Topic Tests for Unit 4a: Making business decisions
For the 2013 examinations, based around the Superdry pre-release material
For Edexcel’s Business Studies A2 level, 6BS04
By Ned Browne, Carly Evans and Gerald Wood
Contents
These Topic Tests are designed to give teachers assessment tools, which they may use at the
end of teaching successive sections of Unit 4a. They may also be used by teachers to
familiarize themselves with the issues raised by the Case Study prior to teaching the course.
There are four tests outlined below:
Topic test title Specification
reference
Page
Section 1: Corporate objectives and strategy 4.3.1a 1
Section 2: Making strategic decisions 4.3.2a 13
Section 3: Assessing competitiveness 4.3.3a 25
Sections 4: Company growth 4.3.4a 37
Each Topic Test has four key features:
1. They are laid out in the general format of the Unit 4a examination, and so help students to
become familiar with the approach which they will face when they sit the Unit. Each Topic
Test uses the 2013 pre-release material on Superdry / SuperGroup.
2. They cover the core concepts in the relevant section of the syllabus.
3. Accompanying each test is a mark scheme, based around Edexcel’s own mark schemes.
These both assist the teacher in marking students’ work, and help students understand what
they need to do to improve their mark.
4. Also accompanying each test is a set of suggested answers. These are rather longer than
most students would have time to produce in an examination setting, and also contain more
analysis and detail than students would be expected to know. They will therefore be useful as
a source of further study.
Licence
The printed material is sold with a licence to photocopy for the benefit of staff and students
within the purchasing institution, but not further afield.
Disclaimer
While the authors are all experienced teachers of Edexcel’s A level specifications, the
endorsement of Edexcel has neither been sought nor given for this work.
August 2012
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Instructions
Use black ink.
Fill in the boxes at the top of this page with your name, centre number and candidate
number.
Answer all questions in both Section A and Section B.
You may use a calculator.
Information
Total marks for this paper is 80.
Quality of written communication will be taken into account in Questions 7a and 7b
in Section B. This is indicated with an asterisk*. You should take particular care on
this question over spelling, punctuation, grammar and clarity of expression.
Advice
Read each question carefully.
Keep an eye on the time.
Try to answer every question.
Check your answers if you have time at the end.
Write your name here
Centre Number Candidate Number
Unit 4a Topic Test based on
2013 pre-release, Section 1
Surname Other name
Unit 4a: Making Business Decisions
Section 1: Corporate objectives and strategy
Date:
Time: 1 hour 30 minutes
Paper Reference
6BS04/01
You need the pre-issued Evidence A to I for this
examination paper
Total Marks
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SECTION A
Evidence A to I was pre-issued before the date of the examination.
Using the Evidence and your own knowledge, answer all six questions (total 30
marks).
Time allowed (35 minutes).
Additional Evidence J
Superdry: from rebel outfit to the corporate mainstream?
SuperGroup began with the founding of Cult Clothing in 1985 by Julian Dunkerton
and a former business partner.
After three E’s at A level, Dunkerton hired an indoor market stall in Cheltenham and
called it Cult Clothing. The original Cult Clothing store led to the creation of others
across the country, many of them in university towns. Over 15 years, he grew it into
a nationwide chain with an annual turnover of £17 million. "At 19, I found I
understood this market. To be a good retailer you have to understand people and make
them happy.”
Superdry employs young trendy Brand Ambassadors to promote the brand. Its shops
play loud music and are staffed by good-looking employees draped in Superdry’s
clothes. It is considered a hip company to work for – no one wears a tie.
The company has come a long way. In March 2010 the business undertook a
successful flotation on the London Stock Exchange. By July 2012 the company was
valued at £1.2 billion.
However, concern has been raised that its customers will desert the brand if it
becomes too mainstream. Profit warnings early in 2012 have certainly raised alarm
bells.
The company recently hired John Lewis Partnership's director of fashion and beauty,
Susanne Given, as chief operating officer. Business analysts have suggested that this
is a sign of Superdry’s changing corporate culture.
Sources: media articles written in 2011-12
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1. What is meant by ‘corporate culture’ (Evidence J, final paragraph)? (2)
2. What is meant by ‘Corporate Social Responsibility’ (Evidence G)? (2)
3. Explain how Superdry has sought to gain competitive advantage. (4)
4. Briefly comment on Superdry’s business (i.e. corporate) strategy (Evidence
B). (5)
5. Analyse the usefulness of the Boston Matrix for companies such as Superdry.
(8)
6. Assess the likely demands placed on Superdry’s resources (financial, physical,
human) given its rapid expansion. (9)
SECTION B
Decision-making report
Using ALL the Evidence and your own knowledge, answer both parts of the
question (total 50 marks).
Time allowed (55 minutes).
7 *(a) With reference to Evidence J, evaluate the likely impact of Superdry’s
corporate culture on its past growth and future growth potential. (20)
7 *(b) Evaluate the potential for conflict between Superdry’s ethical ideals outlined
in Evidence G, and the conventional business objectives of increasing turnover and
profit. (30)
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Unit 4a, Section 1– Corporate objectives and business strategy: mark
scheme Note: Any acceptable answer which shows the range of skills required may score full marks
Q. 1 What is meant by ‘corporate culture’ (Evidence J, final paragraph)? Mark
Knowledge up to 2
A definition of corporate culture i.e. the collective behaviour of employees
based on a shared set of assumptions
Note: 1 mark for partial explanation; a valid extension or example will
gain the second mark.
1-2
Total: 2
Q. 2 What is meant by ‘Corporate Social Responsibility’ (Evidence G)? Mark
Knowledge up to 2
A definition of CSR i.e. self-regulation by companies in pursuit of ethical
objectives
Note: 1 mark for partial explanation; a valid extension or example will
gain the second mark – e.g. reference to Boston Matrix.
1-2
Total: 2
Q. 3 Explain how Superdry has sought to gain competitive advantage. Marks
Knowledge up to 2
A definition of competitive advantage e.g. some aspect of the business that
improves its position relative to its rivals in the eyes of consumers
Application up to 2 Rapid growth of product mix (1), applied e.g. Evidence F (1)
Flagship store (1), applied e.g. top Regent St location Evidence I (1)
Focus on trendy market segments (1), applied e.g. students Evidence A (1)
Any other valid point (1); applied (1)
1-2
1-2
Total: 4
Q. 4 Briefly comment on Superdry’s business (i.e. corporate) strategy
(Evidence B).
Marks
Knowledge up to 2
Of corporate strategy e.g. the long-term planning needed to achieve the
mission, often expressed in terms of growth of profits or turnover
Application up to 2
Growth targets mentioned in Evidence B with clear market segmentation
strategy
Analysis - 1
Evidence of success – e.g. reference to Evidence C or D or H
1-2
1-2
1
Total: 5
Q. 5 Analyse the usefulness of the Boston Matrix for companies such as Superdry.
Level Marks Descriptor Possible content
1 1-2 Knowledge/understanding: of
Boston matrix
Reference to market growth &
market share
2 3-4 Application: of the matrix to
Superdry
Potential identification of stars,
cash cows etc from Evidence F
3 5-6 Analysis: how useful is this for
companies such as Superdry?
Help Superdry to focus on rising
stars e.g. …
4 7-8 Evaluation: some balanced wrap-up E.g. on the other hand, loyalty to
fashion items is weak; the overall
brand is probably much more
important than individual lines
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Q. 6 Assess the likely demands placed on Superdry’s resources (financial, physical,
human) given its rapid expansion.
