1 mark.
In sub task 2, candidates were asked to recommend strategies S/D should implement to minimise the impact of any legislation that
would force it to be responsible for recycling its waste. This sub task tested core activity A.
This sub task was answered well by most candidates, with most achieving at least a level 2 mark. Many answers gave a good range
of potential strategies to help S/D to minimise the impact of any proposed legislation enforcing recycling of its waste products. Level
3 answers covered strategies including lobbying the government of Middland and developing relationships with other manufacturers
in a similar position, as well as strategies to improve its own recycling such as re-engineering the pods.
The low-scoring answers on this sub task tended to be rather thin and did not cover a sufficient range of potential strategies. Most of
the weaker answers focused only on trying to re-design the coffee pods, without any consideration of strategies to minimise the
actual impact of the legislation, such as lobbying the government. A level 3 answer would have addressed the strategies to minimise
the impact.
Task 2
The first sub task required candidates to consider the ethical implications of S/D claiming its commitment to protecting the
environment whilst purchasing the recycling plant. This sub task tested core activity D.
This sub task was not answered particularly well by most candidates. However, it was encouraging to see that there were far fewer
merely theoretical “ethical code” based answers than there have been in the past. High-scoring answers covered the general
sustainability ethical arguments within the framework of the ethical principles and used the ethical issues from the exhibit to structure
their arguments against S/D’s claiming it is protecting the environment. Level 3 answers correctly examined whether there were
questions of integrity and honesty relating to the recycling plant acquisition.
Low-scoring answers tended to be thin and undeveloped, with some candidates presenting only a few sustainability points which
they might have had pre-prepared from the pre-seen material. Also, some candidates incorrectly argued that there were no ethical
issues at all and that the acquisition of the recycling plant would firmly enhance S/D’s ethical standing. Most of these answers were in
fact not logical and failed to correctly evaluate the material from the exhibit.
There were also occasional unusual approaches, such as using Johnson & Scholes to do a general feasibility study answer related
to the pros and cons of behaving ethically and sustainably. Whilst this could gain some marks with points that could be said to be
contributing to an appropriate answer, this sort of approach is not likely to gain higher than a level 2 mark. It also wastes valuable
time during the case study exam.
Sub task 2 required candidates to recommend how S/D should finance the acquisition of the recycling plant, taking into consideration
its current financial situation. This sub task tested core activity C.
This sub task was well answered by most candidates. It was encouraging to see that there was a stronger use of financial data than
in recent sessions, with many candidates calculating ratios such as gearing, interest cover and dividend pay-out from the pre-seen
material and using the un-seen additional material to enhance these calculations. Most candidates presented a good and balanced
appraisal of equity and debt and most also did take into consideration the current financial position of S/D. However, very few
candidates mentioned the nature of the asset being purchased or the fact that it was in Greyland. Weaker answers were those that
either presented very theoretical answers or those that didn’t include any numbers at all. Given it was a question about financing this
was bound to make such answers thin.
Task 3
Task 3 focused on an internal audit report relating to an alleged incident of fraud at the Greyland recycling plant, which was acquired
by S/D 4 months previously. The internal audit report sets out how a fraudulent salesperson at the plant was able to divert excess
customer payments into their own bank account.
The first sub task asked candidates to advise on the internal controls that should have been in place to prevent this fraud. This sub
task tested core activity D.
This requirement was reasonably well answered by most candidates. The majority of candidates correctly attempted to relate the
internal controls they suggested to the facts of the scenario. It was also encouraging to see that most candidates recognised the
weakness/lack of segregation of duties from the exhibit and discussed this in some depth.
Weaker answers were often very theoretical with little or no attempt to relate the controls suggested directly to the Greyland plant
operations. Although segregation of duties was obviously a very important weakness of the current control environment, some
weaker answers went little further than discussing this one control weakness and failed to consider any other weakness which were
evident in the internal audit report, this approach usually achieved a level 1 mark.
The second sub task asked candidates to explain how the Internal Audit Department should plan and carry out an investigation to
identify the victims of the fraud and the extent of the excess charges imposed on customers. This sub task tested core activity E. This
requirement was not answered well by most candidates. Answers to this task were mainly in the level 1 or level 2 range, with few
candidates being able to sufficiently discuss the main tasks that should be carried out to investigate this alleged fraud. Many
candidates went straight into what should be done to investigate the fraud, disregarding the wording in the requirement which clearly
asked for an explanation as to how the Internal Audit Department should plan the investigation. Very few candidates actually
considered at all the planning of the audit investigation. Candidates are reminded to read the question requirements very carefully to
make sure that they are answering everything that has been asked. Failure to do so results in a low-scoring mark.
It was also quite disappointing how many candidates struggled to identify appropriate points relating to what the internal audit
investigation would actually do to fully investigate this fraud. Several candidates also seemed to not fully appreciate that this was a
special investigation; instead they merely discussed general planning for an internal audit assignment or focused on what should
happen to the perpetrator, which was not asked for in the requirement. Again, this approach did not score well.
Overall, this task of the case study exam was answered less well than the other two. It would appear that candidate knowledge and
understanding of internal audit activities is poor and it is an area which candidates need to improve on.
Variant 2
Task 1
Task 1 began by explaining that a major retailer of electrical goods was considering the rationalisation of its product range. Any such
decision would probably encourage rival retailers to follow. That could make it difficult for consumers to buy new or replacement
coffee machines that are compatible with S/D pods, thereby threatening S/D’s revenues.
The first sub task of this task asked how S/D’s Board should manage the relationships between S/D, the coffee machine
manufacturers and the retailers. This tested core activity B.
A level 3 response to this sub task would have demonstrated S/D’s interest in the various relationships and would then have
recommended one or more strategies for managing those relationships. Many candidates started by stating that S/D’s only real
interest is to ensure that there is always a ready availability of machines and that it did not necessarily have to protect all three of the
manufacturers. Those candidates generally offered suggestions as to how S/D might encourage retailers to select one favoured
manufacturer. As an alternative, other candidates argued that it was not sustainable to depend on retailers and that S/D might
develop a more direct relationship with the manufacturers by retailing machines through its website. Those candidates reflected on
the fact that S/D already has an efficient online sales and fulfilment operation.
Some candidates failed to recognise that the management of the relationships should be considered from the perspective of S/D’s
strategic interests. That led to discussions that had little real relevance, such as ways to make sure that S/D ensured fair and equal
treatment of all three manufacturers.
The second sub task dealt with the question of whether S/D should have referred to its dependence on these manufacturers in its
published risk report. It had always refrained from doing so because of fears that the manufacturers would exploit any such
admissions of reliance. This tested core activity D.
A level 3 response would have understood and appreciated that quoted companies are required to publish a risk report before
evaluating the need to include those disclosures in that report. The pre-seen contained an extract from S/D’s annual report in order to
remind candidates of that responsibility. Many candidates missed the point of this question by confusing the external disclosures with
the internal risk register.
Level 3 answers understood the question of making these concerns public knowledge in the annual report and then addressed the
need to include a reference to this matter. Generally, candidates argued – correctly – that S/D’s Board had a duty to make full
disclosure and that there was no justification for excluding the information. Stronger candidates developed that argument by pointing
out that the manufacturers and the retailers would realise for themselves that S/D needed an adequate retail network for its
machines.
Task 2
The second task explained that S/D had been offered the opportunity to acquire an electrical goods factory from one of the
manufacturers of S/D compatible machines. S/D can also acquire the rights to use the trademarks and designs of the three
manufacturers to produce the full range of machines using that factory.
The first sub task asked how S/D should evaluate the acquisition of the factory and the rights. That tested core activity A.
A level 3 response would offer realistic explanations of the factors that S/D should consider. At this level, candidates should have
considered the differences between the factory, which is a physical asset and could be repurposed and sold on in the event of
disappointing results, while the manufacturing licences are more specific to S/D. Level 3 responses also paid attention to the request
for a justification for recommendations, explaining why factors that had been identified were relevant.
Many candidates failed to refer to the manufacturing licences, even though the factory would have little value to S/D unless it had a
product to manufacture there.
The second sub task asked about the negotiation and valuation of the interests that are being acquired. That tested core activity C.
Level 3 answers reflected the fact that a business valuation generally involves a negotiation because the buyer’s and seller’s
interests generally diverge. There are many different valuation models and the interested parties will tend to select whichever
approach matches their interests. That can lead to some interesting dilemmas. For example, S/D might not be prepared to pay for
brand names if it can sell the coffee machines under the S/D brand.
Some candidates suggested negotiating strategies that might be used by S/D. For example, buying the rights to use the Homewyre
brand might make it easier to negotiate a lower price for Orpalast and Zendiclam because S/D does not necessarily have to offer
consumers a choice of brands of machine.
Task 3
This task began by explaining that S/D had acquired the factory, but that the IT systems used there are incompatible with those of
the S/D Group as a whole.
The first sub task asked whether S/D’s directors should have been aware of the incompatibility. That tested core activity E.
Level 3 answers tended to focus on the fact that S/D’s Board should have conducted a full due diligence investigation before
acquiring any new business interest. As part of that, it is more than reasonable to expect that there could be problems with the
systems. Some candidates argued that the Board would have been unlikely to obtain detailed access to the systems, even in the
process of conducting due diligence, and so the Board should not be held negligent. Both arguments are reasonably valid and so
both were awarded credit, even though they are essentially contradictory.
The second sub task asked about the cyber risks associated with creating files for the factory once its system had been modified.
That tested core activity D.
Level 3 answers took a wide view of cyber risk, including the risk that data inputs would be incomplete or incorrect. Some candidates
focused exclusively on fraudulent inputs, which were certainly relevant to the question and were marked accordingly however
restricting arguments to fraud effectively cost them the ability to gain additional points.
The third sub task asked whether it would be appropriate to ask S/D’s Internal Audit Department to check the conversion of the files.
That tested core activity E.
This sub task could be answered in various ways. Relevant arguments included: the role of internal audit, the need for internal audit
to adhere to planned investigations and the competence of internal audit for conducting this task. Candidates did not need to discuss
all of those in order to score a level 3 mark, but it was helpful to weigh up the advantages and disadvantages of redirecting internal
audit resources in this way.
Variant 3
Task 1
The first sub task introduced the information that Valyoumart, a major supermarket, has begun to make coffee pods which are
compatible with the machines used for S/D’s pods.
The candidate was first asked to evaluate the possible criticism that S/D’s Board should have identified and mitigated the risk that
other companies would launch compatible pods. This tested core activity D. Candidates could achieve a level 3 answer by providing
a comprehensive discussion of the implications of accepting risk as well as the scope for mitigating them. A level 3 answer would
recognise that criticism of the Board is limited by the fact that the pods cannot be patented. Many candidates did not fully grasp the
issues, explaining that the Board should have obtained patents, despite the question stating clearly that patenting is not possible.
The second sub task was to evaluate the proposal that S/D should sell its pods through supermarkets as well as online. This tested
core activity A. Many candidates achieved high-scoring answers in this section and responses were generally good. Candidates
achieved these scores by describing the impact of selling pods through supermarkets very clearly, including the effect on competitive
advantage and recognising both advantages and drawbacks of the proposal. On the other hand, some candidates’ responses were
constrained by the use of the SAF model which limited their discussion on the implications of changing business model and the
issues relating to competitive advantage.
Task 2
The second task introduced a proposal that a company called Dolsav wished to launch a range of own brand coffee pods compatible
with S/D machines and would like S/D to manufacture them. A key point of this proposal was that the arrangement would be
completely confidential.
In the first sub task candidates were asked how shareholders might perceive the new business and how their fears about the impact
on the financial results could be allayed. This tested core activity B. A level 3 answer would have focused on what the shareholders
would see reported in the financial statements and how they would perceive the impact on the results. This sub task was often not
well attempted with a significant number of candidates not scoring highly by failing to recognise that S/D were unable to disclose the
details of the confidential arrangement to shareholders. Many assumed that the confidentiality of the agreement did not apply to
shareholders. Some candidates did appreciate that shareholders would not be given information about the agreement and wrongly
described a lack of ethical behaviour, explaining that the Dolsav deal should be rejected as not informing shareholders would be
unacceptable.
The second sub task asked candidates how best to raise the funds needed to finance the property plant and equipment needed. This
tested core activity C. Many answered this very well achieving level 3 answers by correctly identifying the options and backing up
their discussion with relevant calculations and also using the extracts of S/D’s financial statements provided by the pre-seen material.
Candidates who provided less comprehensive discussion scored at level 2, but some weaker answers recommended the use of
S/D’s retained earnings to finance the investment.
Task 3
The final task raised the issue of the confidential and commercially sensitive information S/D will have relating to Dolsav.
In the first sub task candidates were first asked what safeguards should be put in place to protect the data that the liaison team would
be working with. This tested core activity D. The majority of candidates described details of practical safeguards that could be put in
place to protect the confidential arrangement, this represents a new area within the changed syllabus and was answered very well.
Many achieved level 3 answers by not only recommending safeguards but also providing solid justification of their choices, and by
providing comprehensive answers discussing both software and procedures to be introduced.
In the second sub task candidates were asked what tests S/D’s Internal Audit Department might undertake in order to check
compliance with the safeguards. This tested core activity E. To achieve a level 3 answer candidates needed to recognise the need to
treat this as an area of priority and carry out regular reviews. Appropriate tests would include reviewing evidence of training,
reviewing the behaviour of staff and checking that appropriate software is in place. Whilst some candidates attempted this well, level
1 scripts discussed the theory of Internal Audit testing rather than explaining the precise tests which should be undertaken in these
circumstances.
The final sub task was to explain whether creating an exit strategy for S/D at this early stage might imply weak and indecisive
governance. This tested core activity E. A level 3 score would be achieved by recognising that an exit strategy would help to mitigate
the risks arising from the business relationship, and that it would be much easier to negotiate the necessary agreement at an early
stage. Whilst some candidates approached this well, responses were often scant and lacking in depth of discussion and therefore
were low scoring.
Tips for future candidates
Good answers require:
• relevance to the requirement
• a good understanding of the technical content of the syllabus
• the ability to analyse strategic challenges faced by quoted companies
• well-structured answers, with good use of paragraphs to clarify the development of an explanation
• justification of the arguments made in the answer.
This can be achieved as follows.
Before the exam
• Revise study materials thoroughly. Candidates should study all areas of the syllabus and ensure that all three pillars are
covered. It is risky to skip topics, even if they are difficult.
• Read the pre-seen material carefully and think about it. Think about the industry and the entity. That is important because the
tasks are all about application to the scenario, which could mean that the technical issues have to be applied in a particular
way.
• Practising tasks from past case studies and reflect on whether your answers are full and relevant. Take the time to type or write
full answers. You need not necessarily do so under exam conditions at first because part of the value of this exercise is to
ensure that you can interpret and answer questions correctly. As you progress in your studies, you may attempt some
requirements against the clock.
• Read the business press carefully. The issues arising in the SCS are generally of sufficient magnitude to be discussed in the
quality press and in professional magazines. Reading about real events can provide helpful and realistic insights into the best
way to approach scenarios.
During the exam
• Plan your answers during the exam and pay close attention to timings. It is very helpful when constructing your answer that it
has a logical structure. The Strategic Case Study often asks you to justify your answer. Typing an outline answer plan at the
start of each task or sub-task, will help you to plan the structure and reduce the risk of forgetting any good points.
• Commit to an argument. Some answers are weak because they seem to have been written with the intention of avoiding
contradicting the examiner’s suggested solution. Remember that the marker is under strict instructions to mark answers on
their merits. There can sometimes be more than one correct answer in business. If you are unsure then it might be better to
invest a minute or two in thinking and developing an argument rather than typing something vague.
STRATEGIC CASE STUDY FEBRUARY 2020 EXAM ANSWERS
Variant 1
These answers
These answers have
have been
been provided
provided by
by CIMA
CIMA for
for information
information purposes
purposes only. The answers
created are
created are indicative
indicative of
of aa response
response that
that could
could be
be given
given by
by aa good
good candidate.
candidate. They
They are
are
not to
not to be
be considered
considered exhaustive,
exhaustive, and
and other
other appropriate
appropriate relevant
relevant responses
responses would
would
receive credit.
receive credit.
CIMA will
CIMA will not
not accept
accept challenges
challenges to these answers on the basis of academic judgement.
SECTION 1
Requirement 1 – reputational risk
The reputational risk here is potentially significant. There could be a loss of revenue if
consumers start to feel guilty about the damage that their favourite coffee is causing to
the environment. S/D should have been ready to deal with this type of criticism by
having an argument ready to present to consumers. For example, encouraging
consumers to pay greater attention to returning their used coffee pods might help to
alleviate any guilt that they feel about the product. It might also be possible to focus on
the “guilty pleasure” aspect by reminding consumers that they enjoy drinking S/D
coffee and would have to revert to other types.
S/D’s pods are a relatively easy target for environmental campaigners because they
use significantly more in terms of resources to manufacture and distribute than
conventional means of making coffee. A bag of coffee beans or a jar of instant coffee
will make many drinks, while leaving a much smaller environmental footprint than a
batch of pods. Coffee pods require additional material and processing once the ground
coffee has been obtained and so they are inherently more harmful than the traditional
means by which coffee is sold for home use. The coffee pods will add significantly to
the weight and bulk of, say, a week’s supply of coffee, requiring more delivery
vehicles.
The fact that S/D has acknowledged the possible reputational impact in its risk report
demonstrates, at least, that the potential risk has been recognised. The real concern is
that the recognition has not resulted in an effective change that would pre-empt the
bad publicity associated with these pods. By reporting the risk and highlighting the
concern, S/D may have encouraged the campaigners to start the petition, if only
because S/D has drawn attention to it and so created an easy target. The stated
mitigation appears to offer only a very limited and reluctant response to the problem,
which probably adds to the risk that S/D is taking.
Planetgard’s decision to confront S/D in this way is not particularly surprising, but the
risk would have been difficult to manage. Even if S/D could achieve 100% success in
recalling used pods, they would require resources to collect and transport. S/D would
find it almost impossible to argue a case for its sustainability, even if the recovery of
materials could be improved. S/D is competing with instant coffee manufacturers
whose products are sold in glass jars that can be placed in the recycling bin. The only

