Business and Management ANS

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Business & Management Answer Book

Answers to case study questions

Dear Colleagues,

Thank you for purchasing my textbook and for the encouraging words that many of you have passed on. Iam aware that you are all chasing after an Answer Book (Solutions Book) for the 215 case studies in thetextbook.

Rather than waiting until solutions have been written for the entire text, IBID Press and I have decided toupload the answers on a regular basis. In the first installment, I have put together answers/solutions to 68case studies (not in any particular order). I hope you will find these solutions as a useful starting point. Iaim to complete all the answers by the end of the summer.

As with all B&M mark schemes, the solutions in this document should be used with caution and flexibility.Students who take an alternative approach to the solutions should still be credited as appropriate; teachersshould use their professional judgement in such cases.

I hope that you and your students will find the answers (and they are only suggested answers at best) usefulin the teaching and learning of Business and Management. Please feel free to contact me if you spoterrors/omissions or have any other constructive suggestions, and IBID Press and I will then work on tryingto address these issues.

Finally, please note that this Answer Book is legally protected by copyright legislation so please seekpermission from IBID Press and myself if you wish to reproduce any part of this document. Distribution of

the Answer Book, in electronic form or otherwise, and/or photocopying any part of the document infringesthe intellectual property rights of the publisher and author. Many thanks for your attention to this matter.

Yours faithfully,

Paul [email protected]

2008 Paul Hoang and IBID Press
mailto:[email protected]:[email protected]:[email protected]


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Unit 1.1 Nature of Business Activity

Question 1.1.1

a) The fashion magazine is likely to contain text and coloured photos which brings in far greater valueto the consumer than 100 pages of paper.

b) A photo of a famous celebrity on its own is not unique. A signed photo with the celebritysautograph is much more special and desirable and hence adds more value.

c) A laptop computer is made up of plastics and metals, which would be of little value to anyone.However, the finished product itself will be of much greater use to the consumer and hence addsvalue.

[6 marks]

Question 1.1.2 - Business opening hours

a) Opportunity cost refers to the cost of the next best alternative that is foregone in a decision. In thiscase, it refers to the loss revenue by not opening supermarkets on Sundays. [2 marks]

b) Examples of opportunity cost mentioned include

Loss of supermarket sales by not operating on Sundays or by not operating 24-hour stores.

Banks potentially losing clients on Sundays.

Fines for non-compliance.

These factors will clearly affect business decision making, e.g. whether to trade on Sundays or 24-hour a day. [6 marks]

Question 1.1.3 The business of education

a) Specialization means that a business concentrates on the production of a particular good or service,such as schools that specialise in the provision of education. For example, secondary (high) schoolteachers specialise in the teaching of certain subject, such as Business & Management, Economicsor Psychology. [2 marks]

b) Application of the four main business functions needed. For example:

Human Resources: The recruitment and on-going training of teaching and non-teaching(support) staff

Finance: Allocating budgets for the years spending on items such as books, equipment, repairsand improvements. They might also seek additional sources of funding such as governmentassistance. There will also be a need to account for all costs (expenditure) and revenues of theschool.

Marketing: schools need to attract customers (students and their parents). This might be donethrough means such as offering a broad and enriching curriculum and wide opportunities (suchas extra-curricular activities). Public relations and promotion (such as informing parents andthe community about exam results) will also be important.

Operation Management: the main output in schools is the provision of lessons (learning).

Other operations might include the hiring out of school resources for outside agencies. [6marks]


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Question 1.1.4 Production Sectors

a) A = IndonesiaB = BelgiumC = Czech Republic

b)

Indonesia Belgium Czech RepublicAgriculture 43 2 4

Industry 13 25 40

Services 44 73 56

Explanation and analysis of the data is needed to support the given answers. For example:

In LEDCs like Indonesia, agriculture accounts for a larger proportion of GDP. Belgium andthe Czech Republic do not, therefore, fit this trend.

Indias large pool of graduates and English-speaking workers means that its tertiary sector is

also relatively significant. Many US and UK multinationals, for example, have investeddirectly in India for this very reason.

The Czech Republic is an industrializing nation, and it is therefore safe to assume thatmanufacturing accounts for a significant share of GDP; this is more apparent in the CzechRepublic than in the other two countries.

The services sector is the most predominant sector in MEDCs, such as Belgium. In addition,Belgium does not need to rely heavily on its manufacturing base, unlike the Czech Republic.

Unit 1.2 Types of Organisation

Question 1.2.1 Reload

a) Banks might be reluctant to lend money to Reload for various reasons, including:

Reload being a relatively unknown business outside of New Zealand

Larger and stronger rivals (such as Delifrance and Subway) might pose serious problems forthe survival of Reload

Ultimately, there is more risk involved for banks that choose to deal with relatively new andunestablished organisations such as Reload.

Award 1 mark for each relevant factor that is identified in the context of Reload. [2 marks]

b) Problems that Reload might encounter include:

Rivals such as Subway and Delifrance are better known multinational companies with well-established customer networks. This presents a problem for a relatively small company such asReload from entering overseas markets where such rivals exist.

By locating in a different continent, Reload will need to establish itself with new suppliers whoare reliable in providing the firm with fresh ingredients for its food and beverages.

Legal systems are different in foreign countries so legal experts will need to be hired to ensurethere is a smooth transition of operations in Scotland and other countries outside of New

Zealand. Overseas eating and dining habits might be very different from those at home in New Zealand,

so it is likely that Reload will need to spend money on marketing research in their overseasmarkets.


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The choice of location itself can be a problem for management. Location decisions are oftenmade on the basis of familiarity and this becomes more difficult when deciding betweenoverseas locations.

There may also be workforce planning issues, e.g. the need to employ translators and managerswith linguistic skills in non-English speaking European countries.

Award up to 2 marks for each problem that is explained in the context of Reload. [4 marks]

Question 1.2.2 Exquisite Flowers

a) The benefits to Natalie in operating as a sole trader include:

It would have been relatively simple for Natalie to set up the business since there are fewlegalities and procedures involved

Being her own boss allows Natalie to have more flexibility in decision making, e.g. closing thestore early so that she can pick up her children from school or to attend parents evening at the

childrens school The profits would be reaped only by Natalie as there are no other owners

Being a small business, she could keep all business transactions private, i.e. only the taxauthorities need to know about her financial accounts

However, there are also costs for Natalie choosing to operate as a sole trader:

Sole proprietors have unlimited liability so this means that Natalie could possibly lose herpersonal possession in order to finance any debts that she might incur

As a sole trader, Natalie would find it difficult to secure various sources of finance, especiallyas she does not sell a wide range of products

There might also be costs related to her private circumstance, e.g. child care or loss of timewith the family

For maximum marks, there should be an analysis of both the potential costs and benefits to Natalieoperating as a sole trader. [5 marks]

b) Advantages of specialisation include:

Being able to provide a specialised, focused and personalized service to their customers meansthat sole traders can thrive

Sole traders become experts/specialists at their jobs and this enhances their productivity

There are lower costs involved compared to providing a wide range of different goods andservices.

Note: although sole traders specialise in the provision of a good or service, they tend to need avariety of management skills since they cannot afford to hire specialists (and hence do not benefitfrom the division of labour).

Disadvantages of specialisation include:

There is greater risk in providing only a limited range of products or services, i.e. sole tradersare not able to enjoy risk bearing economies of scale

Specialisation and repetitive tasks can become boring and demotivate the worker. In this case,

Natalie may get fed up with selling only flowers

There is a limited customer base if firms specialise too much in the provision of one or twoproducts only; this therefore reduces their profitability.


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Award candidate for the correct definition or explanation of specialisation. Both the advantages anddisadvantages of specialisation should be considered for maximum marks. [5 marks]

Unit 1.3 Organisational ObjectivesQuestion 1.3.1 - Vision and Mission Statements

a) Mission statement refers to the declaration of an organisations overall purpose, such as NokiasConnecting people It forms the foundation for setting the objectives of a business. [2 marks]

b) The role of vision and mission statements in a business organisation includes:

to have a clear purpose, i.e. what the business is trying to achieve

outlines the organisations values

states the underlying purpose of an organisations existence

serve to unify all people and corporate cultures within the workforce

Examples from the case study should be applied to the above points. [6 marks]

Question 1.3.2 - Lenovo

a) Reasons could include:

Provides a focus for its staff

Can be used to measure the performance of the business

Informs strategic planning Any other valid point

Two clearly explained reasons needed for maximum marks. [4 marks]

b) Reasons (barriers) could include:

Conflict, e.g. accuracy and truth seeking might limit Lenovos ability to earn high profits.Alternatively, shareholders might demand high dividends, but management seek to invest

profits for the long term.

Culture clash, e.g. compatibility of Chinese and American cultures.