Level Marks Descriptor Possible content
1 1-2 Knowledge/understanding: of
financial, physical & human
resources
Brief explanation of any two
2 3-4 Application: to Superdry E.g. Evidence H balance sheet for
financial & physical resources
3 5-7 Analysis: e.g. how rapid expansion
would place demands on these
resources
e.g. €7 million cash paid to owner
of CNC (Evidence D); decline in
acid test ratio in Evidence H
4 8-9 Evaluation: some balanced wrap-up On the other hand, most of the
CNC purchase paid for by offering
shares
*Q.7a With reference to Evidence J, evaluate the likely impact of Superdry’s corporate
culture on its past growth and future growth potential.
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding
present - e.g. of corporate culture
and/or past growth & future
growth potential
QWC: struggling with business
terms, frequent errors in spg
Growth in terms of turnover or profit,
measured in % pa
2 3-6 Application: e.g. reference to
corporate culture in Evidence J
QWC: uses some business terms,
weak style, some spg errors
Youth & university culture initially,
perhaps turning into something more
‘mainstream’
3 7-13 Analysis
7-10: elementary discussion
attempted but lacks depth /
development
11-13: clear analysis with some
depth / development
QWC: comfortable use of
business terms, appropriate style,
reasonable-to-good spg
Initial appeal based entirely on youth
/ hip image; essential for its growth
But what about future growth? A
youth image may help it expand
internationally – as indeed it is doing
4 14-20 Evaluation:
14-17: some evaluative
summation
18-20: informed, realistic and
personal conclusion
QWC: effective use of business
terms, organised, coherent and
fluent response, good-to-excellent
spg
On the other hand, are there enough
young people with enough money for
sales to continue to grow?
Or will it have to move to the
‘mainstream’ (Evidence J)?
Trick is – can it move mainstream
without losing its existing core
customers?
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*Q.7
b
Evaluate the potential for conflict between Superdry’s ethical ideals outlined in
Evidence G, and the conventional business objectives of increasing turnover and
profit.
Leve
l
Marks Descriptor Possible content
1 1-2 Knowledge and understanding present i.e.
of ethical ideals
QWC :struggling with business terms,
frequent errors in spg
e.g. treatment of all
stakeholders, not just
shareholders
2 3-6 Application: e.g. to Superdry
QWC: uses some business terms, weak
style, some spg errors
e.g. Evidence G refers to
honesty, SEDEX, monitoring
of suppliers
3 7-17 Analysis:
Low level 3: 7-10 marks – basic
commentary
Mid-level 3: 11-13 marks – makes a range
of analytical points
High level 3: 14-17 marks – makes a range
of analytical points in depth
QWC: comfortable use of business terms,
appropriate style, reasonable-to-good spg
Detailed look at supplier
supervision – which ones will
raise costs, which ones will
not?
Being ethical has both a
monitoring cost, and an
underlying cost if goods
become more expensive
4 18-30 Evaluation:
Threshold Level 4: 18-19 marks; some
evaluative summation
Low Level 4: 20-22 marks; a narrow range
of evaluation
Mid Level 4: 23-26 marks; wide range of
evaluation, if not at the highest level
High Level 4: 27-30 marks; informed,
realistic and personal summation based on
detailed consideration – at the highest level
QWC: effective use of business terms,
organised, coherent and fluent response,
good-to-excellent spg
Have to balance these
additional costs against
possible extra sales (whether
due to positive publicity or
avoidance of bad); increased
motivation for workforce and
effective PR.
Also depends on positioning
– difficult for a cost leader to
pay for being ethical. But
Superdry hardly one of those.
Can probably afford a little
ethical stardust.
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Q Know-
ledge
Appli-
cation
Analy-
sis
Evalu-
ation
Total Specification coverage (all 4.3.1a)
1 2 2 Corporate culture
2 2 2 Corporate Social Responsibility
(CSR)
3 2 2 4 Competitive advantage
4 2 2 1 5 Corporate strategy
5 2 2 2 2 8 Boston matrix
6 2 2 3 2 9 Effects of strategic & tactical
decisions on human, physical &
financial resources
*7a 2 4 7 7 20 Corporate culture
*7b 2 4 11 13 30 Potential conflicts of ethical
behavior and profit-based
objectives
Total 16 16 24 24 80
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Unit 4a, Section 1 – Corporate objectives and business strategy:
suggested answers
SECTION A: about 35 minutes, 6 questions, 30 marks
The total of 30 marks is split roughly 10 for Knowledge/Understanding, 10 for Application, 6
for Analysis and 4 for Evaluation:
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
1. What is meant by ‘corporate culture’ (Evidence J, final paragraph)? (2)
Answer: The corporate culture of a company describes the collective behaviour of its
employees, based around a shared set of assumptions. Examples might be a formal culture,
based on respect for the boss, or a relaxed, creative culture where employees are expected to
work out their own schedules. In Superdry’s case, the culture is young and trendy.
2. What is meant by ‘Corporate Social Responsibility’ (Evidence G)? (2)
Answer: Corporate Social Responsibility describes the self-regulation that many companies
impose on themselves with respect to their ethical behaviour. This might includes general
values such as honesty (as Superdry mentions at the start of Evidence G) and/or more specific
approaches outlining – for example – commitments to the environment or to their suppliers.
3. Explain how Superdry has sought to gain competitive advantage. (4)
Answer: A company gains competitive advantage if it manages to place itself in a favourable
position relative to its rivals. This could include lower costs, higher quality, or a stronger
brand profile. In the case of Superdry, one way it has sought competitive advantage is by
leasing a prime site in the world-famous Regent Street in London. Only the strongest brands
can afford a site in Regent Street, so setting up shop there sends a strong signal that your
brand has ‘arrived’.
Another way it seeks to gain competitive advantage is to react very quickly to changing
fashion. We see in Evidence F how it is widened its T-shirt graphics from just six designs to
over 400 in the space of eight years. Having chosen a fast-moving industry, Superdry must –
in its own words – ‘continually evolve’ its brand.
4. Briefly comment on Superdry’s business (i.e. corporate) strategy (Evidence B). (5)
Answer: A corporate strategy is the long-term direction that a business takes in order to
achieve its corporate objectives and so – ultimately – achieve its mission. It may be couched
in terms of targets for turnover, profits, geographical reach or market share.
In Superdry’s case, we are told in Evidence B that the emphasis is on growth ‘in the UK and
internationally’ with the focus being on its chosen market segment, namely youth fashion.
Given Britain’s strong reputation in creative industries, seeking to leverage the brand onto an
international scale is an obvious strategy. We see in Evidence D that they have already
embarked on this with the acquisition of CNC.
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However, the fashion industry is notoriously fickle. Today’s hot brand can very quickly
become yesterday’s news, so Superdry should take care not to over-extend itself. Sensibly,
the purchase of CNC is being funded predominantly by the sale of equity, rather than
following the riskier path of taking out a loan.
5. Analyse the usefulness of the Boston matrix for companies such as Superdry. (8)
Answer: The Boston matrix is a way of categorising a company’s product mix on two
criteria, the market share of each product and the rate of market growth in that product area.
So products in low-growth, mature industries are called cash cows if they have a large market
share and dogs if they do not. In fast-growing industries, the equivalent products are called
rising stars and problem children.
In Evidence F we are given some indication of what Superdry’s product mix is, with the well-
established T-shirts, polos and hoodies presumably having a high market share. By contrast,
the ‘development’ categories like luggage and fragrance are areas where Superdry, as yet, has
a low market share.