real defence against the reputational issue is to hope that criticisms of coffee pods
does not capture the public’s imagination and environmentalists move on to deal with
a different category of products.
Requirement 2 – strategy
As a starting point, S/D should aim to identify the stakeholders whom it will have to
deal with in order to address this criticism.
S/D should consider how best to deal with the environmentalists, who have high
interest in sustainability issues but who have relatively little power of their own. They
could, however, harness the power of other stakeholders such as the government.
There is little point in negotiating directly with the environmentalists themselves
because they are unlikely to withdraw their complaints about S/D, under any
circumstances. Indeed, any direct engagement with Planetgard or any of the other
lobbyists could simply generate additional adverse publicity. S/D should, however, aim
to engage directly with these organisations through the media. S/D should aim to offer
its own perspective of any point raised by Planetgard in order to ensure that the public
(who are also potential customers) recognise that S/D is not necessarily as guilty as
suggested of harming the environment.
S/D should engage directly with the government. The government has a great deal of
power, because it could have relatively little interest in imposing such an onerous
change in the law. If the environmentalists succeed then the prices of consumer goods
will rise because manufacturers will have to allow for the cost of recycling. Such a
move could make the law unpopular with voters. There may be ways in which S/D
could make sufficient changes to enable the government to argue that the proposed
change in the law is unnecessary. The government could then claim to have taken
steps to reduce the problem, enabling it to avoid losing the votes of consumers whose
spending power will otherwise be impaired.
S/D should aim to work with other manufacturers, with a view to arguing that it would
be necessary for them to relocate in the event that the proposed law was passed.
Other manufacturers will have a high interest and, if they work together, should have
some power to resist the proposed law. The law would clearly not apply to S/D alone;
many other manufacturers would be left in a position where their costs would increase.
If large numbers threatened to move away from Middland then the government might
withdraw from the proposal to protect jobs. At the very least, S/D should be able to
count on support from the companies that manufacture S/D-compatible coffee
machines, who would lose this line of revenue. Care should be taken to ensure that
the tone of any lobbying is managed carefully to avoid creating the impression that the
government is being bullied. The focus should be on protecting the livelihoods of
employees and the investment of shareholders.
S/D should attempt to address the root cause of the criticism. Ideally, it should
encourage consumers to return their pods for recycling because doing so would
reduce the wastage of scarce resources. The consumers probably have very little real
interest in this issue because they are unlikely to collect and return their used pods
unless there is an incentive for them to do so. S/D might consider giving a discount to
customers who return their used pods or make a donation to charity for every pod
returned. It may also be possible for S/D to seek a different approach, such as
February 2020 2 Strategic Case Study Exam

