Form 5 Business Studies

Quiz 3

Time Allowed: 40 minutes

Total Marks: 30

McKenzie Ltd is a private limited company owned by McKenzie family. The family business sells custom-made clothes.

The mission statement of the company is:

We are committed to providing the best quality clothing experience by being innovative in our design and by having

excellent quality control of the products.

One of the objectives that the business set for the next few years is growth. The business currently has 1 store in the

capital city of Country X. The business has thought of opening a second store in the same city. Some of the family

members do not agree with the proposal because they believe quality products are more important than expansion but

the chairperson said that business growth is necessary in order to survive in this competitive market.

The business has $350,000 in the bank account. The initial cost of establishing the second store (such as purchasing

shelves and computers) is estimated to be $150,000. The chairperson has projected the following data:

Table 1: Projected data

Now (Before expansion) 1st year after second store 2nd year after second store

Sales Revenue $4 million $4.5 million $5 million

Market Sales $40 million $42 million $44 million

Market Share X 10.7% 11.4%

Profit (after deducting all

costs, including interest cost)$1 million $1.2 million $1.3 million

Number of employees40 (including 20 family

members)

45 (including 20 family

members)

45 (including 20 family

members)

Number of Directors 4 (all family members) 4 (all family members) 4 (all family members)

The chairperson is going to retire soon and according to past practice, the chairperson shall be passed to his eldest son,

who is now working at a school as a teacher.

REQUIRED:

(a) Explain the following terms:

i. Mission Statement [3]

ii. Objectives [3]

(b) Calculate the market share (marked X in Table 1) that McKenzie has now in the clothing market. [2]

(c) Explain ONE benefit to McKenzie Ltd when there is a higher market share in the clothing market. [4]

(d) Analyse the strengths and weaknesses of running a family business. [8]

(e) Using McKenzie Ltd as an example, discuss why internal growth has been chosen as a way of expanding the

business. [10]

Answers to Quiz 3

(a) Mission Statement is a qualitative statement to stakeholders the core aim of the business. The mission statement is

phrased in a way to motivate employees and to stimulate interest by outside group. In this case, the mission

statement is to inform workers and family members the purpose of McKenzie Ltd (which is to produce best clothes)

so to encourage them to achieve the aim.

Judgement:

1 mark for partial explanation (definition)

2 – 3 marks for good explanation (including reason why having mission statement and application)

(b) Objectives are the targets that the business tries to achieve. Objectives must be specific, measurable, achieveable,

realistic and time-frame. The business can set an objective such as: having one new clothing store every year.

Judgement:

1 mark for partial explanation (partial definition)

2 – 3 marks for good explanation (correct definition plus reference to the case by making up an example)

(c) Market share: 10% (4 / 40 million x 100)

Judgement:

1 mark for correct method but incorrect answer.

2 marks for correct answer.

(d) Increasing market share can make the business become a market leader and enjoy higher sales (simple

explanation). Becoming a market leader is important because McKenzie will become a brand leader in the market

which means consumers have confidence in the product (consumers feel that the quality of custom-made clothing is

different from that of mass-production clothing) and they are more willing to buy the clothes from McKenzie Ltd

therefore sales of McKenzie Ltd will increase (explain why higher sales will occur)

Increasing market share can make the business become a market leader and enjoy economies of scale (simple

explanation).

As McKenzie Ltd will become a market leader, then suppliers of fabric are more willing to supply McKenzie Ltd

fabrics at a discounted price because firstly, McKenzie needs more fabric to produce as the sales of clothes has

increased. The average cost of cloth purchase will decrease. Secondly, as the business becomes a market leader,

suppliers are more keen to promote the products at a cheaper cost because suppliers now rely on McKenzie Ltd in

order to have more sales. (These reasons explain why economies of scale benefits McKenzie Ltd).

Judgement:

1 mark for simple explanation.

2 – 3 marks for quality of explanation (if simple explanation is made plus partial developed explanation is made – 2

marks)

4 marks for developed explanation plus application.

(e) A family business is defined as a private business organization (can be a sole trader, partnership or a limited

company) that is owned and managed by a group of family members. There are some strengths of running a family

business and they are:

Commitment – a family business would strive hard to earn sufficient profit. The reason why the business needs to

earn sufficient profit is that the McKenzie family relies on the profit as part of their family income. If the company

fails, then the members will suffer loss of income and also become unemployed.

Flexibility – family members are more flexible in terms of having different working hours than non-family members.