However, none of these categories could be regarded as particularly high growth – at least not
in the UK where the entire clothing market is mature, and there is very little possibility of
technical developments leading to radically new products. The Boston matrix may, therefore,
work better in a traditional manufacturing context, where there is a greater possibility of
genuinely new products.
Nonetheless, one of the main points from the Boston matrix does hold good. Superdry will
have its cash cows, presumably its UK core range, and this can be used to fund development
of other markets. These might either be selling the same products in more countries, or
extending the product range in the UK. The basic message from the Boston matrix about the
need to fund tomorrow’s winners from today’s successes holds good in every industry.
6. Assess the likely demands placed on Superdry’s resources (financial, physical, human)
given its rapid expansion. (9)
Answer: Superdry is expanding both in terms of product range (see Evidence F), and in terms
of geographical spread (Evidence G). The combination of these two growth paths is evident
in the balance sheet (Evidence H) with its near doubling of both stock and short-term
creditors over the single year 2010-11.
However, it does not follow that it is financially stretched. We are told it specialises in
‘affordable, premium quality clothing’ which sounds like the products will have a healthy
gross margin. Certainly there appears to be no shortage of cash in the business, though it is
noticeable that cash reserves have not grown with the rest of the business over 2010-11.
Nor will physical resources prove much of a stumbling block. High Streets have been
decimated by a combination of the 2008-09 recession and the switch to Internet shopping, so
it will be relatively easy to lease space. Evidence C shows this to be the case, with a rapid
growth over 2007-11 in both stand-alone stores and concessions.
The main pinch point is likely to come in the area of human resources. Finding staff for its
stores and concessions will be no problem, as the same trends mentioned earlier that have left
High Street stores vacant will also have left plenty of shop assistants looking for work.
However, the same cannot be said for top management which is often the input in shortest
supply. Fashion retailing needs a particularly sure touch given the hyper-competitive, ever-
changing nature of the market. We read in Evidence J that Superdry has sought to address
this issue by hiring John Lewis’ director of fashion and beauty, Susanne Given. But John
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Lewis, with its proud co-operative traditions stretching back many decades, is a very different
sort of store to Superdry.
In conclusion, we will have to wait and see whether Susanne Given – and indeed the new
team from CNC mentioned in Evidence D – can effectively manage the tensions created by
Superdry’s rapid expansion, as it transitions from upstart outsider to the fashion mainstream.
SECTION B: about 55 minutes, 2 questions, 50 marks
These questions involve extended writing, and the total of 50 marks is split roughly 6 for
Knowledge/Understanding, 6 for Application, 18 for Analysis and 20 for Evaluation. Note
the strong contrast with Section A, where two-thirds of the marks were for
Knowledge/Understanding and Application.
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
*7a With reference to Evidence J, evaluate the likely impact of Superdry’s corporate culture
on its past growth and future growth potential. (20)
Answer: A company’s corporate culture describes the way its employees think and act,
based on their understanding of who they are, and what their company is about. In Evidence
J we have several indications that Superdry has (or at any rate had) a young, fashion-
conscious culture. Stores were set up in university towns, it is described as a hip company
where ‘no one wears a tie’ and it employs staff who are ‘young trendy … good-looking’.
Given that its target market, as described in Evidence B, is youth fashion it was absolutely
essential that it had this image. It would have been impossible to establish the brand if its
staff had worn suits and ties! Its corporate culture was, therefore, an absolutely essential part
of its early growth.
However, just because its corporate culture was an essential part of its early growth, we
should not imagine that that was all there was to it. For every Julian Dunkerton whose market
stall turns into a billion-pound business, there will be thousands of others who remain
stallholders all their lives. Incredibly hard work, all-round managerial skills and a healthy
dose of luck are all likely to have been essential ingredients of its early growth. Yes, the
corporate culture was necessary, but it was by no means sufficient on its own.
With regard to its future growth potential, the existing corporate culture is both a blessing and
a curse. It is a blessing in its international expansion plans, as there are tens of millions of 18-
25s worldwide, many of whom are getting a lot richer than the previous generation at a
similar age. Beyond Europe lie both North America and the growing BRIC economies,
which are ready to spend serious money on top UK brands, as we have seen in a different
market with the recent soaring overseas sales of Jaguar-Land Rover. If Superdry can ride on
its ‘Cool Britannia’ image, supported by David Beckham among others, then the £1.2 billion
valuation mentioned in Evidence J may only be the beginning.
On the other hand, as the years pass, its existing core customers are getting older. The
question then becomes, how does it hang onto its 20-year-old customers of 2010 when they
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are 30 years old in 2020? Or does it accept that it will lose them, and be replaced by the next
generation of 20-year-olds? The problem, of course, is that the next Superdry is already
there, hiding among a thousand market stalls, ready to sell a fresh image to the next
generation of teenagers. In reality, it is very difficult to stay at the cutting edge of teenage
fashion: the market is simply too unpredictable.
It is therefore likely that Superdry will tone down its youth image and become more of a
young-adult mainstream fashion label as it follows its existing customers up through their
twenties, taking advantage of their rising salaries. We already have an indication of this at the
end of Evidence J, where reference is made to its ‘changing corporate culture’, and its hiring
of a John Lewis director. John Lewis is a traditional retailer whose reputation is excellent,
but who is not particularly associated with either fashion or young people.
In conclusion, corporate culture is not an unchanging given. Superdry will attempt to hang on
to its youth fashion image, but at the same time make it easy for older people to buy its
products too. It will be the skill with which it manages to bridge this gap, developing a
corporate culture that appeals to the young but also to the not-quite-so-young, that will
determine its future growth path. With skill and luck, it may succeed in appealing to both age
groups. The danger is that it ends up appealing to neither, as is suggested at the end of
Evidence J by the ‘profit warnings early in 2012’.
*7b Evaluate the potential for conflict between Superdry’s ethical ideals outlined in
Evidence G, and the conventional business objectives of increasing turnover and profit. (30)
Answer: Like many businesses, Superdry claims to have ethical ideals, that is, to act in a
moral and responsible fashion in all its business dealings. Evidence G comes from
Superdry’s own share offer prospectus, and provides some indication of what they think
acting responsibly means in practice.
This includes a general statement about acting ‘with integrity and honesty’ (paragraph 1).
There is no conflict between this aim and their aims of increasing turnover and profit.
Superdry relies on repeat business from its customers and this will not be possible to achieve
without a great deal of trust. If Superdry were to be constantly in the newspapers for claims
about unfair dismissal of staff, exploitation of suppliers or a miserly attitude towards
customers wishing to return goods, then that level of trust would soon evaporate. Of course,
if Superdry were cost leaders selling itself on the basis of the lowest price, then its customers
might be prepared to tolerate a poor reputation. Some low-cost airlines, for example,
positively revel in their less-than-perfect reputations. However, for a brand which describes
itself as selling ‘affordable, premium-quality clothing’ (Evidence B), customers will want the
brand to have a feel-good factor about it. There is no surer way of losing a feel-good factor
about a brand than to have a constant drip of negative publicity. The best way to avoid this is
to have nothing to hide in the first place –in other words, to act with integrity and honesty.
Superdry’s commitment to ethical ideals is further spelled out in some detail in the rest of
Evidence G. In particular, the way suppliers operate is discussed in some detail. Recent
adverse publicity about Western garment manufacturers profiting from ‘sweatshops’ in poor
countries have brought this matter very much to the forefront of public discussion. It would,
therefore, be virtually impossible for a new brand like Superdry not to have a policy on this
issue.