reengineering the pods so that they can be recycled more easily or even just so that
they contain less material.
SECTION 2
Requirement 1 – ethical arguments
The principle of integrity requires S/D to be straightforward, honest and truthful. The
claim that S/D is motivated by a desire to protect the environment appears to breach
that principle in several ways. The plant itself will require used pods to be collected
and brought to the plant from around the world. That will create an environmental
problem in itself. The recycling will then cause significant harm to the environment,
through the evaporation of solvents and the need to get rid of contaminated coffee
grounds, which will either involve emissions through burning or problems associated
with dumping the grounds in landfill, from which the solvents may further evaporate or
leech into the ground. At best, the argument that S/D is attempting to protect the
environment is dishonest because the company is, at best, only reducing the harm
caused by the manufacture and use of these pods.
It could be argued that this plant will involve a breach of professional competence and
due care because S/D is merely obeying the letter of the law as it currently stands, but
it seems likely that it will be in breach of the spirit of the law. S/D is not protecting the
environment if it is polluting the atmosphere by burning chemical waste in order to
recycle materials, some of which are of little real value even after they have been
recovered. The underlying spirit of the law is to avoid consuming scarce resources
unless absolutely necessary and to avoid harmful emissions. This plant does not
conform to society’s needs and interests. S/D cannot claim to be acting out of a desire
to protect the environment if the acquisition of this plant is merely an attempt to do the
bare minimum required to avoid breaking the law.
S/D’s Board would also be in breach of the principle of professional behaviour by
risking the company’s reputation, which could prove detrimental to the shareholders’
interests if the facts become widely known. The proposed manner in which the plant
will operate will cause significant damage to the environment, which can only prove
damaging to the company’s reputation. The Board will compound this threat by
claiming that it is acting to protect the environment because its actions will be clearly
inconsistent with its claims. If the customers are motivated to return their pods out of a
concern for the environment, in addition to the discount against future purchases, then
they may resist any future alternative approaches that the company takes to manage
the recycling.
Requirement 2 – financing
The most immediate issue is the impact that the funding decision will have on S/D’s
statement of financial position. At present, the company’s gearing ratio is
942/(942+2,167) = 30%. Borrowing will increase that ratio to 1,342/(1,342+2,167) =
38%, which is a significant increase. If S/D issues equity in order to fund the
investment then it will reduce its gearing to 942/(942+2,567) = 27%. In terms of the
raw accounting ratios, debt will have a significant impact on gearing and will make the
company appear significantly riskier.
The recent funding strategy applied by S/D should also be considered. The company
increased its debt during the most recent financial year. Last year’s statement of

financial position shows a gearing ratio of 735/(735+2,095) = 26%. That increase may
have been used to fund the significant acquisition of PPE. Further borrowing could
create the impression that the Board is taking a somewhat reckless approach to
expansion, with increasing borrowing leading to additional risk. The shareholders
might find it more reassuring for any further expansion to be funded with equity rather
than debt.
The need to avoid any further increase in gearing is compounded by the nature of the
asset that is being funded. S/D is entering a period of uncertainty because of the
possibility of the introduction of onerous new laws that could disrupt operating cash
flows. The plant itself is potentially incapable of addressing the concerns arising from
the legislation and so there may be a need to modify it or even scrap it. In the event of
any such disruption, the increased gearing will amplify the impact of the additional
costs.
The plant will be located overseas, which could have implications for the terms of any
borrowing arrangements. Lenders based in Middland may be unwilling to accept the
plant itself as collateral for any loan because it would be potentially difficult to exercise
any claim against it. Local lenders may be reluctant to accept the plant in any case
because it may be difficult to sell due to the pollution associated with the solvents and
metals that have been processed there. It may be difficult to secure the loan against
other assets because existing debts amount to 857/1,233 = 70% of S/D’s PPE and so
those assets may already have been pledged and would be subject to debt covenants.
There is, of course, a downside to funding this investment using equity. The
investment itself appears to be a response to threatened regulation and so will not
improve future cash flows. The upside of investing is the avoidance of penalties that
have not been a concern until now. Buying the plant is likely to be perceived as a
negative NPV investment and so the share price will decrease. Funding the
investment using equity will exacerbate the decrease because of the additional
dilution.
SECTION 3
Requirement 1 – internal controls
The most obvious control would have been to have separated the duties of making
and recording sales from dealing with customer queries. This would have meant that
any questions raised by customers would have been dealt with by a member of staff
who would have had no incentive to have misled the customer. Ensuring that a
manager or supervisor dealt with all queries would permit questions to be addressed
by someone who was competent to deal with them and also to consider the concerns
arising from the customer’s request.
Credit notes should not be authorised or issued by anyone who is responsible for
raising invoices or handling receipts from customers. The salesperson should have
been required to request the raising of a credit note from a supervisor or manager in
accounts receivable, who should have been quick to query the reason for the error in
the pricing of the invoices. Seeking authorisation from the same person would also
have highlighted the number of credit notes being issued.
The salesperson should not have had the authority to input selling prices in sales
invoices. Aluminium is a commodity that has a fluctuating selling price. Selling prices
should be determined at least daily by a sales manager. Invoices should be raised by
a computerised routine that prices sales using unit prices that have been authorised
and input by senior managers who are not responsible for handling receipts. The unit

prices should be visible on the company website so that customers can check that
they are being charged the latest authorised price.
The salesperson’s fraud was only possible because he could effectively handle cash
receipts in addition to creating invoices. The fraud was only possible because of the
unwitting collusion between the customer and the salesperson. It would have been
possible to reduce that threat by ensuring that all customers were issued with a clear
set of S/D’s terms of trade for these sales and that those terms included the contact
details, including bank details. Proper paperwork in setting up the relationship with
customers would have helped prevent this loss.
Requirement 2 – internal audit

The first thing would be for internal audit to establish the objectives of their
investigation because that could affect the manner in which evidence is to be gathered
and evaluated. The chief internal auditor should be briefed as to whether the intention
is to prosecute the fraudulent salesperson, to offer customers who have suffered
losses a refund or simply to understand the scale of the irregularities that have
occurred. The audit team should be selected and given a time budget. Given the
nature of the problem, S/D should ensure that the audit team comprises experienced
staff who will not be under any real time pressure on this investigation.
The audit team should gather any and all “objective” material that they might use in
order to identify and evaluate transactions. In particular, the audit team might ensure
that it has a file of definitive prices for the sale of aluminium for the period covered by
the investigation. That will enable the team to be certain as to whether the correct
price has been charged for any given transaction that is under review. Ideally, the
content of the file should be confirmed by a senior sales manager, or similar, in case
the salesperson disputes an auditor’s claim that a sale was mispriced.
The audit team should list all of the credit notes that have been raised during the
period under review and classify those as to who raised them and why. Clearly, any
notes raised by the salesperson will be particularly suspect, but he could have been
collaborating with others within the company. The recipients of credit notes should be
listed because they are all potential victims of the salesperson’s fraud. The overall
value of the different categories of credit note should be totalled because that will
make it possible to establish a rough approximation to the fraud.
The audit team should examine a sample of sales invoices and check that the pricing
is in accordance with the definitive prices. Such a check is required because there is
no guarantee that the credit note adjustment was the only form that the fraudulent
salesperson used. It may be possible to download all invoices raised during the period
under consideration so that the pricing could be checked electronically. Any deviations
should be noted and the overstatements of the prices could then be estimated
arithmetically.
The audit team could check the saleperson’s emails, telephone log and
correspondence. Emails to customers already identified at risk should be studied with
particular care. The salesperson should be suspended or transferred during the
investigation so that any redirection of payments to his bank account will be
highlighted by an apparent failure by the customers to pay any recent invoices. The
customers should be contacted and asked to clarify which accounts they have been
paying for purchases from S/D.