Financial constraints, e.g. sponsorship could harm cash outflow in the short term; any benefits

are only reaped in the long run. Any other valid reason that is examined in sufficient detail.

Thorough examination of two reasons, or brief but coherent examination of three reasons, neededfor maximum marks. [6 marks]


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Unit 1.5 External Environment

Question 1.5.1

There should be consideration of both opportunities and threats for maximum marks in each case. Award up

to 3 marks for each demographic consideration. Examples of possible issues are shown in the grid below: [12 marks]

Demographic change Opportunities Threats

a)Growing number of self-employed people

Consultation, advisory andsupply chain opportunities

Financial services providers arelikely to benefit from patronage,e.g. banks and insurance firms

Franchising opportunities asmore people wish to become their

own boss

Smaller pool of potentialemployees / recruits, i.e. labourshortages. This can thereforelead to higher wages being paid.

Possibly an increase incompetition from those who haveset up their own businesses

b)Increasing number ofsingle parent families

Child-care and related products

Impact on workforce planning,e.g. workforce flexibility

Labour immobility

Relatively low income earners(or lower disposable incomes)

Possible reduction in size ofpotential labour force

c)Parents choosing to havefewer children and at alater stage in their lives

Career development of femaleworkers

More females opting for full timeemployment

Perhaps a greater labour supplyin the short term

Higher disposable incomes

Long term impacts on relatedindustries, e.g. schools andmanufacturers of toys

Smaller workforce in the future

d)More people graduatingwith University degrees

Increased potential pool ofskilled and qualified workers

Increased productivity

Higher earners lead to greaterspending in the economy

Higher salaries as firms competeto attract the best workers

Reduced workforce as morepeople enter higher education(postponed entry to theworkforce)

Possibly higher staff turnover asskilled employees tend to bemore mobile / headhunted

Unit 1.6 - Organisational Planning Tools

Question 1.6.3

a) Opportunity cost refers cost measured in terms of the next best alternative choice that is foregonewhen a decision is made. In this case, the opportunity cost to Peckham Traders Ltd. in choosing tolocate in Kazakhstan would be the foregone opportunities that could be reaped if it located in SouthKorea (and vice versa). [2 marks]

b)


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Low

$125,000

$5,000

0.25

0.75

$0

0.4

High

$150,000

Low

B

Kazakhsta

$95,000

0.6

SouthKorea

High$93,750

$1,250

C

$0

$90,000

$90,000

A

[6 marks]

Deduct one mark for each error (but award according to the Own Figure Rule)

Award maximum marks only if the candidate shows which of the two options is the best choice, i.e.South Korea.

c) Decision trees allow:

The user to gain a broad idea of possible outcomes of the project/decision, i.e. in this case thechoice of two locations

Easier interpretation of the decision to prevent misunderstanding or confusion

Easy and straightforward calculations to be made to aid decision making

Easy accessibility for all users to make rational/scientific decisions

Provide a quantitative tool in decision making

However, decision trees:

Are based on estimated figures only and the actual outcomes may well be very different

Can be inaccurate unless all costs, benefits and possibilities are considered

Only consider quantitative issues in decision making, so might be considered too simplistic a

model

Qualitative factors could be examined, e.g. familiarity with the two different locations,availability of skilled labour, recruitment and training concerns, cultural issues, legal issues, taxsystems or simply management preferences

Similarly, other quantitative methods could be considered, e.g. investment appraisal to seewhich location would generate the greatest return

Other decision making tools might also be useful to Peckham Traders Ltd. such as force fieldanalysis in order to minimize any resistance to change or PEST analysis. [8 marks]

Award up to 4 marks if only advantages ordisadvantages are examined.

Both the advantages and disadvantages of decision trees should be considered for 56 marks.Evaluation of the usefulness of decision trees to the firm is required for 78 marks.


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Unit 2.3 Communication

Question 2.3.1 The importance of body language

a) Any two reasons explained. For example:

Good communication skills are important to enhance the level of customer services (therebyhelping to meet their needs and wants) and customer loyalty.

Good communication skills can make business operations more cost effective with otherstakeholders, e.g. suppliers and investors.

It can also have motivational effects feel more valued (since they have been consulted orcommunicated with).

Finally, effective communication can help a firm to make better (more informed) decisionmaking. [4 marks]

b) According to the research, 55% of communication is dependent on non-verbal signals. This

suggests that the body language is critical to good communication skills. This is perhaps why somany firms spend a large amount of money on customer service training.

Students should explain body language and non-verbal signs can affect the way in which a messageis communicated to customers. McDonalds, for example, have a Smiles are free policy. Hotelstaff are trained to greet customers with a warm smile and to adopt a friendly approach. People,

being part of the wider marketing mix, therefore play a very important role in the marketing of afirms products.

In addition, there could be reference to the use of visual stimuli (such as poster adverts) orpackaging being used to market and communicate a firms products (these being non-verbal formsof communication). [6 marks]

Question 2.3.2 Email usage at work

a) Electronic mail (email) refers to the process of using computers and telephone lines as a mailingsystem for both internal (intranet) and external (internet) communication purposes. [2 marks]

b) Email could encourage informal communication in several ways, such as:

Allows personal messages to be sent from the workplace to family and friends

May not be monitored (by the employer) so this can encourage informal communication and

emails not related to work There is no financial cost to the sender (employee) so this may further encourage informal

communication, both internally and externally

Note: Informal communication is not the same as Informal messages. [2 marks]

c) Students should clarify what they see as an improvement in communication in the workplace.Measures used to judge the efficiency of communication could include:

Speed

Accuracy

Cost

Comprehension (of the message being sent)

Email works well as a form of communication when


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Reference to data and information is needed, perhaps at a later date, e.g. sales figures

Speed and cost are an important consideration (compare to fax or postage mail)

The same message needs to be relayed to many recipients in different geographical locations

There is sufficient training in using the email system at work

Use in a professional manner, observing protocol and email etiquette.

Email does not work well as a form of communication when

There are technical hitches, e.g. power failure, viruses or computer hacking

There is monitoring of emails by the employer (conflict and controversy over privacy andmanagement time issues)

The use of email is not embedded in the organisational culture, i.e. people do not regularly andsystematically read/respond to emails

Codes of practice (email etiquette) are not established to guide employees in the use of email atwork

External communication requires the use of more traditional/formal methods of communication,e.g. written contracts (which require signatures on letter-headed paper)

It is abused by staff, e.g. if significantly used for informal communication not connected to workmatters

Junk mail and spam mail clogs Inboxes (which reduces worker efficiency).

Whether email improves efficiency in the workplace really depends on how and why it is used,based on the considerations of some of the above points.

Note: Award up to 3 marks if students only consider the advantages and disadvantages of usingemail as a form of communication

Question 2.3.3 The Global Office

a) Foreign language might hinder communication due to any of the below reasons (not an exhaustivelist):

Misunderstanding or simply not understanding messages expressed in a foreign language

Some words can have very different meanings in different languages and cultures (see Box 4.7afor some examples) and this can lead to misinterpretations of a message

Poor command of a foreign language can mean that communicators lack the confidence toexpress their ideas in the foreign language.

Overall, ineffective command of a foreign language can negatively affect the quality, speed andaccuracy of communication.

[2 marks]

b) An awareness and knowledge of multiculturalism may foster improved communication because:

Workers can communicate better with one another in order to achieve organisational objectives

Conflict caused by misunderstandings can also be avoided, thereby enhancing communicationflows

An understanding of different cultures can prevent embarrassing situations (see Box 4.7b forsome examples)

Opportunities for communicating global marketing messages are enhanced

Any psychological barrier between different groups of workers is removed, thereby promoting

improved formal and informal communications and encouraging a more harmonious workplace Workers might feel more accepted (a sense of belonging) and this security can also foster

improved cooperation and communication.


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Any two relevant factors, explained, is sufficient for maximum marks. [4 marks]

Question 2.3.4 OCRs examination paper blunder

a)

Identification and explanation of any two barriers to effective communication: e.g. jargon, technicalfaults, misunderstandings or poor communications management. Application is needed formaximum marks, such as: [4 marks]

Poor management of information communication systems, e.g. failing to send the rightdocuments to clients

Tall hierarchical structures (OCR is one of the UKs largest exam boards) leading to distortedmessages being communicated

Inadequate staff training leading to gaps in the work being carried out. This is clearly linkedto poor planning and management.

b)

Effective communication (unlike the OCRs examination blunders) is vital to an organisation suchas the OCR exam board because it helps to:

Keeps schools (the customers) up to date with curriculum developments and organisationalchange

Minimises errors and mistakes (such as the one in the case study), thereby improvingproductivity and efficiency in the organisation

Guide workers in the right direction in order to achieve organisational objectives

Preserve or enhance OCRs reputation and organisational image

Promotes organisational efficiency in order for the OCR to compete with its rivals

Helps to improve working relationships (or prevents potential conflict) since misunderstandingsare likely to be minimised

Prevents schools and parents losing confidence in the organisation, thereby preventing themfrom switching to rival examination boards such as the AQA or IBO

Gain feedback in order for the organisation to continually improve

Improve the management of communications, especially since OCR deals with clients fromaround the world.