The question is: will this damage profits? The whole point of making garments in poor
countries is to benefit from the low wages that local workers are paid. Garment manufacture
is still a labour-intensive industry, which is why it gravitates to low-wage countries. These
are the places that have a comparative advantage in these sectors of the economy, and – as the
theory indicates – they actually stand to gain from such specialisation along with everyone
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else. If Superdry’s commitment to acting in a socially responsible manner means that their
suppliers in Bangladesh, China and Vietnam have to pay the same wage rates as those paid in
rich countries, then Superdry would have to pay a lot more for its clothes than everyone else,
and their profits will indeed be damaged.
However, a careful reading of Evidence G shows that Superdry’s stated policy with regard to
its suppliers is actually going to cost it very little. First of all, the organisation which
Superdry has joined (called SEDEX) will not be calling Superdry to account. The name ‘data
exchange’ suggests it is an information-sharing forum, rather than an organisation empowered
to conduct surprise inspections on Superdry’s suppliers. Superdry remains firmly in the
driving seat, simply using SEDEX’ ‘system and tools’.
Then the final paragraph simply states that Superdry ‘expects’ its suppliers to adopt ‘fair and
ethical labour practices’. There is no suggestion as to what action – if any – Superdry might
take if these expectations were not fulfilled. Superdry has said it expects its suppliers to use
‘no forced labour’ and ‘no physical maltreatment’. Refusing to profit from slavery, and from
beating up workers, is hardly at the cutting edge of good practice!
As far as costs go, the key issues are the wage levels paid and the working hours expected in
the Superdry supplier factories. Here, no assurances are given at all. Instead, we are told that
wages will be ‘fair’ and working hours ‘reasonable’ (final paragraph, Evidence G). These
phrases are capable of almost any interpretation. They are so vague as to be meaningless.
In conclusion, on the basis of the evidence presented to us, there is no reason to think that
Superdry has committed itself beyond the bare minimum expected of an upmarket clothing
brand. Its rivals will all have similar statements, some of which may indeed be worded rather
more strongly than the modest offering we have here. Its ethical ideals, such as they are,
seem unlikely to cause any serious conflict with the conventional business objectives of
increasing turnover and profit.
Of course, if Superdry had taken a stronger ethical stance, then this might well have increased
its costs. In such a case, it is still possible that profits would be unaffected. It might well be
possible to pass on these increased costs in return for the extra brand value that a strong
ethical stance would create. This is the path taken by Fair Trade products where, in return for
outside endorsement from the Fair Trade organisation, workers really are paid more than they
otherwise would be paid – and this extra is passed on to consumers in the form of higher
prices.
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Instructions
Use black ink.
Fill in the boxes at the top of this page with your name, centre number and candidate
number.
Answer all questions in both Section A and Section B.
You may use a calculator.
Information
Total marks for this paper is 80.
Quality of written communication will be taken into account in Questions 7a and 7b
in Section B. This is indicated with an asterisk*. You should take particular care on
this question over spelling, punctuation, grammar and clarity of expression.
Advice
Read each question carefully.
Keep an eye on the time.
Try to answer every question.
Check your answers if you have time at the end.
Write your name here
Centre Number Candidate Number
Unit 4a Topic Tests based on
2013 pre-release, Section 2
Surname Other name
Unit 4a: Making Business Decisions
Section 2: Making strategic decisions
Date:
Time: 1 hour 30 minutes
Paper Reference
6BS04/01
You need the pre-issued Evidence A to I for this
examination paper
Total Marks
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SECTION A
Evidence A to I was pre-issued before the date of the examination.
Using the Evidence and your own knowledge, answer all six questions (total 30
marks).
Time allowed (35 minutes).
Additional Evidence J
SuperGroup slows in 2012
In April 2012, SuperGroup, owner of the Superdry clothing brand, announced
disappointing financial results.
It was acknowledged that the current economic environment had contributed to the
company’s difficulties. However the Chairman, Peter Bamford, admitted that the
“problems have largely been self-inflicted”.
In the past three years, Superdry has grown at a rapid pace. There has been a
particular focus on overseas expansion as the following figures indicate:
Opened 37 new stores in the UK (up from 42 to 79)
Opened 72 new stores in other countries (up from 29 to 101)
Suffered from stock shortages
Not increased the management and operational capacity sufficiently to keep
up with the increasing size of the business, leading to a declining Average
Rate of Return on new stores
Some business analysts have suggested that Superdry should have undertaken a more
thorough investment appraisal before embarking on such a rapid expansion.
Sources: adapted from media reports, mid-2012
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1. What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? (2)
2. What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? (2)
3. Explain how Net Present Value calculations are useful when making
investment decisions, such as acquiring a franchise partner (Evidence D). (4)
4. Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s
strategic direction. (5)
5. Assess the usefulness of Critical Path Analysis for Superdry when opening a
new store, such as the Regent Street branch (Evidence I). (8)
6. Assess the role of contingency planning for Superdry, when launching new
product categories. (9)
SECTION B
Decision-making report
Read the following evidence carefully.
Using ALL the evidence and your own knowledge, answer both parts of the
question (total 50 marks).
Time allowed (55 minutes).
7. Superdry is considering the development of their product range (Evidence F).
Some of the options being considered are to:
a. Develop the core range
b. Introduce womenswear
c. Develop and introduce a range of luggage
Option Probability of market reaction and
projected profit
Good Moderate Poor
a. 50% £60m 30% £30m 20% £10m
b. 30% £100m 30% £30m 40% - £20m
c. 30% £30m 50% £nil 20% -£10m
The estimated probability factors are based on the reactions of a focus group
of Superdry’s target market.
*(a) Construct a decision tree based on the information above, and advise Superdry
how to proceed. (20)
*(b) Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J).
(30)
16
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Unit 4a, Section 2 – Making strategic decisions: mark scheme
Note: Any acceptable answer which shows the range of skills required may score full marks
Q. 1 What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? Mark
Knowledge up to 2
Simple definition e.g. the average annual profit of an investment over its
lifetime, expressed as a percentage of the initial investment outlay (1); any
extension such as fuller explanation, or example (1)
Does not have to be related to Evidence J, though this is one way to gain
marks - provided information is not simply repeated
1-2
Total: 2
Q. 2 What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? Mark
Knowledge up to 2
Simple definition e.g. the assessment of a proposal to put money into a
project with the hope of a future return (1); any extension such as fuller
explanation, or example (1)
Does not have to be related to Evidence J, though this is one way to gain
marks - provided information is not simply repeated
1-2
Total: 2
Q. 3 Explain how Net Present Value calculations are useful when making
investment decisions, such as acquiring a franchise partner (Evidence D).
Marks
Knowledge up to 2
Simple explanation e.g. to work out how much a proposed investment is
currently worth, bearing in mind that money received in the future has a
lower value than money in the present (1); some extension e.g. the basis
on which future money is discounted to arrive at a present value, or the
significance of ‘net’ (1)
Application up to 2
Any example – including acquiring a franchise partner; producing notional
figures one way to achieve marks, but not necessary
1-2
1-2
Total: 4
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Q. 4 Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s
strategic direction.