Variant 2
These answers
These answers have
have been
been provided
provided by
by CIMA
CIMA for
for information
created are
indicative of
of aa response
response that
that could
could be
be given
given by
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candidate. They
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and other
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responses would
would
receive credit.
receive credit.
CIMA will
CIMA will not
not accept
accept challenges
SECTION 1
Requirement 1 – managing relationships
S/D will have to accept responsibility for the management of these relationships
because the manufacturers and retailers do not depend upon S/D to the same extent
that S/D depends upon them. The manufacturers rely on S/D only for the right to use
its brand name in their promotion of coffee machines and the retailers do not rely
directly on S/D for any purpose. If S/D does not take some initiative then the retailers
may take the decision to discontinue the sale of S/D-compatible machines without
consultation, which could prompt the manufacturers to cease production. S/D should
factor the relative importance of the relationships into the approaches that it makes to
these parties.
S/D could start by thinking about what it has to offer the manufacturers and retailers, in
the hope that it might strengthen its bargaining power. Ideally, S/D would offer the
prospect of an increase in sales of pods, which could stimulate demand for machines
and so benefit both manufacturers and retailers. The fact that sales are direct and
online means that S/D has a good relationship with its customers and can offer
evidence to back up its claims that demand will continue and even expand. S/D might
unveil any plans to actively promote its pods and discuss timing of any such initiative
so that the manufacturers and retailers could make the best possible use of it.
S/D should start by attempting to seek the cooperation of the manufacturers in dealing
with the retailers. Doing so will ensure that they are offering a more coherent response
to the threat of closure. It might be possible to work with the manufacturers to develop
new features that would enable them to relaunch their coffee makers and so attract
more sales. S/D might contribute to the desirability of these new features through
promotion or even by adding some varieties of pods that have been blended to make
use of them. The retailers would be more likely to continue to stock S/D-compatible
machines if there was the possibility of a strong demand from consumers.
As an alternative to collaborating with all three of the manufacturers, S/D could
consider supporting just one and helping it to negotiate with the retailers. Arguably,
S/D only needs one manufacturer, so there is no particular need to retain all three in
order to maintain the supply of machines. The advantage of that is that the sale of just
one brand of S/D compatible machines would be compatible with the “keep things
simple” approach. The danger is that any manufacturer who refuses this offer to

collaborate with S/D will then expect S/D to approach its competitors and could
therefore be encouraged to cease manufacturing prematurely.
In the event that the retailers are not open to persuasion, S/D could offer the
manufacturers the ability to sell machines through SD’s website. Given the benefits of
retaining a ready supply of machines, it might not even be necessary to make any
charge or seek a full margin from sales. Customers who use S/D pods will be on the
site in any case and so the manufacturers will have direct access to the market. S/D
could provide the links to the machines and the manufacturers could fulfil the orders
directly.
Requirement 2 – risk report

The purpose of the risk report is to enable the shareholders to understand the risks
that their funds are exposed to because of their investment in S/D. That implies that
the report should always provide a full account of all significant risks even if that might
provide third parties with useful information. In this case, the risk itself is obvious, so its
exclusion from the risk report could create the impression that the directors have
evaluated the risk and decided that it does not matter.
Excluding such a significant and obvious risk from the report is more likely to leave the
shareholders with the impression that the Board is unaware of the threat. That could
easily undermine the shareholders’ confidence in the directors. It could also undermine
confidence in the credibility of other information that is published by the company,
such as the financial statements.
Excluding the report for the reason stated could be counterproductive. The
manufacturers will clearly be aware that S/D is dependent upon a steady supply of
machines. Attempts to play down that dependence might be interpreted as weakness
and could actually encourage the manufacturers to press S/D for some advantage. It
would probably be more effective for S/D to acknowledge the risk and offer a clear
statement in mitigation.
As a general principle, directors are not permitted to withhold information that is
required by regulations just because the disclosure would compromise or embarrass
the company. It is debatable whether suppressing the disclosure would be effective in
any case because the markets are generally efficient and are capable of making use
of all available information. If a known risk is excluded from the risk report then the
market will simply infer the missing facts, which could have the effect of increasing the
harm done to the market capitalisation.
SECTION 2
Requirement 1 – evaluation of strategic option
The SAF model offers a useful starting point.
The suitability of this option depends on its strategic fit. S/D is in the business of
making and selling coffee pods, which may not appear to be a suitable basis for
investing in a factory making electrical goods. The factory could be viewed as an
extension of the existing business model. S/D creates wealth through the manufacture
and sale of pods. Adding the machines that enable consumers to make coffee from
those pods would be a logical extension of the existing strategy. There is clear synergy
between the pods and the machines, if only because they are sold to exactly the same
customer base.

There is a further argument that this investment would be suitable because it would
protect the revenue stream from the manufacture and sale of coffee pods. S/D’s
ownership of the factory would ensure that consumers could obtain compatible
machines going into the future. This would eliminate a potential source of risk in S/D’s
business model.
The acceptability of this model would depend on the shareholders’ response to S/D’s
investment. It may prove difficult to convince the shareholders that this would be a
sound investment because of S/D’s lack of experience in this market. The fact that an
experienced manufacturer of electrical goods is selling the factory would further
undermine the credibility of the proposal. The danger is that the shareholders may not
fully understand the business logic associated with this proposal.
In this case, the Board may have to tolerate a slight decrease in S/D’s share price if
the market does not fully support the proposal. The changing market for these
machines may mean that they cannot be manufactured and sold at a profit and so S/D
will have to take over their manufacture, even if that involves little or no profit. It is
unlikely that the shareholders will have such a negative reaction that this will cause a
significant drop in the share price or prompt calls to replace the Board.
The feasibility of this project is quite strong. S/D already has a distribution channel
through its website. S/D can use a courier company to collect and deliver machines
from the factory, which should not require more than a minimal alteration to support
such logistics. If necessary, the whole of the fulfilment system could be outsourced to
a third party, with factory output being collected in bulk and taken to a purpose-built
fulfilment centre operated by a courier company.
There could be concerns about S/D’s lack of expertise with regard to the manufacture
of electrical goods, but those could be addressed by hiring staff to close that gap.
Presumably, the factory staff will be available for hire by S/D and they can continue to
make the same machines as before. The new product lines to be added from Orpalast
and Zendiclam should not require significant retaining for the staff.
Requirement 2 – valuation
Homewyre’s factory is essentially an unquoted business and so should be valued as
such. As always, the final valuation will be determined by negotiation and will reflect
the fact that this process is a zero-sum game, with one side wishing the highest
possible selling price and the other side seeking the lowest. The fact that Homewyre
plans to close down the factory suggests that S/D might press for an earnings-based
valuation, which would probably place a low value on the business. Homewyre might
respond by pressing for an asset-based valuation, which would be a realistic valuation
basis for both parties because S/D effectively wishes to acquire assets and that is
essentially what Homewyre is selling.
The valuation basis for the assets included in the factory will also require some
consideration. S/D might press for a low value, based on the possibility that the assets
may have to be scrapped if the sale cannot be agreed. Homewyre may counter that
the factory is worth a great deal more than scrap value to S/D because it is acquiring a
complete and functional factory that will save the time and cost associated with
establishing a factory from scratch. To an extent, the bargaining position will depend
on the alternatives open to Homewyre because there may be other potential buyers,
who could wish to acquire the factory to develop it for some other purpose and so may
be prepared to pay more than the value of the existing assets. The fact that S/D will be