Unit 3.1 Sources of Finance

Question 3.1.1 - Olympic Games 2012

a) Revenue expenditureis spending on the daily runningof a business, such as wages and materialsused in the preparation for the 2012 Olympic Games. Capital expenditure, on the other hand,refers to the finance spent on purchasing fixed assets, such as the land, buildings and machineryused in preparation of the Olympic Games in London. [4 marks]

b) There are various potential benefits to businesses, such as:

Pre-Olympic Games, firms in the construction and transport industries will be involved in theinfrastructure needed to hold the Olympic Games, e.g. building an Olympic Games stadium.

Huge opportunities exist for job creation and human resource planning. The development andpreparation of the Olympic Games will create jobs and wealth in London and the UK, therebyproviding further potential benefits to UK businesses.


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The Olympic Games will attract a huge volume of foreign visitors and tourists to London andthe UK, thereby providing many business opportunities.

Seasonal price increases will help to boost profit margins for London and UK-bases businesses.

There are huge marketing opportunities for British multinationals, including advertisingagencies and sponsorship deals. Broadcasters will also enjoy the global attractiveness of theOlympic Games.

Businesses in London are most likely to benefit the most, although other organisations such assuppliers outside of the capital may also benefit. There must be a clear analysis of at least two

benefits to be awarded maximum marks. [6 marks]

Question 3.1.2 - Industrial and Commercial Bank of China (ICBC)

a) An Initial Public Offering (IPO) occurs when a publicly-listed company floats its shares on a stockexchange for the very first time. For example, ICBC floated its shares in both Shanghai and HongKong. [2 marks]

b) Two explanations required for full marks, such as:

The main benefit of issuing shares in a company is the potential to raise a huge amount ofcapital. In the case of ICBC, it was able to raise almost $22 billion, significantly improving itscash flow.

The extra source of finance would allow the Chinese bank to compete against more establishedglobal banks such as Citibank and HSBC, especially as it would be able to expand its operationswithin and beyond China.

In addition, going public allows a business to have the protection of limited liability. [4marks]

c) Investors in the stock market tend to buy for the medium to long term. Given that ICBC is Chinasbiggest lender, this may have provided sufficient reason for investors to pour money into thecompany. With Chinas rapid and sustained economic growth, confidence levels in China and ICBCmay have led to the influx of investment funds. Presumably, investors felt positive about the

profitability of ICBC. There is, after all, a positive correlation between a firms profitability and itsshare price and dividend payout. [4 marks]

Question 3.1.3 Manchester United Football Club

a) By opting for the AIG sponsorship deal worth 56.5m, MUFC is foregoing the larger deal of 70m,i.e. the opportunity cost is the extra 13.5m had they opted for the Mansion deal. [2 marks]

b) Vodafone and AIG might want to sponsor a club such as MUFC due to several reasons, such as:

The huge amount of publicity that sponsors would enjoy. Each time MUFC playscompetitively, their sponsors logo is being marketed.

A large sports club, such as MUFC, would help to the sponsors to get internationalexposure.

They might be associated with an image of health and fitness.

Through sponsorship deals, AIG and Vodafone may gain brand awareness and even brandloyalty.

Sponsorship of well-known clubs or organisations can be a very cost-effective marketingtool. [4 marks]


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c) Although the sponsorship deal with Mansion was financially more attractive, management at MUFCclearly felt that non-financial factors needed to be considered before agreeing on a new sponsorshipdeal. Had they opted for the Mansion deal, there would have been an extra 13.5m worth of funds.However, it is likely that the management of MUFC did not want to be associated with a sponsorinvolved in gambling. This is especially important since a significant segment of its fan base isyoung children. MUFC, therefore, may be acting in line with its policy on corporate socialresponsibility. The bottom line is the management did not feel the extra 13.5m was worth the risk

in upsetting the Clubs reputation amongst its key stakeholders. Furthermore, since MUFC hasmajority shareholders in the USA and continually wishes to grow in the US market, it might preferto be associated with American International Group. [6 marks]

Question 3.1.4 Tiffany Stones Ltd

Answer80% of $180,000 = 144,000 hence cash flow problem should be (just) solved. [3 marks]

Unit 3.2 Investment Appraisal

Question 3.2.1 Chelsea Football Club

a) Reasons could include: the potential for CFC to return healthy profits; CFC may have beenundervalued at the time of purchase; Abramovich could simply be a big fan of the club, i.e. personalinterest. [2 marks]

b) There is no guarantee that CFC would become profitable; Abramovich had spent a lot of his ownmoney on the club; CFC were suffering from huge financial losses so Abramovich is taking a risk

by investing in such a business; the club was not estimated to break-even until some 7 years afterAbramovich took over the business. [4 marks]

c) Definition of payback period; It would inform Abramovich how long it would take (as an estimate)before his spending on the club would generate enough revenue to pay back the value of theinvestment; a shorter payback period would tend to reduce the risk of such an investment project.Ultimately, it acts as a decision-making tool for risk assessment. [4 marks]

Question 3.2.2

a) $130,000 [1 mark]

b) Project Atlanta has the shorter payback period [4 marks]

Atlanta Boston

Payback 1 year and 10 months 2 years and 2 months

ARR 7.7% 12.8%

c) Both projects outperform the interest rate so are worth pursuing, but Project Boston has a muchbetter ARR yet the projects cost the same. [5 marks]

d) This depends on whether the firms priority was a quick return on the investment (in which caseAtlanta would be picked) or if profit were more of a priority. Although there is a better average rate


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of return for Boston, much of the money is received at a later stage in the projects timeline, i.e. itwould be worth less in todays value. [5 marks]

Question 3.2.3

a) [5 marks]

Investment Colorado Investment DetroitYear

Net CashFlow ($)

DiscountFactor

Present Value($)

Net CashFlow ($)

DiscountFactor

Present Value($)

0 (300,000) 1.00 (300,000) 300,000 1.00 (300,000)1 50,000 0.9524 47,620 100,000 0.9524 95,240

2 100,000 0.9070 90,700 200,000 0.9070 181,400

3 200,000 0.8638 172,760 200,000 0.8638 172,760

4 200,000 0.8227 164,540 50,000 0.8227 41,135

NPV 175,620 190,535

b) Based on these figures, Project Detroit should be pursued as it has the higher NPV. Although bothprojects yield the same absolute amount of net cash flow (each totalling $550,000), Project Coloradodoes not see most of its returns until the final two years, i.e. when the money has lost much of itsvalue. In addition, the payback period for Detroit is shorter (just 2 years). The ARR is the same for

both projects (since DCF are not considered in the calculation of ARR). Other quantitative factorsmay also need to be considered, e.g. management preferences. [5 marks]

Question 3.2.4

a) Students will need to carry out a full quantitative investment appraisal:

Project HK Project UK

Payback 2 years, 7 months 2 years

ARR 22.5% 20.83%

NPV $21,141 $19,990

Based on the financial data, Project UK has a shorter payback (by just over 6 months), so ifliquidity is an issue, then the firm should opt for this venture.

However, the ARR is higher if the firm opts for Project HK; although both are significantlyhigher than any return from savings at a bank

The NPV is higher for Project HK (by a $1241 or 6.23%)

Overall, on financial grounds, Project HK seems the better option if the business is prepared

to wait a further 6 months or so before it achieves payback.

In addition, investment appraisal methods should consider the qualitative factors (the PORSCHEmnemonic) that affect the investment and the business. For example, there needs to be aconsideration of organizational objectives and the views of stakeholders. [10 marks]

Question 3.2.5 Deregulation in India

a) Some of the dangers/risks might include:

Cultural differences American and British businesses may not be aware of the norms andcultures in India. For example, the clothing range from M&S must be adjusted to suit localtastes and climate.


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Much of Indias population still suffers from mass poverty; this will limit the amount ofconsumer spending in the economy.

Developing countries will lack the infrastructure and communications networks thatWestern multinationals are used to.

Legislation is likely to be another potential barrier. Apart from different legal systemsoverseas, laws tend to be rather more lax and this can create all sorts of organizational

problems.