Marks
Knowledge up to 2
Some understanding of the matrix, e.g. four expansion options based on
whether a) new markets, and b) new products are developed – or not (1-2)
Application up to 2
Examples of product development and/or market development and/or
penetration and/or diversification
Analysis: 1
Some comment e.g. which expansion option (or options) seem most
important to Superdry
1-2
1-2
1
Total: 5
Q. 5 Assess the usefulness of Critical Path Analysis for Superdry when opening a new
store, such as the Regent Street branch (Evidence I).
Level Marks Descriptor Possible content
1 1-2 Knowledge/understanding:
Of CPA e.g. general definition, and some
extension
2 3-4 Application:
e.g. working out the length of CPA, what the
absolute requirements are to achieve it
3 5-6 Analysis:
Comment e.g. value of knowing ‘float’ for
various activities; need to factor in slippage
4 7-8 Evaluation: some balanced
wrap-up
e.g. value as a means of reducing
management costs if opening a series of
stores; basic CPA only has to be done once.
Limitation – needs to be efficiently executed
Q. 6 Assess the role of contingency planning for Superdry, when launching new product
categories.
Level Marks Descriptor Possible content
1 1-2 Knowledge/understanding:
Definition with some extension e.g. likely
contingencies
2 3-4 Application:
e.g. explanation of relevant contingencies,
possibly including failure of product
category
3 5-7 Analysis:
Need to ‘protect the downside’ commented
upon.
4 8-9 Evaluation: some balanced
wrap-up
e.g. protecting the downside not in itself a
strategy for success; just one building block
in a much wider set of business skills
required
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*Q.7a Construct a decision tree based on the information above, and advise Superdry how
to proceed.
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding
present.
QWC :struggling with business terms,
frequent errors in spg
Basic understanding of decision
trees
2 3-6 Application: to figures in preamble
QWC: uses some business terms, weak
style, some spg errors
Decision square with three
options (1); three circles each
with three outcomes (1);
numerical value of each decision
identified (1-2)
3 7-13 Analysis
7-10: elementary discussion attempted
but lacks depth / development
11-14: clear analysis with some depth
/ development
QWC: comfortable use of business
terms, appropriate style, reasonable-
to-good spg
Why core range development
offers the greatest potential
returns for the lowest risk;
possibility of choosing 2 or 3
options – all have net positive
values;
particular value of womenswear
4 14-20 Evaluation:
15-17: some evaluative summation
18-20: informed, realistic and personal
conclusion
QWC: effective use of business terms,
organised, coherent and fluent
response, good-to-excellent spg
Constraint of management time
and expertise (see end of
additional Evidence J); also,
possibly, of cash;
luggage is most different and has
limited upside – most obvious
one to sacrifice;
limitations of decision trees
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*Q.7b Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J).
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding present.
QWC :struggling with business terms,
frequent errors in spg
e.g. of expansion,
acquisition
2 3-6 Application: to Superdry’s overseas
expansion
QWC: uses some business terms, weak
style, some spg errors
Purchase of its leading
franchisee, CNC (Evidence
D); opening of new stores
overseas (Evidence J)
3 7-17 Analysis:
Low level 3: 7-10 marks – basic analysis
Mid-level 3: 11-13 marks – looks at a
range
High level 3: 14-17 marks – looks at a
wide range
QWC: comfortable use of business terms,
appropriate style, reasonable-to-good spg
Concepts that could be used
include brand leverage,
economies of scale,
Ansoff’s matrix, global
youth culture, competitive
advantage, market
saturation
4 18-30 Evaluation:
Threshold Level 4: 18-19 marks; some
evaluative summation
Low Level 4: 20-22 marks; a narrow range
of evaluation
Mid Level 4: 23-26 marks; wide range of
evaluation, if not at the highest level
High Level 4: 27-30 marks; informed,
realistic and personal summation based on
detailed consideration of a variety of points
– at the highest level
QWC: effective use of business terms,
organised, coherent and fluent response,
good-to-excellent spg
On the other hand: limited
management capacity &
product diversification also
taking place, cultural
differences of doing
business, competitive
responses, loss of focus on
core UK markets
Question Know-
ledge
Appli-
cation
Analy-
sis
Evalu-
ation
Total Specification coverage (all
4.3.2a)
1 2 2 Average Rate of Return
2 2 2 Investment appraisal
3 2 2 4 Net Present Value
4 2 2 1 5 Ansoff matrix
5 2 2 2 2 8 Critical Path Analysis
6 2 2 3 2 9 Contingency planning
*7a 2 4 7 7 20 Decision trees
*7b 2 4 11 13 30 Overseas growth
Total 16 16 24 24 80
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Unit 4a, Section 2 – Making strategic decisions: suggested answers
SECTION A: about 35 minutes, 6 questions, 30 marks
The total of 30 marks is split roughly 10 for Knowledge/Understanding, 10 for Application, 6
for Analysis and 4 for Evaluation:
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
1. What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? (2)
Answer: The Average Rate of Return is the average annual profit of an investment over its
lifetime, expressed as a percentage of the initial investment outlay. The average profit is
calculated after deducting the cost of the equipment, so a true rate of return may be calculated
which may be compared with what the investment outlay could have earned if left in the bank
to gain interest.
2. What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? (2)
Answer: Investment appraisal is the process of assessing the likely returns on spending
money now on a project which, it is hoped, will generate returns in the future. Investment
appraisal may involve using formal mathematical techniques, but may equally well be
conducted informally by reflecting on the proposed project in the light of past experience.
3. Explain how Net Present Value calculations are useful when making investment decisions,
such as acquiring a franchise partner (Evidence D). (4)
Answer: The Net Present Value (NPV) of an investment is a way of working out how much
the expected future profit earned (minus the initial cost) is worth in today’s money. Future
earnings are discounted by the rate of interest in order to find out how much money you
would need today (if then invested in a savings account) to get the amount of money
generated by the project in the future. The equivalent in today’s money is known as the
‘present value’ of the future profit. So in the case of Superdry’s acquisition of CNC (see
Evidence D), expected future profits could be discounted to arrive at their present value.
Only if they were substantially more than the €40 million asking price should the purchase
have gone ahead.
4. Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s strategic
direction. (5)
Answer: Ansoff’s matrix presents four expansion options, based on whether increased sales
are to come from new or existing markets, and from new or existing products. At least three
of these options are evident from the Evidence on Superdry’s expansion. Selling the existing
product range to more UK customers through the opening of new stores and concessions is an
example of market penetration, as shown in Evidence C. Selling a wider range of products to
existing customers is called product development, and we see this in Evidence F where the
number of T-shirt graphics has expanded from 6 to over 400. At the same time, the
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expansion into new overseas markets recorded in Evidence D and F is an example of market
development.
So in the case of Superdry, Ansoff’s matrix shows that the company is expanding in almost
every direction. Only Ansoff’s fourth expansion option of selling totally new products into
totally new markets (known as diversification) is not explicitly mentioned in the Evidence.
5. Assess the usefulness of Critical Path Analysis for Superdry when opening a new store,
such as the Regent Street branch (Evidence I). (8)
Answer: Critical Path Analysis (CPA) is a means of working out in detail which small tasks
need to be done when in order to get a project completed in the shortest possible time. In
order to work out a CPA, you need to define all the tasks that need doing, the time each task
will take, and which tasks cannot be started until other defined tasks have been completed.
For example, a new store cannot be painted in Superdry colours until after the electrics have
been installed and the plaster work repaired.
CPA will be an absolutely essential tool for Superdry. Every new store opening will need
very much the same set of procedures to follow, so it will be a great time saver to get CPA
worked out for one new store, and then re-use it (with minor modifications) for all the others.