in a position to offer the factory staff jobs could work in the other direction because it
will save Homewyre the bad publicity associated with making staff redundant.
The valuation of the rights to use brand names is a rather different matter. The three
companies will have to consider the impact that these rights could have on their sales
in other areas. For example, the manufacturers are risking the possibility that S/D’s
quality management will be poor and so their reputations could be damaged by the
sale of defective coffee machines that carry their names. They could also be
concerned that S/D could eat into sales of other products that they make, including
machines that are compatible with other pod systems or even generic coffee makers
that do not rely on pods. Overall, the manufacturers will have reason to seek a fairly
high charge for the brand rights in order to compensate for the risks and costs. They
will also seek fairly substantial reassurances that the quality standard will be high.
S/D is in a slightly stronger position with regard to the negotiation because it is
debatable whether it really needs the manufacturers’ brand names. S/D could simply
pay for the design of its own range of coffee machines that could be sold under its own
brand name. It would clearly be preferable for the existing manufacturers to let S/D use
their names, but S/D could use its existing relationship with consumers to sell
machines if agreement cannot be reached. S/D also has the fact that it is in
negotiation with three manufacturers as a bargaining point because it would be
possible to make machines under a familiar brand name if a deal can be reached with
only one or two of the manufacturers. That would weaken the positions of the
individual manufacturers.
SECTION 3
Requirement 1 – incompatible systems
S/D should have considered the possibility that the factory’s systems would be
incompatible with the rest of the S/D Group when it was conducting due diligence on
the acquisition. The Board should have asked the IT staff to investigate the systems in
place before a final price was agreed. Presumably, S/D would have been aware of the
potential incompatibility and the Board decided to proceed with the purchase in any
case.
While the due diligence should have considered S/D’s systems, it is debatable how
much access S/D would have been able to obtain prior to the acquisition. The
manufacturer who owned the factory would have been reluctant to give access to
check the files because that would have given S/D access to potentially sensitive
information. The Board should have worked on the basis that it would have to budget
for significant changes to the factory’s systems and so the fact that this cost must be
incurred cannot be viewed as negligence.
The fact that the systems were incompatible would be almost inevitable given that the
factory is in a very different business to the rest of S/D. While it would have been ideal
to have found a factory that used a more desirable system, waiting to find one would
probably have involved a great deal of compromise in a more important area, such as
the suitability of the manufacturing equipment. S/D was in urgent need of a means to
protect the availability of machines for its customers.
The Board should have considered the need to adapt systems in evaluating the cash
flows associated with this investment. An attempt should have been made to have this
taken into account in negotiating the purchase price, although the seller could probably
have resisted such attempts because S/D had to buy the factory in order to protect its

main business. Negligence would only have been an issue if S/D had been reckless
with regard to the systems in its decision to proceed.
Requirement 2 – cyber risks

The structure of the files might not lend itself to the software that S/D uses. For
example, the manner in which costs are classified might be more complicated than in
the rest of S/D and so the recording of purchases might require a different program
altogether. It may be possible to adapt the software, but that might lead to problems
with the consolidation of the output in the form of management accounts.
A similar issue could arise for payroll, if there are differences in the nature of
employment contracts that do not fit with S/D’s software. For example, the structure of
overtime payments or pension arrangements could be incompatible with the new
software. Even if the software is compatible, these are potentially complicated areas
that could lead to errors arising from the need to set up the software to adapt to those
differences.
Even relatively straightforward adjustments could lead to errors. For example, it may
be necessary to give suppliers or employees new reference numbers. It would almost
certainly be possible to program the conversion from one reference system to another,
but there could be errors in the conversion process. For example, two different
suppliers could be issued with the same reference number, which could lead to one of
them being paid for invoices submitted by the other.
The conversion of the system could be exploited by fraudulent staff, who might make
changes to standing files in order to conceal theft. There will be a large number of new
records being created and so it would not be difficult to add, say, a small number of
fake staff records to the payroll. If that addition succeeded, the bogus staff salaries
could be transferred electronically into bank accounts created by the fraudulent staff.

S/D’s Internal Audit Charter follows the usual practice of defining the duties of Internal
Audit in terms of the Board’s wishes, which could include the checking of the
conversion of the system if the Board so wished. S/D’s Board may wish to make the
best possible use of the internal auditors’ expertise in devising tests and gathering
evidence and so they should have the necessary skills. Using Internal Audit in this way
would avoid the risk of distracting other staff from their normal responsibilities and so
would be less likely to cause delays or omissions elsewhere.
S/D’s Board could announce that it plans to have an Internal Audit investigation carried
out, which might encourage staff to do their work properly and might deter dishonesty.
The Board can use the Internal Audit Department to set a tone from the top that will
result in a sound control environment. The fact that S/D’s Board plans to invest internal
audit resources in this activity signals that the directors take this matter seriously.
Quoted companies normally use their internal audit work department to compliance
test systems rather than conduct detailed tests of files and records. S/D has an annual
internal audit plan that will be disrupted if internal audit staff are diverted to test the
implementation of the new system. It might be argued that checking the conversion is
really the responsibility if the IT staff and staff responsible for applications such as
purchases or payroll, although Internal Audit staff will be more objective in conducting
this review than the managers and staff who had a role in the initial implementation.

There is a risk that the independence of S/D’s Internal Audit Department could be
compromised by this assignment. If Internal Audit reviews the conversion and reports
that it is satisfactory then the audit staff may prove reluctant to report on any problems
that are subsequently detected at a later date. That lack of independence could also
be manifested in a recklessness in testing in that area in future audits because the
staff may take it for granted that nothing was overlooked.

Variant 3
These answers
These answers have
have been
been provided
provided by
by CIMA
CIMA for
for information
created are
indicative of
of aa response
response that
that could
could be
be given
given by
by aa good
good candidate.
candidate. They
They are
are
not to
not to be
be considered
exhaustive, and
and other
other appropriate
relevant responses
responses would
would
receive credit.
receive credit.
CIMA will
CIMA will not
not accept
accept challenges
SECTION 1
Requirement 1 – risk mitigation
The Board can only be blamed if it failed to identify and implement any realistic
mitigation strategies that would have been available for addressing this risk. If the
pods cannot be patented and they can be sold as “S/D compatible” without breaching
trademark restrictions then we would have had no legal basis to prevent them. It was
also inevitable that our pods could be easily reverse engineered and copied because
they are simply plastic containers with aluminium lids.
The Board should have been aware of the possibility of such a duplicate product being
launched and it should have had a contingency plan ready. There is a huge barrier to
entry to this market for vendors who wish to establish their own coffee systems
because consumers have to be prepared to buy a compatible machine. Making pods
that are compatible with S/D machines will be much easier and cheaper and will
enable the vendor to be associated with the S/D brand.
It may be that the most effective mitigation for this risk is already in place. By
maintaining its brand image, it is pre-empting the entry of a rival company. S/D invests
heavily in maintaining quality, buying good quality coffee beans. Its capsules are well
made and feel as if they are of good quality. It advertises heavily and promotes its
brand image through its association with a major film star.
The impact of this risk has still to be determined and so it may be too soon to criticise
the Board. The rival product has only just been launched and so it is still unknown
whether it will affect S/D’s revenues. S/D possibly needed to wait for the inevitable
attempt to enter this market in order to establish how best to respond. The fact that
Valyoumart is competing on price rather than quality may require a different mitigation
than an attempted entry by a rival who claimed to be making better quality pods.
Requirement 2 – retail sales

At present, S/D has a coherent business model. It distributes its pods online, asking
consumers to buy them in relatively large quantities. That approach encourages
consumers to hold inventory and so effectively has the effect of accelerating consumer
sales. Customers pay at the time of sale, which is good for S/D’s cash flows. Fulfilment
is handled by third-party couriers, which simplifies the processing and delivery of

orders. Opening up a retail sales line would threaten these benefits by encouraging
consumers to switch to purchasing in small quantities from supermarkets.
Selling through supermarkets would force S/D to upgrade its logistics system to handle
bulk deliveries to business customers. S/D would be forced to invest in the
administrative systems required to support such sales, including accounts receivable
staff and account executives to maintain ongoing sales. Time would be spent in
negotiating discounts and managing relationships with major customers. The end
result might simply be to divert existing sales from online to supermarkets and so there
would be no additional sales volume.
Before selling through supermarkets, S/D will have to conduct market research in
order to establish whether doing so might attract new customers to their brand.
Customers are already being asked to make significant investment in a machine, so
asking them to buy a large quantity of pods to go with that could discourage them from
trying it at all. The need to buy a machine might, in itself, be sufficient to discourage
customers from trying this style of coffee and so there would be no advantage in
making it possible to buy a single sleeve of pods for trial purposes. This will always be
a high-risk strategy because it will harm S/D’s reputation if it launches in supermarkets
and that proves to be a failure. The supermarkets will only give shelf space if sales are
healthy.
Selling through supermarkets now might appear as an acknowledgement that
Valyoumart’s business model is superior. Even if supermarket sales were under
consideration for other reasons, S/D will appear to be following Valyoumart and it may
lose credibility in the process. S/D may struggle to enter this market because
Valyoumart may not wish to sell S/D pods in direct competition to its own, or it may
simply stock them in order to display them alongside its own pods in order to promote
their superior value for money. Other supermarkets may be reluctant to stock S/D pods
until the impact of Valyoumart’s entry into the market has been clarified. They may
even wish to consider offering their own brand of S/D compatible pods and would not
wish to encourage S/D to establish itself in retail outlets.
S/D would lose the competitive advantage associated with the fact that its customers
are presently forced to buy in relatively large quantities, which might discourage them
from buying other brands of pods sold through supermarkets. S/D’s existing customers
may have sufficient coffee pods to last for weeks and so may not rush out to buy
Valyoumart’s new line. By the time they are running out of S/D pods they may have
forgotten the initial excitement associated with Valyoumart’s launch. Selling through
supermarkets would enable S/D’s customers to buy and hold pods in much smaller
quantities and so make it more convenient for them to try different brands.
SECTION 2
Requirement 1 – shareholders
The shareholders will see the growth in revenue and the increased investment in
assets when the financial statements are published but will be unable to explain this in
terms of the specific strategy that is being pursued. The impact on the figures overall
may prove confusing, with a declining gross profit % amongst other things, and could
leave the shareholders uncertain as to the strategy that is being pursued. It is
important to offer an explanation for any such changes, even if the connection with
Dolsav must be kept confidential, because S/D’s shareholders could believe that their
company is becoming less efficient and is slipping back behind competitors such as
Caffham. S/D could explain this by stating that it had entered new markets, without