They can involve in tasks that require special working hours (for example at midnight) which other workers may not

want to do. Sometimes when a business is in a difficult situation, family members are flexible in terms of the amount

of salary to be received. This is a strength to the family business because sometimes a business may fail because

of insufficient cash on regular payments, such as wages, and if the family members are flexible in terms of wages

payment or the amount of wages to be received, then the business may have more cash for other matters / this will

reduce cost of production because for non-family members who work outside normal working hours, over-time paid

is required.

Shorter decision making time – it will take shorter time to make decision because only a few members of the family

make important decision. This is a benefit to the family business because for a non-family business, a lot of

consultations and discussions are required before a decision can be made – it will be time consuming and

sometimes the business may miss the opportunity. For example, in this case, the business wants to expand, it will

take a very long time for a non-family business to discuss because the Board of Directors may comprise directors of

different opinions and arguments could occur. However, for a family business, the decision is only made by senior

family members therefore they will decide quickly whether or not to expand.

Employee loyalty – employees are more loyal to the family business because of the different working culture (the

workplace is less formal) and the relationship is closer because some family businesses treat their staff as extended

family members. Such good employment relationship will reduce the staff turnover rate and workers are more

committed to increase the sales of the business because they have been treated like a family member. The cost of

training will become less and more sales could have been made therefore the business benefits.

However, there are some disadvantages of a family business:

Rigidity – family business does not want to see changes especially for older family businesses. The reason why

they don’t want to see changes is that they want to preserve traditional family values of running the business, for

example, some family members of McKenzie Ltd are not willing to see the change because it may conflict with their

family value – in this case, developing quality products. This is a disadvantage to McKenzie Ltd because the

business may not be able to compete against other businesses, especially in this competitive clothing industry and

may fail in the end.

Succession – a family business may see family relationship as the key criteria for succession rather than the quality,

vision and competency of candidates. This will affect the quality of leadership because sometimes a poor leader

can be selected and this will affect the operation of the business (for example, unable to make proper decision). In

McKenzie’s case, as the father will pass his director’s position to his eldest son, who is a teacher. This decision may

make McKenzie Ltd into failure because the son does not have sound business experience and he is unable to

make good decision for the company.

Judgement:

Analysis of strengths and weaknesses of family businesses [7 – 8]

Good explanation of strengths and weaknesses of family businesses [5 – 6]

Limited explanation of strengths and weaknesses of family businesses [3 – 4]

Little understanding of features of family businesses. [1 – 2]

(f) Internal growth means expansion from within a business by expanding the range of products and/or locations. In

this case, McKenzie Ltd shows internal growth by opening a second store.

There are some advantages of internal growth, as to McKenzie Ltd:

Cheaper to expand – the cost of opening a second store is cheaper than purchasing an existing business (Limited

explanation). This is a benefit to McKenzie Ltd because if the business decided to take over another business

instead of internal growth, the business might need to take out more loan from the bank and therefore it will increase

the interest cost to the business and lower profit could be earned. In comparison with internal growth, funds are

provided from past profit therefore the risk of debt-funding has been reduced. Furthermore, it will add the burden to

the family business because the company’s debt level is higher than the internal growth plan so the business needs

to repay the bank more in the future (Analysis as to why it is beneficial to McKenzie Ltd).

Less Risky – as the business opens the second store, same business culture can be brought to the new shop

whereas there will be clash between working culture if McKenzie Ltd decided to take over another clothing firm.

Workers in the acquired firm may resist the working culture that McKenzie Ltd has and this will create more conflicts

between management and the workers. This will result in a decrease in efficiency of workers as they are not happy

to work for the business. Furthermore, the conflict between workers and the management may erode / affect badly

the image of McKenzie Ltd.

Full control over the speed of expansion – the management will expand according to its capacity and resources

available if internal growth has been chosen as the way to grow. For example, McKenzie Ltd will choose to grow

only when it has enough past profit and customers available before it expands. Unlike external growth, if McKenzie

Ltd chooses to takeover another company, for example, another clothing store, the business may expand too fast

and the management of McKenzie Ltd has no experience in managing another big business therefore the company

might fail.

However, McKenzie Ltd may need to know that the speed of internal growth is slower than that of external growth

because it takes time to accumulate enough profit for expansion. Therefore, in this competitive environment, the

business may lose its opportunity as the competitors who choose to opt external growth may have a higher market

share. (Evaluation)

Judgement:

Evaluative discussion of expansion through internal growth (i.e. stating the limitation of internal growth, i.e. time

length and apply it to the McKenzie Ltd situation) [9 – 10]

Analysis of why expansion through internal growth is a business option. [6 – 8]

Show understanding of expansion through internal growth. [3 – 7]

Limited discussion of growth / internal growth [1 – 2]