Unit costs of opening should fall, and – crucially – the new stores should get under way and
earning money as soon as possible.
However, drawing up a schedule – which is what CPA amounts to – does not in itself get any
work done. As well as the plan, dedicated implementation is also required, with managers
thinking flexibly when unexpected obstacles crop up. So if, for example, a burst water main
flooded the shop during refurbishment, staff and managers might have to work evenings and
weekends to make up the lost time and stick to the published launch date. In conclusion,
good technical analysis such as that provided by CPA has to be matched with a motivating
management team and a can-do attitude to get the job done.
6. Assess the role of contingency planning for Superdry, when launching new product
categories. (9)
Answer: Contingency planning describes the process of working out what to do if something
bad (i.e. the ‘contingency’) happens. Some contingency planning will be relatively
straightforward, such as taking out buildings insurance in the event of flood or fire, and ‘key
man’ insurance in case the company’s most important person falls ill and is unable to work.
In the case of launching a new product category, the most likely contingency to guard against
would be if the new category flops. In Evidence F, we see that Superdry is planning to move
into luggage and fragrance – quite a stretch from T-shirts and hoodies, and therefore quite a
risk.
The role of contingency planning will revolve around protecting the downside i.e. making
sure that the company loses as little money as possible if the new product launch doesn’t
work. One way of doing this would be to order a relatively small amount of stock prior to
launch, so that if it fails to sell the company will not be left with too much unsold stock.
Similarly, rather than employing extra staff right away, it might make better sense to offer
overtime to existing staff before going to the expense of recruiting and training extra people
who might then not be needed.
However, contingency planning will be only one very small part of the overall planning
needed for a new product launch. While protecting the downside, Superdry will also want to
do everything in its power to make the new product category a success. Product development
and market research will be required, and possibly test marketing too. Then the launch itself
will need point-of-sale materials and probably the assistance of an advertising agency and a
PR company too. It is the task of management to juggle these many tasks and make sure that,
in the event of failure, there is a plan for that too.
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SECTION B: about 55 minutes, 2 questions, 50 marks
These questions involve extended writing, and the total of 50 marks is split roughly 6 for
Knowledge/Understanding, 6 for Application, 18 for Analysis and 20 for Evaluation. Note
the strong contrast with Section A, where two-thirds of the marks were for
Knowledge/Understanding and Application.
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
7. Superdry is considering the development of their product range (Evidence F). Some of the
options being considered are to:
a. Develop the core range
b. Introduce womenswear
c. Develop and introduce a range of luggage
Option Probability of market reaction and
projected profit
Good Moderate Poor
a 50% £60m 30% £30m 20% £10m
b 30% £100m 30% £30m 40% - £20m
c 30% £30m 50% £nil 20% -£10m
The estimated probability factors are based on the reactions of a focus group of Superdry’s
target market.
*7a Construct a decision tree based on the information above, and advise Superdry how to
proceed. (20)
Answer: A decision tree is a tool which helps a business person decide between different
courses of action, where the probabilities of various outcomes (and their financial
consequences) are known with some degree of certainty.
So in this case, developing the core range generates between £60 million and £10 million,
with an average outcome of £41 million once we have taken into account the relative
probabilities of each result. The figure is the sum of (50% x £60m) and (30% x 330m) and
(20% x £10m). Similar calculations value the introduction of womenswear at £31 million,
and the development and introduction of luggage at just £7 million.
These options are outlined in the decision tree below. The square represents a decision to be
made – in other words should the company choose option A and/or B and/or C? The circles
represent unknown outcomes with probabilities and financial outcomes attached.
With these figures, developing the core range (option A) generates the most financial return
on average and is also the safest option as no money is lost on the worst-case outcome.
However, all three options generate a positive financial return, so a case could be made for
doing all three together.
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However, one piece of information we have not been told is what the initial investment
expenditures are on the various options. We might guess that option A is the lowest-cost
option as it is the least radical. We might expect greater marketing expenditure to be
associated with penetrating new markets such as womenswear and luggage compared to
sticking with the same broad product category.
As well as the implications of following all three options together on cash flow, we also have
to consider whether Superdry has the management capacity to develop all three at the same
time. In other words, the probabilities of success with each investment may not be
independent of each other, with the ‘good’ outcomes significantly less likely to be achieved if
all three are attempted at once. Indeed, this is the criticism leveled at Superdry in Evidence J,
where business analysts suggested that ‘more thorough investment appraisal’ was needed
before such ‘rapid expansion’ took place.
Finally, as with any decision tree, the outcomes are only as good as the figures that are put
into the system in the first place, and we have very little evidence to guide us as to what the
probabilities are based on other than the single sentence that they come from ‘reactions from
a focus group’. Critical information which has not been included is any indication as to what
competitors’ responses might be. This would be particularly relevant to Options B and C,
where Superdry will need to take market share from others if it is to enter these new markets
successfully.
However, even on the limited information which we have, it is possible to recommend Option
A because of the relatively low risks and high returns expected. Options B and C could not
be recommended in addition without first acquiring significantly more information along the
lines suggested.
*7b Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J). (30)
Answer: In Evidence D we see that Superdry has spent €40 million acquiring CNC, its
‘leading global franchisee’. As a result of this move, sales of Superdry products will not
increase immediately because CNC are already selling them. Rather, the profit margin on
their sales should increase because CNC will no longer need to be paid for selling them. This
is the point made in the final paragraph of Evidence D where the Superdry founder says the
move will allow Superdry to “capture additional gross profit”.
Evidence J paints a broader picture showing how, over the course of three years, the number
of Superdry’s overseas stores has risen from 29 to 101 – over a threefold increase. This is a
much faster rate of expansion than UK stores, which have less than doubled in number (42 to
79) over the same time period. Superdry’s overseas expansion is, therefore, aimed at
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increasing both sales volume and profit margin. To the extent to which these objectives are
achieved, profits will rise.
We might ask, have we any reason to believe that they will be successful in these ambitions?
Part of the reasoning behind their overseas expansion is that Britain has strong creative
industries and is seen as a world leader in youth culture, particularly in areas such as music
and fashion. This comparative advantage can be exploited by individual companies who also
have a competitive advantage of their own. In Superdry’s case, the latest ‘from Britain’ youth
brand should have strong global appeal. Put another way, the main reason for rapid overseas
expansion is the opportunity it provides successfully to leverage the brand that is Superdry.
In any case, the risks are minimized insofar as CNC is already selling Superdry products in
Europe as a franchisee. So it is not as though Superdry is taking a complete leap in the dark.
Rather, it is leveraging its existing brand asset to scale up in overseas markets, some of which
at least it has already successfully penetrated.
On the other hand, Evidence J points to Superdry’s “disappointing financial results” in April
2012, and goes on to suggest that too-rapid expansion may be to blame. There is a warning
sign of impending trouble in Evidence C, where revenue between 2010 and 2011 is virtually
unchanged, even though UK outlets increased by nearly 50% at the same time. In other
words, sales per square foot were sharply down.
One set of disadvantages of rapid expansion are known as ‘management diseconomies of
scale’, i.e. the fact that large companies are harder to manage effectively than small ones.
These will be particularly significant when companies are expanding rapidly: there may
simply be too much for the existing management team to do. Particularly for a fashion brand
such as Superdry, it will be essential that each new product that is rolled out every few days
or weeks is fully up-to-date and successfully anticipates emerging trends. This is an
extremely difficult task for anyone to achieve, and if the senior management are engaged in
trying to understand overseas markets and negotiate acquisitions with people who will know
their own national markets far better than Superdry’s management ever will then you can
appreciate the scale of the task that Superdry has set itself.