being too specific, and stating that these are still under development. The
shareholders will, hopefully, accept that the figures are improving, even if they do not
understand that strategy.
The fact that S/D has been making sales on credit will be apparent from the increase
in trade receivables. The shareholders will be aware that S/D has been making
business-to-business sales, even though no announcement has been made. S/D
should pre-empt this by announcing in advance that it had entered into some profitable
trading relationships with third parties. S/D could phrase this carefully, avoiding
offering any explanation that might lead shareholders in the direction of a supermarket.
The biggest concern is that S/D’s ROCE may decline because production capacity is
increasing, but the profitability of sales made based on that investment will be
reduced. The directors may appear to be inefficient and the shareholders may be
concerned that the company is entering a decline. The directors will have to ensure
that the expansion is completed as efficiently as possible to minimise the risk of a
negative impact. S/D should consider increasing its dividend to highlight the fact that
its profit has increased in absolute terms, even if it has declined relative to capital
employed.
There may be rumours about S/D being the source of Dolsav’s new line, either
because someone talks or because the changing accounting figures will coincide with
the new sales by Dolsav. The shareholders may be concerned that S/D is undermining
its own competitive position by making pods that will be sold in competition with those
carrying the S/D brand. In the event that such rumours emerge, S/D should argue that
they agreed to this deal in order to prevent Dolsav from opening up in competition and
costing S/D the opportunity to create any added value. If the sales are profitable, then
S/D will be generating further contribution and so benefitting.
Requirement 2 – financing
The funding decision should take full account of S/D’s present funding arrangements.
The company currently has debt of M$942 million and equity of M$2,167 million, which
gives a gearing ratio of 942/(942+2,167) = 30%. S/D might raise funds through an
equity issue, which would reduce the gearing ratio to 942/(942+2,617) = 26%. The
alternative would be to borrow, which would increase gearing to 1,392/(1,392+2,167) =
39%. Equity would slightly reduce the gearing ratio, which would make the group
appear slightly less risky, while debt would increase gearing substantially to a level
that many companies would regard as unacceptably high.
Before going any further, S/D should establish whether it has any debt covenants in
place that might prevent it from borrowing further. It is possible that it has agreed to
restrict its gearing ratio to, say, 40%. In that case it would be reckless to borrow up to
39% because it would leave no further flexibility for borrowing in the future. It could
also mean that any losses that reduced equity could put the company in technical
breach of its covenants. In the event that S/D is close to its borrowing limit, it would
clearly be necessary to seek equity in order to raise this finance.
If debt cannot be raised, then it could be argued that the funding requirement is for
450/2,167 = 21% of S/D’s equity. That is enough to justify a rights issue to provide
sufficient equity finance to meet the funding requirement. S/D would, however, have to
bear significant costs in terms of professional and other fees in order to raise that sum.
It would also be necessary to persuade the shareholders to increase their stake in the
company by a substantial amount while being unable to explain fully the arrangements
that S/D has made with Dolsav.

Overall, it would be cheaper and probably simpler to seek debt, provided S/D has
sufficient debt capacity. The company is planning to invest in plant and equipment that
will, hopefully, provide security to reassure the lender. The cost of debt is generally
cheaper than the cost of equity. S/D will get tax relief on debt, but there is no tax
benefit to be had from equity finance.
SECTION 3
Requirement 1 – data security
The team members should be under strict instructions to prevent colleagues from
looking at their screens at any time when they are accessing Dolsav files. Ideally, a
section of the office could be set aside for the exclusive use of the Dolsav team and
non-members should be discouraged from entering that area. Staff should not be
permitted to leave their laptops unattended at any time. If they are away from their
desks they should either take their laptops with them or lock them in a secure drawer.
The staff should be required to sign non-disclosure agreements that deal with
protecting files and documents in addition to refraining from communicating details of
the contract with Dolsav.
Laptops should be secured by passwords and should always be switched off when not
in use so that they cannot be used easily by any unauthorised user. The user names
and passwords required to access Dolsav files should not be stored anywhere on the
laptops, not even if encrypted or disguised as a phone number or whatever. Staff
should access all files on the server and should not be permitted to store any data or
file extracts on their laptop hard drives.
There should be a clear policy concerning working away from the office. If staff are
permitted to work from home then they should be required to have their laptops in their
possession at all times, except when they are locked away at home. Laptops should
never be left in an unattended car for any reason or for any length of time.
Staff should be fully trained in computer security and they should be provided with
anti-malware software. All anti-virus and firewall software should be active at all times
and it should be kept up to date. The server should only ever be accessed through an
internal network or via a secure VPN.

Internal audit could be tasked to treat this as an area of priority in which the Dolsav
team is reviewed every few months. Regular reviews will remind the team that the
controls are important and that the company is expected to adhere to them. Care
should be taken to prevent the reviews from becoming too frequent and intrusive,
otherwise they may become counterproductive by demotivating the team.
The internal audit team could start by reviewing evidence that computer security
training has been provided. Presumably that training would be provided by either an
in-house or external expert, which would leave some form of record of the participants’
involvement. If the training was provided online then hopefully there was a self-
assessment quiz at the end of each module with a pass mark that had to be exceeded.
The auditor could check that the training covered all relevant areas identified as
necessary to ensure the security of access.
The internal audit team could review the behaviour of the team members with regard
to security whenever they happen to be in the office. They would be looking for signs

that laptops are being locked when staff are away from their desks. This observation
would have to be subtle, otherwise there is a risk that compliance will occur only when
the internal auditor is in line of sight.
From time to time, perhaps annually, the internal auditor should conduct an
unannounced inspect of the laptops. This would involve asking their users to
demonstrate that a password is required to log in when switching the machine on. It
would also be possible to check that any laptops that were not being used at the time
of the inspection were switched off.
The internal auditor could then check that the software that should be in place to
protect the laptops is running by inspecting the machines and checking that all
updates have been applied. The internal auditor could attempt to access the server, in
the hope that the machines had not been set to log in automatically. The content of the
hard drive should be reviewed to check that it does not have any files that should not
be present.
Requirement 3 – exit strategy and governance

It could be argued that S/D’s Board has been negligent in waiting until now to consider
the need for an exit strategy. This is a significant strategic relationship that could turn
out to benefit Dolsav more than S/D. It may prove difficult for S/D to negotiate a break
in the contract unless that is explicitly incorporated into the agreed terms from the very
beginning.
Dolsav’s Board members may view any request by S/D for a break as implying a lack
of commitment to the trading relationship, which is potentially undesirable. They are,
however, unlikely to view the insistence by S/D’s Board to protect S/D’s interests as
weak. An exit strategy is a safeguard that mitigates against the risk that a business
relationship may have some unforeseen and adverse consequences. It is hardly
indecisive to mitigate against such risks.
The logical thing would be for the negotiation of the contract to have considered break
points where either party could request a review or the cancellation of the
arrangement. That would give each side a clear commitment from the other until the
next break point, at which time both sides could seek whatever change is desired. The
fact that this is built into the contract means that both sides will be motivated to treat
the other side honestly.
If S/D has already signed a contract that does not allow for changes, it will become
even more necessary to develop an exit strategy that will be available in the event that
it becomes desirable. S/D may have to find a way to interpret and apply one or more
terms in its contract that would encourage Dolsav to withdraw and agree to set the
contract aside. That could create the possibility of escape, but it would also run the risk
of alienating a potentially useful business contact and damaging S/D’s reputation in
the process.

Strategic Level Case Study February 2020
Marking Guidance
Variant 1
About this marking scheme
This marking scheme has been prepared for the CIMA 2019 Professional Qualification Strategic Case Study [Feb 2020].
The indicative answers will show the expected or most orthodox approach; however the nature of the case study
examination tasks means that a range of responses will be valid. The descriptors within this levels-based marking scheme
are holistic and can accommodate a range of acceptable responses.
General marking guidance is given below; markers are subject to extensive training and standardisation activities and
ongoing monitoring to ensure that judgements are being made correctly and consistently.
Care must be taken not to make too many assumptions about future marking schemes on the basis of this document. While
the guiding principles remain constant, details may change depending on the content of a particular case study examination
form.
General marking guidance
• Marking schemes should be applied positively, with candidates rewarded for what they have demonstrated and not
penalised for omissions.
• All marks on the scheme are designed to be awarded and full marks should be awarded when all level descriptor
criteria are met.
• The marking scheme and indicative answers are provided as a guide to markers. They are not intended to be
exhaustive and other valid approaches must be rewarded. Equally, students do not have to make all of the points
mentioned in the indicative answers to receive the highest level of the marking scheme.
• An answer which does not address the requirements of the task must be awarded 0 marks.
• Markers should mark according to the marking scheme and not their perception of where the passing standard may
lie.
©CIMA 2020. No reproduction without prior consent 1

• Where markers are in doubt as to the application of the marking scheme to a particular candidate script, they must
contact their lead marker.
How to use this levels-based marking scheme
1. Read the candidate’s response in full
2. Select the level

• For each trait in the marking scheme, read each level descriptor and select one, using a best-fit approach.
• The response does not need to meet all of the criteria of the level descriptor – it should be placed at the level when it
meets more of the criteria of this level than the criteria of the other levels.
• If the work fits more than one level, judge which one provides the best match.
• If the work is on the borderline between two levels, then it should be placed either at the top of the lower band or the
bottom of the higher band, depending on where it fits best.
3. Select a mark within the level
• Once you have selected the level, you will need to choose the mark to apply.
• A small range of marks may be given at each level. You will need to use your professional judgement to decide which
mark to allocate.
• If the answer is of high quality and convincingly meets the requirements of the level, then you should award the
highest mark available. If not, then you should award a lower mark within the range available, making a judgement on
the overall quality of the answer in relation to the level descriptor.