Any two relevant factors, explained in context, are needed for maximum marks. [4 marks]

b) Some of the opportunities might include:

Deregulation in India will make conducting business easier

The huge potential increase in sales, due to the large customer base in India, can lead toimproved profits

Indias impressive economic growth means that there is likely to be increased demand forforeign imports

Businesses in the retail, tourism and aviation industries are likely to boom; thereby creating

opportunities for related business sectors The large English-speaking community and skilled labour force also present many

opportunities for Western multinationals

An examination of up to three reasons is sufficient for maximum marks. [6 marks]

Unit 3.3 Working Capital

Question 3.3.3 Cottam Stationers

a) Cash Flow Forecast for Cottam Stationers

Aug Sep Oct Nov

Cash sales 2000 5000 2000 3000

Stock purchases 1000 2500 1000 1500

Rent 0 2000 0 2000

Utilities 500 500 500 500

Other costs 2000 1000 1000 1000

Total outflow 3500 6000 2500 5000

Opening cash balance 5000 3500 2500 2000

Net cash flow (1500) (1000) (500) (2000)

Closing cash balance 3500 2500 2000 0

[6 marks]

b) Definition of liquidity problem, i.e. the extent to which Cottam Stationers can meet its short termdebts. The firm seems to be suffering from worsening liquidity as seen by the closing balancefigures. The net cash flow for the first four months of trading is also negative suggesting the firmhas insufficient working capital. [4 marks]

Unit 3.5 Final Accounts


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Question 3.5.2 Bags R Us Ltd

P&L Account for Bags R Us, year ended 31stMarch 2008.

$ $

Sales ($35 * 3,000) 105,000

Opening stock 15,000Purchases 50,000lessClosing Stock 20,000

Cost of Goods Sold 45,000

Gross Profit 60,000

[4 marks]

Question 3.5.3 P&L for Masks R Us Ltd:

a) [5 marks]$ $

Sales($8 * 15,000) 120,000

Cost of Goods Sold:Opening stock 9,000Purchases 40,000LessClosing Stock 8,000

41,000

Gross Profit 79,000

LessOverhead expenses 18,000

Net Profit 61,000

b) Gross profit is healthy since it represents around 66% of sales revenues. Net profit is also healthy, atover 50% of sales revenue, because overheads are not significant. However, since the P&L accountis only a snapshot of the position of Masks-R-Us, no firm conclusions can be made. To make a

proper judgement of the financial position, the firms cash flow statement, cash flow forecast andbalance sheet should be used. In addition, there is a need to benchmark the data, i.e. historical andinter-firm comparisons. [5 marks]

Question 3.5.6 Satine Enterprise Ltd.

a) Reducing balance method:

Year Depreciation Net Book Value

0 0 $25,000

1 $8,750 ($25,000 x 35%) $16,250

2 $5688 ($16,250 x 35%) $10,563

[3 marks]

b) Straight line method:


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Annualised depreciation = ($25,000 - $2,900) / 5 years = $4,420

Year Depreciation Net Book Value

0 0 $25,000

1 4420 $20,580

2 4420 $16,160

Therefore,total depreciation = $8,840 [3 marks]

c) Students should show their working out (which could include answers taken from Questions 3.5.6aand 3.5.6b.

Method Net Book Value

Reducing balance $6,865

Straight line $11,740

Hence, the reducing balance method depreciates the NBV of the car by a greater amount in this timeperiod. [4 marks]

d)

Reducing Balance Straight line

More realistic method for depreciatingmotor vehicles (these tend to lose mostof their value at the beginning of theiruseful life)

More complicated to calculate

Subjective nature of the (arbitrary)chosen rate of depreciation

Easier to calculate

Simple to understand

Residual value of the asset is often aguess (at best) and may not be realizedin the future

Award up to 2 marks for definitions. [5 marks]

Question 3.5.8 - Crystal Arts

a) Opening stock is the value of a firms stocks at the beginning of a trading period. The value is equalto that of the closing stock in the preceding trading period. Clear definition is needed for maximummarks. [2 marks]

b) [8 marks]

Profit and Loss Account for Crystal Arts (this month)LIFO ($) FIFO ($)

Sales 15,000 15,000

Opening stock 5,000 5,000 10 @ $500 = $5,000Plus Purchases 6,000 6,000 10 @ $600 = $6,000Less Closing stock 2,500

* 3,000

# *LIFO: 5 @ $500 = $2,500

COGS 8,500 8,000 #FIFO: 5 @ $600 = $3,000

Gross profit 6,500 7,000

Less Operating expenses 1,000 1,000

Operating profit beforetax

5,500 6,000


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Tax 1,650 1,800 @ 30% tax

Net profit after tax 3,850 4,200

Note that an extra 9.09% tax is paid if Crystal Arts uses the FIFO method of stock control. Given the lowertax liabilities and that chandeliers are non-perishable stocks, the firm may well prefer to use the LIFOmethod.

Unit 3.6 Ratio Analysis

Question 3.6.1

a) Gross profit = $500,000 and Expenses = $100,000 for Year 2. [2 marks]

b) Year 2 GPM = $500k / $1,000k = 50.0%Year 1 GPM = $400k / $850k = 47.05%

Year 2 NPM = $400k / $1,000k = 40.0%Year 1 NPM = $360k / $850k = 42.35%

The Year 2 GPM figure shows that for every $100 of sales, $50 is gross profit. The Year 2 NPMfigure shows that for each $100 sold, $40 is generated as net profit. Whilst the GPM has improved,

NPM (the relatively more important figure for profitability) has declined; due to the large increase inexpenses from $90K to $100,000 (11.1% increase). Overall, these figures show healthy profitabilityat JKL Ltd, although only limited information is provided. [6 marks]

c) Definition of profitability (not profit): Profitability ratios examine the profit of a firm in relation toother figures, such as sales revenues in order to assess the financial performance of the business.Further information might include: forecast profits and sales figures; or the amount of capital

invested in the firm. Other information could include the use and analysis of:

Return on Capital Employed (ROCE)

Benchmarking data

Looking at profit in relation to the size of the firm

Objectives and targets of the organization [4 marks]

Question 3.6.2

a) Year 2 Current Ratio = 700 / 300 = 2.33 : 1

Year 1 Current Ratio = 500 / 200 = 2.5 : 1Year 2 Acid Test = (700 350) / 300 = 1.17 : 1Year 1 Acid Test = (500 250) / 200 = 1.25 : 1 [4 marks]

b) JKLs liquidity position is quite favorable. In both years, the current ratio shows that there issufficient working capital in the firm, e.g. in Year 2 for every $1 of current liability, JKL has $2.33of current assets. The slight fall in the ratio is not necessarily indicative of poorer liquidity since toohigh a current ratio means the firm is not using its resources efficiently (such as holding too muchcash). Likewise, the acid test reveals that JKLs liquidity is favorable since it exceeds therecommended minimum of ratio of 1:1 (textiles stocks are likely to be quite liquid), although thefigures have slightly deteriorated. [4 marks]

c) Consideration of any two factors for maximum marks. Some of the issues might include: JKLs cash holdings have increased by 300%; this might help to increase liquidity but there

is a potentially large opportunity cost in holding too much cash.


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Stocks have also increased, thereby reducing the value of the acid test in Year 2. Furtherinformation on the type of stock is need, such as whether most of the stock is work-in-

progress or finished stocks. It might also be useful to know the stock turnover, i.e. how fastthe firm sells its products (high stock turnover may mean that the current ratio can beindicative of the firms liquidity position).

JKL Ltd. will also want to investigate the cause of the 50% increase in its short-termliabilities, such as overdrafts and creditors, which have reduced its liquidity ratios.

The relationship with debtors and suppliers can also give some insight to the liquidityposition of the firm. Debtors are more likely to pay on time and suppliers are more likely togrant credit if there is a good professional relationship. [4 marks]

Question 3.6.3

a) Year 2 ROCE = $400k / $1,000k = 40%Year 1 ROCE = $360k / $800k = 45% [3 marks]

b) ROCE is an efficiency ratio that measures the financial performance of a firm compared with the

amount of capital invested. In Year 2, JKL returned 40% from the value of the firm, i.e. for every$100 invested in the firm $40 is generated as profit (before interest and tax). The ratio has fallen by5% suggesting poorer use of the firms capital, i.e. deteriorating efficiency. Profitability can be

judged by comparing to bank interest rates (40% is relatively high when compared to any bankdeposit rate) or benchmarking against JKLs nearest rivals. The ROCE for both years is likely to besignificantly higher than the return from savings offered by banks/financial institutions. [4 marks]

Question 3.6.4

a)

Year 2 Year 1

(350/500) * 365 =255.5 days

(250/450) * 365 =202.7 days

orStock turnover

500/350 =1.43 times

450/250 =1.8 times

Debtor days(150/1,000) * 365 =

55 days(200/850) * 365 =

86 days

Creditor days (300/500) * 365 =219 days

(200/450)*365 =162 days

[6 marks]

b) The term efficiency position should be defined. The efficiency position of JKL Ltd. can be judgedby assessing the firms efficiency ratios, i.e. its Stock turnover, debtor days and creditor days:

Stock turnover Stock is taking longer to turn over (or turning over at a lower rate), i.e.there is less efficiency

Debtor days Debtors are, on average, paying much earlier suggesting that there is

improved credit control Creditor days The firm is taking significantly longer to pay its creditors, which in the long

run might dampen its relationship with suppliers


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Overall then, it seems that the firms liquidity position has probably deteriorated; althoughmore information and data is needed to make any firm conclusions [8 marks]

c) There are three efficiency ratios in this question and hence any development in these should help toimprove the overall efficiency position of the firm. Some examples are given below.