Furthermore, with any acquisition, the price is an extremely important part of the whole deal.
We might wonder whether Superdry’s in-a-hurry management are going to be any match for
Luc Clément when it comes to settling on a price for Luc’s company, CNC (see Evidence D).
Superdry’s existing shareholders have had to dilute their own shareholding to give Luc an
equity stake in order to persuade him to sell so it is important that Superdry has got good
value from the deal.
In conclusion, a better strategy would have been to focus on building market share in the UK
where Superdry’s management expertise already lies. The very fast UK expansion shown in
Evidence C would have been enough to keep Superdry’s management team busy. This is not
to say that overseas markets should be ignored completely. Rather, they can be skimmed for
easy sales and high profit margins by the much less expensive option of building national
websites. These will not achieve the same degree of market penetration as a bricks-and-
mortar operation, but will demand much less in the way of capital outlay and – crucially – the
management time of Superdry’s team. Indeed, we see at the end of Evidence C that this
expansion path has been successfully introduced.
Superdry would have done better to leave it there – for now – while focusing on their
heartland UK operations. The key objective for a young brand has to be to establish its value,
its reputation, in its most important market. In the case of Superdry, it made a good start, but
the comment at the end of Evidence A that it still “flies under the radar” shows that it is not
yet well-established in the UK. Only when the brand is on a secure footing can the
management team afford the time to seek to go global.
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Instructions
Use black ink.
Fill in the boxes at the top of this page with your name, centre number and candidate
number.
Answer all questions in both Section A and Section B.
You may use a calculator.
Information
Total marks for this paper is 80.
Quality of written communication will be taken into account in Questions 7a and 7b
in Section B. This is indicated with an asterisk*. You should take particular care on
this question over spelling, punctuation, grammar and clarity of expression.
Advice
Read each question carefully.
Keep an eye on the time.
Try to answer every question.
Check your answers if you have time at the end.
Write your name here
Centre Number Candidate Number
Unit 4a Topic Tests based on
2013 pre-release, Section 3
Surname Other name
Unit 4a: Making Business Decisions
Section 3: Assessing competitiveness
Date:
Time: 1 hour 30 minutes
Paper Reference
6BS04/01
You need the pre-issued Evidence A to I for this
examination paper
Total Marks
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SECTION A
Evidence A to I was pre-issued before the date of the examination.
Using the Evidence and your own knowledge, answer all six questions (total 30
marks).
Time allowed (35 minutes).
Additional Evidence J
Financial information from SuperGroup plc
£m 2011 2010
Share capital (i.e. equity) 150.8 100.5
Long term liabilities 38.9 16.6
Total capital employed 189.7 117.1
Revenue 237.9 139.4
Pre-tax profit 50.2 26.5
The above figures can be used to work out the Return on Capital, the profit margin
and the gearing ratio.
Source: SuperGroup annual report, 2011
Staff retention
As the economy began to improve in 2010, experts were warning companies,
particularly in the retail and service industries, to think carefully about their staff
retention planning. A survey conducted by PricewaterhouseCoopers (PwC) found that
an average of 10.4% of staff resigned from their job in 2009. They estimated that this
cost the UK £42bn in one year.
Experts urge companies to weigh up the short term cost of increasing salaries, against
the long term costs of additional recruitment and training. In 2010, SuperGroup Plc
employed an average of 798 people. In 2011, this had increased to 1,277.
Source: adapted from media reports in 2010 and 2011
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1. What is meant by ‘profit margin’ (Evidence J)? (2)
2. What is meant by ‘creditors’ (Evidence H)? (2)
3. Explain how SuperGroup would calculate their labour productivity. (4)
4. Calculate and comment on the significance of the change in SuperGroup’s
Return on Capital between 2010 and 2011 (Evidence J). (6)
5. (a) Using Evidence H, calculate the SuperGroup’s current ratio for 2010 and
2011. (4)
(b) Comment on the results of your calculations. (4)
6. Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing
ratio from 2010 to 2011. (8)
SECTION B
Decision-making report
Read the following evidence carefully.
Using ALL the evidence and your own knowledge, answer both parts of the
question (total 50 marks).
Time allowed (55 minutes).
7. The retail industry tends to have higher labour turnover than other industries.
*(a) Assess the usefulness of labour turnover and labour productivity
calculations in monitoring a company’s organisational effectiveness. (20)
*(b) To what extent do financial data enable us to judge the performance of a
company such as SuperGroup? (30)
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Unit 4a, Section 3 – Assessing competitiveness: mark scheme
Note: Any acceptable answer which shows the range of skills required may score full marks
Q. 1 What is meant by ‘profit margin’ (Evidence J)? Mark
Knowledge up to 2
1 mark for basic idea, e.g. profit as a percentage or proportion of turnover
Second mark for any extension or example e.g. from Evidence J figures
1-2
Total: 2
Q. 2 What is meant by ‘creditors’ (Evidence H)? Mark
Knowledge up to 2
1 mark for basic idea e.g. money owed in short-term
Second mark for any extension or example e.g. in Evidence H creditors
are likely to be money owed to factories supplying clothes
1-2
Total: 2
Q. 3 Explain how SuperGroup would calculate their labour productivity. Marks
Knowledge up to 2
For formulae – output / number of workers (1); some extension e.g.
output measured in financial or physical terms (1)
Application up to 2
For example, working out labour productivity from Evidence H (1); some
development e.g. Comparison of 2010 and 2011 figure
1-2
1-2
Total: 4
Q. 4 Calculate and comment on the significance of the change in SuperGroup’s
Return on Capital between 2010 and 2011 (Evidence J).
Marks
Knowledge up to 2
1 mark for basic definition – profit / capital employed
Second mark for any extension e.g. profit is annual figure, capital
employed includes both equity and loan capital
Application up to 2
Figure for 2010 (26.5/117.1 =) 22.6% [accept 22 or 23%] (1); and for
2011(50.2/189.7 =) 26.5% [accept 26 or 27%] (1)
Analysis up to 2
e.g. relatively small change – not very significant (1)
e.g. larger ROCE represents more efficient use of capital (1)
e.g. any extension on above point (1)
1-2
1-2
1-2
Total: 6
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Q. 5a Using Evidence H, calculate the SuperGroup’s current ratio for 2010
and 2011.
Marks
Knowledge up to 2
2 marks for clear formula: current assets / current liabilities
Application up to 2
For 2010: £67m / £24m = 2.8
For 2011: £120.2m / £42.7m = 2.8
1-2
1-2
Total: 4
Q. 5b Comment on the results of your calculations. Marks
Analysis up to 2
e.g. no change, even though both figures have almost doubled – since
they have increased at the same rate, the ratio is unaltered
Evaluation up to 2
e.g. secure ratios – 1.5 or 2.0 normally considered high enough;
SuperGroup should (on these figures) have no difficulty meeting
immediate debts
1-2
1-2
Total: 4
Q. 6 Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing ratio
from 2010 to 2011.
Level Marks Descriptor Possible content
1 1-2 Knowledge/understanding:
Formula plus brief explanation
2 3-4 Application:
Apply formula: 14.2% in 2010, 20.5% in
2011
3 5-6 Analysis:
Gearing ratio has increased i.e. become more
risky – outstanding loans have increased
faster than equity
4 7-8 Evaluation: some balanced
wrap-up
However, gearing ratio still very low: almost
80% of funding remains equity, so plenty of
room for further borrowing without undue
risk
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*Q.7a The retail industry tends to have higher labour turnover than other industries.