Summary of the core activities tested within each sub task
Sub Task Core Activity Sub task

weighting
(%
section
time)
Section 1
(a) B. Evaluate business ecosystem and business environment 50%
(b) A. Develop business strategy 50%
Section 2
(a) D. Evaluate and mitigate risk 40%
(b) C. Recommend financing strategies 60%
Section 3
(b) E. Recommend and maintain a sound control environment 60%

SECTION 1
Task (a): Evaluate the argument that the reputational risk associated with our environmental impact should have been identified and
managed before Planetguard created its online petition.
Trait
Evaluation of Level Descriptor Marks
threat to No rewardable material. 0
reputational risk Level 1 Identifies a limited range of realistic threats to reputation. 1-2
Level 2 Offers some evaluation of the Board’s ability to identify realistic threats to reputation. 3-5
Level 3 Evaluates the Board’s ability to identify realistic threats to reputation. 6-8
Management of Level Descriptor Marks
threat to No rewardable material. 0
reputational risk Level 1 Offers a basic response to reputational risk. 1-3
Level 2 Offers some realistic evaluation of the Board’s ability to respond to identified 4-6
reputational risks.
Level 3 Evaluates the Board’s ability to respond to identified reputational risks. 7-9
Task (b): Recommend, with reasons, the strategy that S/D should follow in order to minimise the impact of legislation that would make us
responsible for recycling our own waste.
Trait
Recommendations Level Descriptor Marks
for strategy No rewardable material. 0
Level 1 Offers a simple response to threat. 1-2
Level 2 Offers some realistic recommendations. 3-5
Level 3 Provides clear and effective recommendations. 6-8
Justification for Level Descriptor Marks
strategy No rewardable material. 0
Level 1 Offers a limited justification for recommendations. 1-3
Level 2 Offers some justification for recommendations. 4-6
Level 3 Provides clear and comprehensive justification for recommendations. 7-9

SECTION 2
Task (a): What are the ethical implications of us claiming that we are committed to protecting the environment if we acquire this plant?
Trait
First ethical Level Descriptor Marks
principle or No rewardable material. 0
argument Level 1 Identifies a relevant ethical principle. 1
Level 2 Offers some discussion of the application of that principle. 2-3
Level 3 Offers a full discussion of the application of that principle. 4
Second ethical Level Descriptor Marks
Third ethical Level Descriptor Marks
Task (b): How should we finance the acquisition of the plant? Please ensure that you include an evaluation of alternatives in the context
of S/D’s current financial situation before making your recommendation.
Trait
Present position Level Descriptor Marks
No rewardable material. 0
Level 1 Brief mention of present financial position and its relevance. 1-2
Level 2 Discusses present financial position and its relevance. 3-5
Level 3 Offers full evaluation of present financial position and its relevance. 6-8
Future position Level Descriptor Marks
Level 1 Brief discussion of debt vs equity to S/D. 1-3
Level 2 Offers some evaluation of debt vs equity to S/D. 4-6
Level 3 Provides full evaluation of debt vs equity to S/D. 7-9

Nature of asset Level Descriptor Marks
Level 1 Makes brief reference to nature of asset being financed. 1
Level 2 Offers some discussion of nature of asset being financed. 2-3
Level 3 Provides full discussion of nature of asset being financed. 4
SECTION 3
Task (a): Advise the Board concerning the internal controls that should have been in place in order to prevent this fraud.
Trait
Advise on Level Descriptor Marks
segregation of No rewardable material. 0
duties Level 1 Describes segregation of duties. 1-2
Level 2 Identifies duties that should be segregated. 3-4
Level 3 Recommends duties that should be segregated with full justification. 5-6
Advise on other Level Descriptor Marks
controls No rewardable material. 0
Level 1 Describes other controls that might be applied. 1-2
Level 2 Offers some justification for selected controls. 3-5
Level 3 Recommends controls with full justification. 6-7
Task (b): Explain how S/D’s Internal Audit department should plan and then carry out an investigation to identify victims of the fraud and
the extent of the excess charges imposed on customers.
Trait
Need to plan Level Descriptor Marks
investigation No rewardable material. 0
Level 1 Refers to need for plan. 1
Level 2 Offers some discussion of planning. 2-3
Level 3 Full discussion of planning issues associated with fraud. 4
Determine scale Level Descriptor Marks
of fraud No rewardable material. 0
Level 1 Describes tests that could determine extent of fraud. 1-2

Level 2 Offers some explanation of tests and their suitability. 3-5
Level 3 Recommends tests with full justification. 6-8
Identify Level Descriptor Marks
customers who No rewardable material. 0
have been Level 1 Offers limited tests that could identify customers. 1-2
defrauded Level 2 Offers some explanation of tests that could identify customers. 3-5
Level 3 Recommends tests that could identify customers, with full justification. 6-8

Marking Guidance
Variant 2
form.
criteria are met.
lie.

2. Select the level

mark to allocate.


weighting
(%
section
time)
Section 1
(b) D. Evaluate and mitigate risk 40%
Section 2
(a) A. Develop business strategy 50%
Section 3
(a) E. Recommend and maintain a sound control environment 34%
(b) D. Evaluate and mitigate risk 33%
(c) E. Recommend and maintain a sound control environment 33%

SECTION 1
Task (a): How should we manage the relationships between S/D, the coffee machine manufacturers and the retailers who sell the
machines?
Trait
Identification of Level Descriptor Marks
interests No rewardable material. 0
Level 1 Identifies some issues arising from relationships. 1-2
Level 2 Offers more insight into issues arising from relationships. 3-5
Level 3 Identifies and justifies a full range of issues arising from relationships. 6-7
Managing Level Descriptor Marks
relationships with No rewardable material. 0
manufacturers Level 1 Offers an overview of approach to managing relationships with manufacturers. 1-2
Level 2 Recommends approach to managing relationships with manufacturers. 3-5
Level 3 Recommends and justifies approach to managing relationships with manufacturers. 6-7
Managing Level Descriptor Marks
relationships with No rewardable material. 0
retailers Level 1 Offers an overview of approach to managing relationships with retailers. 1-2
Level 2 Recommends approach to managing relationships with retailers. 3-5
Level 3 Recommends and justifies approach to managing relationships with retailers. 6-7
Task (b): We have always been reluctant to acknowledge the risk in our risk report that manufacturers would stop making machines. We
were concerned that such a disclosure might give the manufacturers an advantage in any negotiations. Was that concern an adequate
justification for our decision to exclude the risk from the risk report?
Trait
Purpose of risk Level Descriptor Marks
report No rewardable material. 0
Level 1 Describes purpose of risk report. 1
Level 2 Describes purpose, linking to need for full disclosure. 2-3
Level 3 Describes purpose, with strong link to need for full disclosure. 4
Principles Level Descriptor Marks
associated with No rewardable material. 0

content of risk Level 1 Offers some arguments for full disclosure. 1-2
report Level 2 Offers detailed argument for full disclosure. 3-5
Level 3 Offers full and well justified argument for full disclosure. 6-8
SECTION 2
Task (a): How should we carry out the evaluation of the acquisition of Homewyre’s factory and its manufacturing licence and the other
two manufacturers’ licences as strategic options for S/D? Justify your recommendations.
Trait
Suitability Level Descriptor Marks
Level 1 Identifies suitability as an issue (without necessarily using the word). 1-2
Level 2 Recommends on the basis of suitability in the context of this decision (without necessarily 3-4
using the word).
Level 3 Recommends on the basis of suitability, with full justification, in the context of this 5-6
decision (without necessarily using the word).
Acceptability Level Descriptor Marks
Level 1 Identifies acceptability as an issue (without necessarily using the word). 1-2
Level 2 Recommends on the basis of acceptability in the context of this decision (without 3-4
necessarily using the word).
Level 3 Recommends on the basis of acceptability, with full justification, in the context of this 5-6
Feasibility Level Descriptor Marks
Level 1 Identifies feasibility as an issue (without necessarily using the word). 1
Level 2 Recommends on the basis of feasibility in the context of this decision (without necessarily 2-3
using the word).
Level 3 Recommends on the basis of feasibility, with full justification, in the context of this 4-5

Task (b): How should we go about the negotiation and valuation of the business interests that we might be acquiring from Homewyre,
Orpalast and Zendiclam?
Trait
Valuation of Level Descriptor Marks
business No rewardable material. 0
Level 1 Offers a basic insight into suitable valuation method. 1-3
Level 2 Recommends a suitable valuation method. 4-6
Level 3 Recommends a suitable valuation method with good justification. 7-9
Negotiation of Level Descriptor Marks
price No rewardable material. 0
Level 1 Offers a basic insight into negotiation of price. 1-2
Level 2 Recommends a suitable approach to negotiation of price. 3-5
Level 3 Recommends a suitable approach to negotiation of price with good justification. 6-8
SECTION 3
Task (a): Should S/D’s directors have been aware of the incompatibility of the systems when negotiating the acquisition of Homewyre?
Trait
Duty Level Descriptor Marks
Level 1 Identifies need for due diligence. 1
Level 2 Describes need for due diligence. 2
Level 3 Justifies need for due diligence. 3
Board Level Descriptor Marks
competence No rewardable material. 0
Level 1 Describes likelihood of incompatibilities between systems. 1-2
Level 2 Discusses directors’ ability to foresee the extent of incompatibilities. 3-5
Level 3 Evaluates, with justification, directors’ ability to foresee the extent of incompatibilities. 6-8
Task (b): Please evaluate the potential cyber risks associated with creating the files for suppliers and payroll when we convert the
factory’s IT system to S/D’s software.