Stock turnover Hold less stock, e.g. introduce a system of Just In Time (JIT) or introducelean production to the production process.

Debtor Days Improved credit control, e.g. if credit control is too tight, then this could leadto a fall in sales as customers switch to rival firms offering preferential credit terms.

Creditor Days Given the improved cash position of JKL Ltd. suppliers will probably querywhy the firm is taking so much longer to pay its debts. The ratio suggests that the credit

period is rather generous especially since the firm has sufficient working capital andliquidity to meet these debts. This could, therefore, dampen the relationship with itssuppliers.

Award up to 2 marks for each factor considered to improve the firms efficiency position.

[6 marks]

Question 3.6.6

a) Debentures are a source of external long term (loan) finance for which interest is paid to thedebenture holder. Debenture holders do not usually have ownership or voting rights in theorganisation. [2 marks]

b)Year 2 Year 1

250 1,000 250 800= 25 % = 31.25 %

Full working out needed for full marks [3 marks]

c) The gearing ratio is a long term liquidity ratio that measures the percentage of a firms capitalemployed that comes from long-term liabilities, such as debentures. JKL Ltd. has less than 50%gearing so is considered to be relatively safe, given the limited information given.

The firm has lower gearing in Y2 meaning that it is less vulnerable to any increases in interest rates,i.e. it represents less risk. However, there is a need to benchmark this ratio with the industry norm

before any firm conclusions can be made about the organisations liquidity position. [4 marks]

d) The costs and benefits of high gearing should be considered. For example, having high gearingduring times of rising interest rates is likely to be risky (even if the economy is doing well) as thehigher loan repayments will hinder the firms working capital. However, high gearing might benecessary for a firm that lacks internal funds to finance growth and evolution.

In the case of JKL Ltd. the fall in its gearing ratio is not necessarily a good thing, e.g. can JKL Ltd.afford to have higher gearing to finance expansion, especially since it has higher net profit andretained profit in Y2. [6 marks]

Award 4-6 marks for a two-sided argument that considers both costs and benefits of highgearing. Application to a business, such as JKL Ltd. should be shown for maximum marks.

Award up to 4 marks for a well explained but one sided argument.


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Question 3.6.7

a) Gross profit shows the difference between a firms sales revenues and its direct cost of sales(COGS). Net profit, however, is calculated after deducting overheads (expenses) from the gross

profit figure, i.e. it considers both direct and indirect costs in the calculation of profit. Gross profitswill, therefore, always be greater than Net profits. [2 marks]

b) Note: SL students are not expected to use the Earnings Per Share ratio in this question.

Ratio Firm Commentary

Pia Gross profit has fallen by 20% (from GPM of 50% to 40%).

GPMHayman

Gross profit has fallen by just 10% (from GPM of 50% to 45%);therefore Hayman has performed better in terms of its ability tocontrol COGS.

PiaNPM is stable at 20% but this means with a reduced GPM thatoverhead control is improving; overhead accounted for a 30%

differential (comparing GPM and NPM) but only 20% by the Year 3.NPM

HaymanNPM has improved by 5.2% and is quite stable. Haymans ability tocontrol overheads has also improved but Pia performed better.

PiaFall in ROCE of 6.7% but the rate is still quite attractive at 14%return.

ROCE

HaymanImproved by 25% thereby seems very attractive if performance can

be maintained. Haymans ROCE overtakes that of Pia in 3rdyear andseems attractive at 15% return.

PiaHigh acid test ratio in Years 1 and 2; seems to have improved withthe ratio falling to 1.5 (although we have no information about thetype of industry that Pia operates in).

Quick ratio

Hayman Fluctuating acid test ratio that is close to the minimum recommendedof 1:1 so liquidity issues at Hayman could be a concern for someinvestors.

PiaImproving EPS ratio will tend to attract investors (Pias EPS hasincreased by 40% in the given time period).

EPS (HL)

HaymanDeclining EPS ratio may drive away investors in the long term,especially since the EPS has fallen by 33%.

Award a maximum of 4 marks for the analysis of up to two of the given financial ratios.

For SL candidates, at least 3 ratios should be analysed (at least 4 ratios for HL candidates) for 57 marks.

For 89 marks, there should be a justified conclusion as to which firm is the better investmentbased on the given analysis.

c) It is important for potential investors to consider non-financial factors when making investmentdecisions because not all choices are made on quantitative grounds. For example:

There is no information regarding the type of industries in which Pia and Hayman operate;indeed the two firms might not even operate in the same industry!

Labour turnover and factors such as the level of staff motivation can affect the firms long termcosts and profitability

Past financial performance is not necessarily indicative of future performance so caution shouldbe taken when making investment decisions

Financial / quantitative analysis may not be reliable due to window dressing of accounts andhistorical data being used, i.e. the current situation for both firms is likely to have changed


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Consumer confidence levels will also affect investment decisions, irrespective of what financialratios might reveal, e.g. a looming recession might be enough to put off investors

The state of the economy investment decisions tend to be more reserved during a period ofrecession or when the level of consumer and business confidence is declining

The reputation of the two firms is likely to have an influence on investors decisions sincecorporate social responsibility and ethics are increasingly factors that affect the customers

perception (and hence sales) of a firm

Aims and objectives of the two firms are likely to be considered, e.g. Pia might be expandingwhich accounts for its declining quick ratio

Explanation of any two qualitative factors that affect investment decisions is sufficient for maximummarks to be awarded. [4 marks]

Unit 4.1 Role of Marketing

Question 4.1.1 Nokia

a) The combined two-firm concentration ratio of Nokia (35%) and Motorola (approximately 17.5%) isaround 52.5% of the market. [2 marks]

b) Up to 2 marks for correct definition: Market share is a measure of a firms sales revenue expressedas a percentage of the markets total sales revenue. Alternatively, market share can be measured interms of sales volume. Formula is needed for maximum marks. Note: students may choose toexplain market share via concentration ratios and this should be awarded accordingly. [4 marks]

c) Award up to 2 marks for each relevant benefit that is explained. [4 marks]

High market power (price setter) by being the dominant firm in the market

The benefits of economies of scale from large scale of operations, e.g. technological economies

There is a positive correlation between sales revenue and profit levels, i.e. Nokias profits tendto rise as a firm gains more market share

Having a larger market presence means that Nokias key stakeholders such as suppliers,shareholders, managers and employees are more confident (and motivated) by the existence ofthe company

Brand recognition can bring benefits such as a potentially higher customer base and improvedcorporate image

Larger firms are likely to have the funds to invest in Research & Development (essential inNokias case)

Question 4.1.2 Sony

a) Product orientated businesses tend to be inward looking and produce products that they hope willsell in the marketplace. For example, Sony hoped that its 380,000 digital cameras and $101,500audio systems would sell. However, with so much competition in these mass consumer markets,Sony seemed to be ignoring the market prices being paid by the average consumer of such products. [3 marks]

b) Identification and explanation of twodisadvantages needed for full marks. [4 marks]

Since consumer needs are ignored, there is likely to be a high failure rate as in the case of theSony Qualia line of products

It is a high risk marketing strategy since Sony simply hopes that customers will purchase thesehighly expensive gadgets


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Marketing and Research & Development costs often prove fruitless; hence this representsinefficient use of Sonys finances

By being inward looking, Sonys rivals such as Samsung and Hitachi are likely to take awaysome of its market share

The extremely high prices set by Sony do not reflect the ability and willingness of customers topay (such prices) for these products

Question 4.1.3 Singapores Pricing Policy

a) Social marketing is the use of mainstream marketing methods to achieve the benefits of socialchange, such as informing the public about the dangers of under-age drinking, rather than for directcommercial gain.

Other examples include: promoting the use of contraceptives, anti-drug campaigns, protection ofanimals, anti-smoking campaigns, encouragement of recycling and the promotion of healthy eating.