Trait
Compatibility Level Descriptor Marks
Level 1 Identifies compatibility issues. 1-2
Level 2 Offers clear description of compatibility issues. 3-5
Level 3 Offers clear description of compatibility issues with good justification. 6-8
Fraud Level Descriptor Marks
Level 1 Identifies risk of fraud. 1
Level 2 Describes fraud risk. 2
Level 3 Describes and justifies fraud risk. 3
Task (c): Would it be appropriate to ask the Internal Audit department to check that the conversion of the factory’s files and systems
goes smoothly?
Disruption Level Descriptor Marks
Level 1 Identifies issues associated with disrupting plans and distracting from compliance. 1-2
Level 2 Clearly describes issues associated with disrupting plans and distracting from 3-4
compliance.
Level 3 Clearly and comprehensively describes issues associated with disrupting plans and 5-6
distracting from compliance.
Value of audit Level Descriptor Marks
Level 1 Identifies potential benefits of an audit. 1
Level 2 Clearly describes potential benefits of an audit. 2-3
Level 3 Clearly describes potential benefits of an audit with good justification. 4-5

Marking Guidance
Variant 3
form.
criteria are met.
lie.

2. Select the level

mark to allocate.


weighting
(%
section
time)
Section 1
(b) A. Develop business strategy 60%
Section 2
Section 3
(b) E. Recommend and maintain a sound control environment 33%
(c) E. Recommend and maintain a sound control environment 33%

SECTION 1
Task (a): Evaluate the possible criticism that the Board should have identified and mitigated the risk that other companies would launch
S/D compatible pods.
Trait
Understanding risk Level Descriptor Marks
Level 1 Identifies outcome of accepting risk. 1-2
Level 2 Discusses implications of accepting risk. 3-4
Level 3 Discusses implications of accepting risk with good justification. 5-6
Mitigating risk Level Descriptor Marks
Level 1 Identifies scope for mitigation. 1-2
Level 2 Discusses scope for mitigation. 3-4
Level 3 Discusses scope for mitigation with good justification. 5-6
Task (b): Evaluate the proposal that S/D should sell its pods through supermarkets, in addition to continuing to sell online.
Trait
Describe model Level Descriptor Marks
Level 1 Describes business model in use. 1
Level 2 Identifies changes required in business model. 2-3
Level 3 Clearly describes changes required in business model. 4
Change model Level Descriptor Marks
Level 1 Identifies some implications of changing business model. 1-3
Level 2 Describes implications of changing business model. 4-6
Level 3 Evaluates implications of changing business model. 7-9
Competitive Level Descriptor Marks
advantage No rewardable material. 0
Level 1 Identifies issues relating to competitive advantage. 1-2

Level 2 Describes issues relating to competitive advantage. 3-5
Level 3 Discusses issues relating to competitive advantage. 6-8
SECTION 2
Task (a): Explain how the shareholders might perceive the new business that we conduct under this confidential arrangement when we
report the results in our published financial statements. Also recommend how we can allay the fears of shareholders about the impact of
the arrangement on our financial results.
Trait
Identify Level Descriptor Marks
challenges No rewardable material. 0
Level 1 Identifies some of the challenges that might arise. 1-2
Level 2 Describes the key challenges that might be perceived by the shareholders. 3-5
Level 3 Evaluates the key challenges that might be perceived by the shareholders. 6-8
Overcome Level Descriptor Marks
challenges No rewardable material. 0
Level 1 Offers some suggestions for allaying fears. 1-3
Level 2 Recommends approach to allaying fears. 4-6
Level 3 Recommends approach to allaying fears, with good justification. 7-9
Task (b): Recommend how S/D should raise the M$450 million that will be required to finance this operation. Please ensure that you
include an evaluation of alternatives in the context of S/D’s current financial situation.
Trait
Present position Level Descriptor Marks
Level 1 Brief mention of present financial position and its relevance. 1-2
Level 2 Discussion of present financial position and its relevance. 3-5
Level 3 Full discussion of present financial position and its relevance. 6-8
Future position Level Descriptor Marks
Level 1 Brief discussion of debt vs equity to S/D. 1-3
Level 2 Discussion of debt vs equity to S/D. 4-6

Level 3 Full discussion of debt v equity to S/D. 7-9
SECTION 3
Task (a): Explain the safeguards that should be put in place to protect the data about the confidential arrangement with Dolsav on the
liaison team’s laptops.
Trait
Procedures Level Descriptor Marks
Level 1 Basic overview of training and procedures. 1-2
Level 2 Recommends relevant safeguards. 3-5
Level 3 Recommends relevant safeguards with good justification. 6-8
Software Level Descriptor Marks
Level 1 Identifies need for passwords or encryption. 1
Level 2 Describes use of passwords and/or encryption. 2
Level 3 Describes and justifies passwords and encryption. 3
Task (b): Explain the tests that S/D’s Internal Audit department might undertake in order to check compliance with those safeguards.
Trait
Audit tests Level Descriptor Marks
Level 1 Identifies basic audit tests. 1-2
Level 2 Recommends relevant audit tests. 3-5
Level 3 Recommends relevant audit tests with good justification. 6-8
Frequency Level Descriptor Marks
Level 1 Identifies frequency of testing as an issue. 1
Level 2 Discusses need for a decision on frequency of testing. 2
Level 3 Discusses and justifies need for a decision on frequency of testing. 3
Task (c): Explain whether the creation of an exit strategy at this early stage of our dealings with Dolsav implies weak and indecisive
governance by S/D’s Board.

Exit strategy Level Descriptor Marks
Level 1 Defines exit strategy. 1-2
Level 2 Evaluates need for exit strategy at this stage. 3-5
Level 3 Evaluates need for exit strategy at this stage, with good justification. 6-8
Overdue Level Descriptor Marks
Level 1 Identifies possibility that decision is overdue. 1
Level 2 Discusses possibility that decision is overdue. 2
Level 3 Justifies argument that decision is overdue. 3

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February 2020 Scs Post Exam

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February 2020 Strategic Case Study

2019 CIMA Professional Qualification

Full post exam support materials

If you need any further information please contact cima.contact@aicpa-cima.com or

Instant coffee Instant coffee is manufactured by brewing coffee in industrial

S/D’s social responsibility

• We are committed to offering ethically purchased and responsibly produced sustainable

S/D Third Party Code of Conduct in Employment

Matteo Lund, Non-Executive Chairman

Anders Lunt, Chief Executive Officer

Liela Dorcas, Chief Financial Officer

Alanzo Perez, Director of Overseas Operations

Helena Moreno, Commercial Director

Johan List, Human Resource Director

Marcus Unst, Independent Non-Executive Director

Julia Henderson, Independent Non-Executive Director

Johanna Fria, Independent Non-Executive Director

Marcus Unst, Julia Henderson, Johanna Fria,

S/D purchases coffee from S/D uses internal and external

Environmental There is a risk to reputation if S/D hopes to introduce a better

There is a risk to reputation if S/D has a code of conduct which is

S/D is vulnerable to cyber-attack S/D also has a strong internal audit

Share Translation Retained

Total assets 3,829 3,590

Total equity and liabilities 3,829 3,590

Total assets 3,352 3,149

Total equity and liabilities 3,352 3,149

S/D’s geared beta is 0.51. Its ungeared beta is 0.45.

Battle of the Machines

You need to take time for a reality check.

©CIMA 2020. No reproduction without prior consent.

February 2020 2 Strategic Case Study Exam

February 2020 3 Strategic Case Study Exam

February 2020 4 Strategic Case Study Exam

Requirement 2 – internal audit

February 2020 5 Strategic Case Study Exam

©CIMA 2020. No reproduction without prior consent.

Requirement 2 – risk report

February 2020 2 Strategic Case Study Exam

February 2020 3 Strategic Case Study Exam

February 2020 4 Strategic Case Study Exam

Requirement 2 – cyber risks

Requirement 3 – internal audit

February 2020 5 Strategic Case Study Exam

February 2020 6 Strategic Case Study Exam

Requirement 2 – retail sales

©CIMA 2020. No reproduction without prior consent.

February 2020 2 Strategic Case Study Exam

February 2020 3 Strategic Case Study Exam

Requirement 2 – internal audit

February 2020 4 Strategic Case Study Exam

Requirement 3 – exit strategy and governance

February 2020 5 Strategic Case Study Exam

About this marking scheme

General marking guidance

©CIMA 2020. No reproduction without prior consent 1

How to use this levels-based marking scheme

1. Read the candidate’s response in full

2. Select the level