[2 marks]

b) The Singaporean government is likely to use social marketing tactics in order to control litterproblems in its country. Educating people, rather than simply fining them, is likely to be more costeffective in the long term as it becomes part of the culture. The case study mentions the use of litterlaws being taught and promoted in schools as a way to embed the desired culture from a young age.It is therefore likely that the governments success will depend heavily on aspects of socialmarketing. However, much of this will also rely on marketing tactics used to inform the general

public about the penalties for littering.

Other considerations include:

Action will only be undertaken if people believe that the benefits of doing so outweigh the costs,i.e. the littering penalties must be adequate

The government is more likely to succeed if its strategy is based on educating people tocomprehend the social goals and benefits, rather than allowing their own perceptions to dictate

personal action

Education, not social marketing itself, has been used to ingrain a culture of cleanliness

Success does not rely on social marketing itself; legislation (such as littering fines and theCorrective Work Order) is also used to achieve the governments objectives.

In conclusion, the combination of government control and the use of social marketing have clearlyworked in ensuring that Singapore remains one of the cleanest countries in the world.

[6 marks]

Question 4.1.4 Wallington High School for Girls

a) Marketing might be important to an organisation such as WHSG for several reasons, including:

The need to attract the right kind of students to the school (there are rival schools in closeproximity)

Specific marketing is required to attract the most academically outstanding students (WHSG is aselective grammar school); thus effective marketing will prevent/reduce those unsuitable fromapplying

To inform key stakeholders (such as parents and the local community) about schoolachievements

Marketing can help to improve the schools public relations and its market standing

To maintain or enhance its reputation and image, i.e. to uphold its reputation of excellence

To attract donations and/or sponsorship deals to raise school finance


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Any other relevant factor

Award up to 2 marks for each relevant point, up to maximum of 4 marks. [4 marks]

b) Peopleare important in the marketing of schools. In this case, it is most likely to refer to theteachers and support staff of the school. The functions mentioned in the case study suggest thatteachers and other members of staff need to portray a fitting image (such as the quality andqualifications of the staff), in line with the organisations culture and objectives.

The physical evidence(the buildings and facilities) of a school is also important to its marketing.Parents (the customers) are unlikely to want to send their children to schools that lack sufficientfacilities. Schools with adequate space, ICT equipment and other resources are more likely to bemarketed successfully. Indeed, the physical environment of a school can have a direct impact oncustomer perceptions of the quality of teaching and learning in the school.

Processesin schools are also important to their success. Procedures such as communication linkswith parents and entrance exam administration will affect the general level of customer service. Thequality of delivery in teaching and learning will also obviously affect the level of customer

satisfaction. Other processes might include: the schools entrance exams (for selecting students),information evenings for parents, charity events, music concerts and drama productions.

There must be consideration of all three Ps for full marks. Award up to 4 marks if only two of thethree Ps are covered. [6 marks]

Question 4.1.5 Unicef and FC Barcelona

a) Sponsorship refers to financial gifts or donations in support of an event or a business venture inreturn for a dominant display of the sponsors name. In this case, FC Barcelona are sponsoringUnicef, but their commercial return for doing so is not so explicit.

Social values the beliefs of a firm regarding what is morally correct. FC Barcelona believes ingiving back something to those less fortunate, i.e. young children in need. Social and moral valuescan also refer to the social responsibility towards other stakeholders, such as employees. The valuesof the business is closely linked to its organisational culture and will guide its behaviour.

Award up to 2 marks for each definition. [4 marks]

b) There are several possible reasons for FC Barcelona choosing to sponsor a NPO such as Unicef. Forexample:

FC Barcelona is simply adhering to its social corporate responsibilities

There may be indirect commercial benefits for FC Barcelona, such as an improved corporateimage and a wider fan base

The Club is following its values, i.e. it is more than a football club (that seeks to make money) [4 marks]

c) Although commercial marketing strategies have long been used by businesses that aim to maximiseprofits, NPOs have also increasingly used marketing to improve their finances. Students are likelyto discuss a range of marketing strategies used by NPOs, such as;

Social marketing

Sponsorship deals Slogans (catchphrases) and logos

Public relations


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De-marketing

Such marketing strategies, and others that the student might consider, are used with the aim ofachieving organisational objectives. However, it is unlikely that marketing strategies alone willtruly enhance the efficiency and effectiveness of NPOs. Financial control, such as the control ofworking capital, will also be critical to the survival and performance of NPOs. [7 marks]

Unit 4.2 Marketing Planning

Question 4.2.2 Banning Pester Power

a) Ethics can be a rather subjective matter; whether it is ethical to market products directly at childrendepends on several factors:

The age of the children being targeted (younger children are more vulnerable so it may be

considered less ethical if marketing is directed at them) Peoples perceptions of what is right or wrong

The type of product(s) being marketed at children e.g. textbooks and educational toys ormobile phones and fast food?

The type of selling / marketing techniques being used e.g. hard-selling and bait-and-switchaimed at children would probably be considered unethical by most people

Arguments against marketing products directly at children:

Are children able to filter so much advertising clutter?

Peer and social pressures to conform

Children (especially the very young) are vulnerable and are easily influenced/manipulated bywhat they see and hear

Pester power techniques can cause tension between family members

Other issues:

Award up to 2 marks for appropriate definition of Pester Power. Directly targeting childrenwould be considered immoral if marketing techniques take advantage of children and/or their

parents

Marketing at children does not haveto be aggressive, offensive, distasteful or unethical

Children today tend to have more autonomy and power in decision making

The bottom line parents have the final say and, in theory, should be able to make rational

decisions in the best interest of their children[6 marks]

b) The likely outcomes are likely to be either positive or negative:

Positive outcomes Negative outcomes

o Reverse psychology to entice people to buy(Yorkie bar example in the case study)

o Fines for breaking consumer protectionlaws

o Word of mouth / Viral marketing (e.g. therebranding of FCUK worked well for the

organisation)

o Upsetting the general public (e.g. Thierry &Guys Fat Bastardbrand of wines)


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o Brand awareness - shock tactics can drawattention and bring publicity to a firmand/or its products

o Damaging the corporate image (whichcould be irrevocable)

o Can be humourous and memorable even if(slightly) offensive

o Boycotting of a firm that causes offense tothe public

Issues to consider could include the following:o

What is humour and what is simply offensive?o Overly offensive adverts are likely to be banned and this therefore could represent

ineffective use of money to the businesso Knowledge of shock tactics often spread fast, e.g. viral marketing on the interneto Award marks for appropriate use of real world examples

Whether the outcome is likely to be positive or negative is not always clear. Shock tactics are oftena gamble and therefore represent a risky strategy due to their unpredictable outcome. [9 marks]

Question 4.2.6 The business of international students

a) Globalisation refers to the integration and interdependence of social, politic and economic issues(goods, services, capital and people), across the world. For example, consumers from differentcountries have increasingly similar habits and tastes. Hence, educational establishments such asuniversities no longer cater only for the domestic student. [2 marks]

b) Segmentation can allow the universities to have a better understanding of the different types ofcustomers (students in this case) and hence help such organizations to create better (more cost-effective) marketing activities. Students might be segmented in different ways, such as:

Age e.g. college graduates or mature students

Gender e.g. male and female students might have varying hobbies and interests and this canhelp universities to plan their extra-curricular activities (thereby enhancing the experience oftheir customers).

Ethnic background e.g. culture and background. Many universities have societies and clubs tocater for people from different regions of the world. The product range in the university canteencould also be affected by the demographics of the students.

Language - Newsletters and other forms of written marketing correspondence can also betranslated into different languages to cater for students from overseas countries.

Religion e.g. Hong Kong Baptist University.

Academic ability Universities can use segmentation data to target the appropriate student fortheir establishments and courses. For example, Cambridge and Harvard will target their

marketing at top (academic) schools across the world. Such universities are more likely to usefocused marketing; other universities may use more mainstream marketing techniques.

Overall, effective segmentation can help universities to develop more specific marketing strategiesfor their overseas customers and have opportunities to target a wider range of students. [6 marks]

Question 4.2.7 Pink Ladies

a) A niche market refers to a small and lucrative market segment. Marketing strategy is concentratedand targeted at this specific market segment. Pink Ladies is specifically targeted at womentravelling alone who do not have or want to use their own cars. [2 marks]

b) Any two advantages clearly explained for maximum marks. Advantages could include:


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There is limited, if any, competition since Pink Ladies offers a unique service. Thereforepremium prices can be charged, allowing the firm to earn higher profit margins

Focused marketing at the specific market segment helps Pink Ladies to meet their consumerneeds better, thereby improving the firms competitiveness

There is more effective use of the marketing budget since marketing is highly concentrated onthe particular target market

The highly specialized service helps to promote customer loyalty [4 marks]

c) Award up to 2 marks for the correct definition of pilot scheme (or piloting). Application should bedemonstrated for maximum marks.

Piloting is the process of introducing marketing activities to a group of people, such as ladiestravelling alone at night, to measure their responses, feedback and reactions to a product (in this casea ladies only taxi service). A pilot scheme might be important to Pink Ladies because:

It can potentially save Pink Ladies a lot of time and money by providing useful information andidentifying areas in need of improvement before it launches the service on a much larger,

perhaps national, scale.

It can help to refine product design and development (in this case a female-only taxi service) toraise its chances of success

It helps the firm to improve its marketing plans and strategy to better meet the needs of itsclients

Given the high failure rate of new products launched on the market, piloting can help to reducethe threat of launching an unpopular or unsuccessful product

Hence piloting helps Pink Ladies to reduce the risks and uncertainties of operating in nichemarkets. [4 marks]

d) Award 2 marks for each alternative method of market research that is considered in the context ofPink Ladies (up to a maximum of 4 marks). These might include:

Qualitative Vs Quantitative market research techniques

Focus groups

Interviews/Surveys with potential female clients

Secondary research, e.g. economic data (to judge the level of consumer spending levels)[4 marks]

Question 4.2.10 Paisey B&B

a) Mean = $3,283Median = $3,000

Modal = $3,000 [3 marks]

b) Range = 4,500 2,500 = $2,000The range shows the difference between the highest and lowest sales forecast figures for PaiseyB&M, i.e. there is a difference of $2,000 between the peak period and the off-peak period for thefirm. [3 marks]

c) Accurate sales forecasting coupled with knowledge of average sales figures and the range can helpPaisey B&B in several ways, including:

Improving its working capital, e.g. knowing that sales are likely to be lowest in June can helpthe firm to arrange an overdraft if necessary

Aids cash flow forecasting, e.g. in order to secure other sources of external finance

Stock control can be improved, e.g. more stock is needed between Dec-Feb

Improved workforce planning, e.g. more part-time staff may be hired in the summer months


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Aids the budgeting process, e.g. comparing income and expenditure (variance analysis)

Helps with financial planning, e.g. to predict break even and profits/losses

Any two relevant points explained for full marks. [4 marks]

Question 4.2.11

a) A niche markettargets a specific and well-defined market segment. Firms that operate in nichemarkets will therefore cater for the distinct and precise needs of their customers. Unlike massmarkets, the client base for niche markets is relatively small. Yoshiko Travel Ltd. might beconsidered to operate in such a market because it offers a specialised service to its wealthy Japaneseclients who are fans of the English Premier League. [2 mark]

b)

Jan Feb Mar Apr May JunSales ($000)30 28 32 35 28 0

3-month moving averages 90 3 = $30,000

95 3 = $31,166795 3 = $31,166763 3 = $21,000

[4 marks]

4 marks: Award 1 mark for each correctly worked out set of moving averages.

3 marks: If answers are correct but not expressed in $000 and/or there are minor errors/omissions.

1-2 marks: If there is no working work and/or two or more mistakes are made.

c) See graph [5 marks]

Sales for Yoshiko Travel Ltd.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan Feb March Apr May June

Month

Sales($)

Actual Sales

3-month moving average

For maximum marks, the axes should be correctly labelled. Deduct a mark for each error made.

Note: The 3-month moving average could be plotted as a time-series line.


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d) Due to the large fluctuations in sales (with a variance of $35,000 in April and zero sales in June), it

is difficult to establish any underlying trend line by using the actual sales figures. The 3-monthmoving average does smooth out these fluctuations to some extent, however.

During the football season, the range in sales is only $7,000 (from $35,000 to $28,000) and the firmis likely to be able to manage this. However, with no sales at the end of the football season Yoshiko

Travel Ltd. will need to have strategies in place to deal with a lack of cash inflow during such times,i.e. sales forecasting can help the firm to improve its financial management. There are also likely to

be some staffing issues during the off-peak football season. [4 marks]

Both the trend/fluctuations and the implications should be commented on for 3-4 marks.

Unit 4.3 Product

Question 4.3.1 - Mattel

a) Product portfolio refers to the variety of the different product lines produced by a business. In thiscase, Mattels product portfolio includes: toy cars, board games, dolls, cuddly toys and educationaltoys.

Product portfolio should be defined in the context of Mattel for maximum marks. [2 marks]

b) Having a diversified product portfolio is important to Mattel for several reasons, including:

Increased sales since a wider customer base is catered for. This can also encourage repeat

custom (consumer loyalty) since customers may be attracted to buying a range of different toys. Risk-bearing economies of scale. A diversified product portfolio can help to compensate losses

made by unpopular product lines by profits being made in other more successful products orstrategic business units, a diversified portfolio reduces risks.

It can increase Mattels market share and market power, i.e. the firms competitivenessimproves.

Economies of scope Mattel can promote the family brand across the whole portfolio ofproducts, thereby cutting marketing and other related costs.

Broadening the product portfolio can help to publicise the Mattel brand and this makes futureproduct launches more likely to succeed.

Note: Diversification (a growth strategy) is not the same as a diversified (varied) product portfolio.

Award up to 2 marks for explaining the meaning of a diversified product portfolio, i.e. product linesthat are clearly distinct from one another. For example,Barbiefor girls,HotWheels for boys,Elmofor toddlers and Scrabblefor families.

Award 3 marks for each reason that has been fully examined, up to a maximum of 6 marks.Alternatively, award 2 marks for each reason that has been explained. [6 marks]

Question 4.3.2 - Virgin Group Ltd


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a) A product portfolio is the range of products that a business owns or the strategic business unitsowned by a firm. In bigger firms, such as Virgin, a broad product portfolio might be considereddesirable for several reasons, including:

Having an extensive product portfolio allows firms such as Virgin to access a wider range ofmarkets, e.g. transportation, beverages and mobile phones

By offering a broad range of products, the business can increase sales revenue as the productscan appeal to wider and larger markets

A broad product portfolio gives customers choice and therefore this can improve the profits andcompetitiveness of the organisation

It can also spreads risks and improve cash flow - profits made by cash cows (e.g. VirginAtlantic) and stars in the portfolio can be used to offset losses made by dogs and anyunprofitable product lines

Hence a broad product portfolio can be considered crucial since the conditions within businessesare ever changing

Award maximum marks for any two reasons fully explained. [4 marks]

b) Businesses such as Virgin need a different marketing mix for each of their distinct products as eachproduct is aimed at a different target market and each product is also likely to be in a different stageof the product life cycle. For instance, Virgin Atlantic might be marketed at middle to high incomeearners who can afford to travel. It would therefore have to be promoted in the right places so thatthe right people are targeted and the advertising is effective. This type of promotion would be verydifferent from the promotion of Virgin Cola which could be promoted as a mass market productaimed at people of any income bracket.

There are several justifications for using such an approach:

Virgin is an immensely large organisation which has an extremely large product portfolio, so auniform marketing mix will not be suitable, e.g. the promotional strategy for an airline and a

mobile phone would be entirely different The products or SBUs within the portfolio may share nothing in common except the parent

name, Virgin, so a homogenous marketing mix is unlikely to succeed in marketing the firmsproducts

Pricing will vary for the different categories of products within the Boston Matrix, e.g. premiumprices can be charged for cash cows whereas penetration pricing might be used for wild cards

The distribution channels for the products in the portfolio may be vastly different, e.g. mobilephones and cola could be sold in supermarkets but it is unlikely that airline or train tickets wouldbe purchased in such outlets

A different marketing mix is used for each of their products in order to differentiate them fromeach other. Virgin needs to ensure that each product has its own identity so that if one of the

products fails or does not appeal to a particular market segment it will not affect the personsperception of the other products in the portfolio

The type of promotion used for problem children products would also be more persuasive,whilst that used for cash cows might just be to remind the customer about the product in order tokeep sales revenue high

It is with the differences in these marketing mixes that can highlight and optimize the specialqualities of each product within the firms portfolio, thereby helping it to maximise potentialsales and profits.

Award 3-4 marks for an examination of 2-3 elements of the marketing mix.

There should be an examination of the 4 Ps applied in the context of the case study in order to be

awarded maximum marks. [6 marks]


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Unit 4.7 International Marketing

Question 4.7.1 Colgate-Palmolive

a) This refers a business, such as Colgate-Palmolive being able to sell the same product using the samemarketing approach throughout the world. It is used by firms with global brands that often have asignificant share of their revenues earned from overseas markets. [2 marks]

b) There are several possible answers here; justification/reasoning is needed to award both marks. Forexample, Colgate toothpaste might be described as being a consumer product or as a fast-moving-consumer good. [2 marks]

c) This question requires a two-sided argument. For many products, the brand name is crucial to itssales. Colgate (and other globally recognized brand names) will help the company to sell its

products due to brand awareness, recognition and loyalty. Globalization has meant that internationalbranding is increasingly important as a business strategy. On the other hand, the brand name must

be carefully chosen and considered in the context of overseas markets (see Box 4.3c on page 521and Box 4.7a on page 591 for some examples of multinationals that went the wrong way aboutinternational branding).

Evaluation of the extent to which branding is important is needed for top marks. For example, thebrand itself will not usually be sufficient to secure success in overseas markets; other marketingconsiderations are needed such as the products price and distribution channels. Non-marketingaspects might also need to be considered, such as economic, legal, political, social and ethical issues. [6 marks]

Question 4.7.2 Viya Crab Products Company

a) Cultural exports are the commercial transfer of ideas and values from one country to another.Canned crab meat is a popular local delicacy in Thailand and Viya Crab Products Co. has chosen toexport this to overseas continents. [2 marks]

b) International marketing will be vital to the success of a business such as Viya Crab Products Co.They will need to consider marketing issues such as price, promotional, packaging and distributionin overseas markets. Each of these components of marketing is likely to differ slightly from onecountry to another. The product itself may need to be slightly modified to better suit the tastes ofoverseas customers.

A discussion of three marketing issues needed for maximum marks. [6 marks]

Question 4.7.3 Pakistan International Airlines Corporation

a) PIAC was obviously negatively affected by the health and safety concerns of the EU. With 27countries raising public concern, PIACs corporate image is likely to have been damaged by the ban.For businesses such as airline companies, health and safety are paramount. Hence, any negativenews is likely to damage PIACs corporate image, perhaps irrevocably. In order to compete withlarger and more established airlines in overseas markets, PIAC will need to restore publicconfidence. If the EUs claims are unjust, then PIAC will need to rectify this position. The use of a

public relations company may therefore prove useful. Indeed, some would argue that if PIAC didnot contest the ban, they would be admitting to poor quality standards at the airline. Ordinarily,


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corporate image would be one of many variables that affect the success of a business in internationalmarkets. However, in this case it is absolutely vital. [7 marks]

Unit 4.8 E-Commerce

Question 4.8.1 HMV

a) B2C businesses provide goods and services to the general pubic, i.e. consumers. HMV sell music,DVDs and books (via Waterstones) to private individuals and can therefore be classed as a B2C

business. [2 marks]

b) Reasons include: the convenience of online retailing; cheaper prices online; ability to shop for thebest bargains without having to visit various retail outlets; the ability of customers to buy just thetunes/music they want rather than whole albums; improved online security has also attracted many

buyers to switch to e-commerce. [4 marks]

c) Any other strategy that is fully explained would warrant full marks. Examples include: Marketingits own website; Placing a greater emphasis on selling music and DVD products online; Allowingcustomers to pay by more convenient methods, such as improved online security; Loyalty schemes;Any other relevant marketing strategy. [4 marks]

Unit 5.1 Production Methods

Question 5.1.1 Bristol Cars Ltd.

a)

Ltd. stands for private limited company, i.e. a business with limited liability with shares beingissued only to family and friends with the approval of the board of directors. Note, however, that insome countries such as Australia and Hong Kong, publicly listed companies can also carry Ltdafter their name. [2 marks]

b) Identification (1 mark) and description (up to 3 marks) of job production. Note: there is no need toexplain the advantages and disadvantages of job production in this question. [4 marks]

c)

Consequences can be positive, negative or both. Examples include:

i. High prices can be charged for the cars; Prestigious corporate image; Benefits ofspecialisation and niche markets; High profit margins; High cost of hiring skilled labour

force; Sales limited to around 100 vehicles per year, i.e. small customer base; High costs ofproduction; Limited, if any, economies of scale; Long working capital cycle.

ii.

Motivated workforce; High productivity; High salaries; Job satisfaction from challengingwork; More involved in decision making; Limited sales and profits may hinder future payincrements.

iii. Limited channels of distribution; Expensive (luxury perfection!); Long waiting time (fromplacing the order to getting the car); Customer satisfaction; Feeling of pride/prestige.

[9 marks]

Question 5.1.2

a) iPod Mass/Line production is most suitable given that Apple can sell the standardised product tomass markets across the globe. Only slight variations to the production process is needed for


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different versions of the iPod (e.g. 4GB or 8GB models), but there is a large enough market for eachof these to mass produce the product.

b) Wedding cakes - Job production or batch production could be used. In some cases, clients maydemand a highly unique cake (job production) which is made to order. In other cases, clients may

be given a choice from several different cakes on offer (batch production). Customers might alsobuy a batch-produced cake but have finishing touches to make the cake more unique.

c) Cookies (biscuits) - Batch production is most suitable as each group of products is standardised butthe product can be modified slightly to produce different batches of cookies, e.g. plain or chocolatechip flavour.

d) Navy battleships - Job production will be most suitable as navy battleships are highly expensive andsophisticated products with unique features and capabilities. The infrequency of orders and the hugecosts of production also make it difficult to use batch production.

e) Plasma televisions - Large manufacturers, such as Sony and Samsung, are likely to use mass/lineproduction, especially as the global market for plasma televisions continues to rise. [10 marks]

Unit 5.2 Costs and Revenues

Question 5.2.1 - Airline costs

a) Variable costs: Fuel, Meals and drinks onboard, Remuneration of flight attendantsFixed costs: Advertising and promotions, Airport charges and Remuneration of administrative staff.

Deduct one mark for each pair of errors. [3 marks]

b) Definitions and application of differences between direct costs and indirect costs. A direct cost isspecifically related to a particular flight. For a flight on a no-frills airline carrier, the catering costsare considered to be direct costs. Indirect costs are not directly linked with a particular flight, e.g.advertising and insurance costs. [4 marks]

Question 5.2.2 - Calculating business costs

a) Complete the table for the costs of producing wooden toy trains: [5 marks]

Output

(Units)

TFC

($)

TVC

(S)

TC

(S)

AC

(S)0 2,000 0 2,000 -

100 2,000 500 2,500 25.0

200 2,000 1,000 3,000 15.0

300 2,000 1,450 3,450 11.5

400 2,000 1,800 3,800 9.5

500 2,000 2,500 4,500 9.0

600 2,000 3,820 5,820 9.7

b) i. Graph [5 marks]ii. Graph [3 marks]


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c) AC falls from $25 per unit to $9.0 and then rises again to $9.7. This is representative of the patternof economies and diseconomies of scale experienced by firms as they produce increasing levels ofoutput. [3 marks]

d) Reasons might include a lack of working capital to exploit economies of scale or insufficientdemand to justify producing at the optimal level of output. Full explanation needed for maximummarks. [4 marks]

Unit 5.3 Break-even Analysis

Question 5.3.1

a)

200,000 / (30 5) = 8,000 units [2 marks]

b) Sales = 8,000 * $30 = $240,000 [2 marks]

Question 5.3.2 Tread-it and Play-it

a) i = 800 units, ii = 250 units, iii = 60% [3 marks]

b) Definition and explanation of the MOS. Tread-it has the better MOS when measured as apercentage; although Play-it has the better MOS in absolute terms; Better to use the percentage forcomparisons across different industries (hiking shoes and wooden toys). [4 marks]

Question 5.3.3 - Lisa Chans Day-Care Centre

(a)

TFC = $1,840 (Rent, Salaries, Admin + Power) [2 marks]

(b) BEQ = $1,840 / $16 = 115 child places [2 marks]

(c) Graph: Title; Axis labels; TR line; TC line and TFC line accurately drawn and labeled [5 marks]

(d) Graph: Break even point shown and Break even level of output shown [2 marks]

(e) Demand = 20 children per day * 22 days = 440

Safety margin = 440 - 115 = 325 child places (or a very safe 282%)The safety margin must be clearly shown on the graph for maximum marks [3 marks]

(f) Strengths(application needed): [6 marks]

It is quick to construct and easy to understand, especially for one product businesses such asLisa Chans Day-Care Centre.

As a management decision making tool, it can be used to study the impact of changes in theselling price, fixed costs and/or variable costs.

It can be useful when a business needs to seek external finance, perhaps for expansion reasons,especially if it has a high MOS.

Weaknesses (application needed):

Fixed costs do not necessarily remain constant, e.g. rent and salaries may increase Average variable costs are unlikely to be constant due to economies of scale

Prices are likely to be lowered (i.e. not remain constant) to entice greater demand


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Break-even analysis is a static model so the results are of limited use

Cost and revenue figures are based on estimates which may not prove to be accurate

Award a maximum of 4 marks if student does not account for both strengths and weaknesses ofusing break-even analysis.

Question 5.3.4 - Phoebes Dance Studio

(a)

The BEQ is 200 customers per month, i.e. $3,000 / ($20 $5) [2 marks]

(b)

The margin of safety is 300 customers, i.e. 500 200

Business and Management ANS

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