Assess the usefulness of labour turnover and labour productivity calculations in
monitoring a company’s organisational effectiveness.
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding present
QWC :struggling with business terms,
frequent errors in spg
Brief explanation of labour
turnover and labour productivity
(1 mark each)
2 3-6 Application: e.g. to Evidence J for
labour turnover
QWC: uses some business terms, weak
style, some spg errors
Explanation of why high labour
productivity and low labour
turnover are desirable
3 7-13 Analysis
7-10: elementary discussion attempted
but lacks depth / development
11-14: clear analysis with some depth
/ development
QWC: comfortable use of business
terms, appropriate style, reasonable-
to-good spg
Labour productivity: higher than
industry average might indicate
efficiency – or a more capital-
intensive approach;
labour turnover a higher-than-
industry-average might indicate
ineffectiveness – or simply
position as a cost leader
4 14-20 Evaluation:
15-17: some evaluative summation
18-20: informed, realistic and personal
conclusion
QWC: effective use of business terms,
organised, coherent and fluent
response, good-to-excellent spg
Organisational effectiveness best
measured by some more over-
arching variable, such as ROCE;
however, sharp changes year-on-
year in either labour turnover or
labour productivity would be
worth investigating as a possible
source of changing effectiveness
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*Q.7b To what extent do financial data enable us to judge the performance of a company
such as SuperGroup?
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding present
QWC :struggling with business terms,
frequent errors in spg
Shows understanding of 1 or 2
technical terms e.g. profit,
turnover, ROCE
2 3-6 Application: e.g. to SuperGroup
QWC: uses some business terms, weak
style, some spg errors
Turnover gives indication of
size; profit of potential return;
ROCE on efficiency of capital
3 7-17 Analysis:
Low level 3: 7-10 marks – basic
analysis
Mid-level 3: 11-13 marks – looks at a
range of factors
High level 3: 14-17 marks – looks at a
range of factors in depth
QWC: comfortable use of business
terms, appropriate style, reasonable-to-
good spg
Most commercial companies
are driven by financial data,
often looking at sales on a daily
basis;
key management tool;
value of time series – this year
compared to last;
value of comparisons with
rivals;
issue of how much financial
data is published, and how
much kept secret
4 18-30 Evaluation:
Threshold Level 4: 18-19 marks; some
evaluative summation
Low Level 4: 20-22 marks; a narrow
range of evaluation
Mid Level 4: 23-26 marks; wide range
of evaluation, if not at the highest level
High Level 4: 27-30 marks; informed,
realistic and personal summation based
on detailed consideration of a variety of
points – at the highest level
QWC: effective use of business terms,
organised, coherent and fluent
response, good-to-excellent spg
On the other hand:
financial data may fail to pick
up on longer-term
considerations e.g. company
culture, whether staff like
working there & whether
suppliers like the relationship;
financial data needs to be
complemented with ‘softer’
data e.g. labour turnover, staff
satisfaction surveys;
also financial data poor at
picking up long-term
preparedness e.g. how many
new products are in the
pipeline
Ques-
tion
Know-
ledge
Appli-
cation
Analy-
sis
Evalu-
ation
Total Specification coverage (all 4.3.3a)
1 2 2 Profit margin
2 2 2 Balance sheet
3 2 2 4 Labour productivity
4 2 2 2 6 Return on capital
5a 2 2 4 Current ratio
5b 2 2 4 Current ratio
6 2 2 2 2 8 Gearing
*7a 2 4 7 7 20 Labour turnover & productivity
*7b 2 4 11 13 30 Interpretation of financial statements
Total 16 16 24 24 80
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Unit 4a, Section 3 – Assessing competitiveness: suggested answers
SECTION A: about 35 minutes, 6 questions, 30 marks
The total of 30 marks is split roughly 10 for Knowledge/Understanding, 10 for Application, 6
for Analysis and 4 for Evaluation:
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
1. What is meant by ‘profit margin’ (Evidence J)? (2)
Answer: The profit margin of a company is its profit expressed as a proportion or a
percentage of its turnover. So, for example, in 2011 the profit margin of SuperGroup was
£50.2m/£189.7m = 26.5%. In other words, for every £100 of sales, just over £26 was profit.
2. What is meant by ‘creditors’ (Evidence H)? (2)
Answer: Creditors are people to whom you owe money. Where, as in Evidence H, these are
recorded under current liabilities, they refer to short-term debts. For a fashion company like
SuperGroup, these are likely to include the factories which manufacture their clothing.
3. Explain how SuperGroup would calculate their labour productivity. (4)
Answer: Labour productivity measures the output of a company per employee. The output
might be measured in physical terms (e.g. 15 cars manufactured per worker per year) or in
financial terms (e.g. £400,000 of turnover per employee).
Since SuperGroup is a retail brand selling dozens of different lines, a financial measure would
make most sense. Looking at the figures in Evidence J, their labour productivity in 2011 was
£237.9m / 1,277 = £186,296 per employee per year. However this figure will need to be
interpreted with caution, as lots of SuperGroup apparel is sold through franchisees whose
employees are not SuperGroup’s.
4. Calculate and comment on the significance of the change in SuperGroup’s Return on
Capital between 2010 and 2011 (Evidence J). (6)
Answer: The Return on Capital of a company measures its annual profit as a proportion of
the money invested in the business both by shareholders and by lenders such as banks. The
formula is Return on Capital = annual operating profit / capital employed.
So in 2010, SuperGroup’s ROC was (from Evidence J) [£26.5m / £117.1m =] 22.6%. In
2011, ROC rose to [£50.2m / £189.7m =] 26.5%.
Given that Britain and much of the world was still recovering from the recession of 2008-09,
these are very good figures and represent a much higher return on capital than a savings
account would give you of perhaps 4 or 5%. However, they are not spectacular compared
with the long-term norm of about 17% for UK business. Furthermore, the fashion business is
notoriously fickle, with today’s hot brand being tomorrow’s has-been. While ROC has
improved marginally, a one-year increase tells us very little about the long-term prospects of
the company. More significant than the ROC figure is the almost-doubling in profit. This,
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together with a comparable increase in turnover, tells us that SuperGroup grew very fast
indeed.
5. (a) Using Evidence H, calculate the SuperGroup’s current ratio for 2010 and 2011. (4)
Answer: The current ratio is the number of times that current liabilities are covered by
current assets, and is expressed by the formula, current ratio = current assets / current
liabilities. Current assets are cash, and the assets easily converted into cash – stock and
debtors. Current liabilities are short-term loans which have to be paid off within a year.
So from Evidence H, the 2010 current ratio is £67m / £24m = 2.8.
And the equivalent figure for 2011 is £120.2m / £42.7m = 2.8.
(b) Comment on the results of your calculations. (4)
Answer: In both years, for every £100 of current liabilities, SuperGroup has £280 of current
assets. Both current assets and current liabilities have almost doubled over the year, but
because they have increased at the same rate the ratio between them has stayed the same.
A ratio of 1.5 to 2.0 is normally considered secure enough. A current ratio of 2.8 indicates
that SuperGroup will have no difficulty in meeting its immediate debts. For example, if we
look at the position on 1st May 2011, £42.7 million is owed over the coming year, but there is
£32.2 million in cash and a further £35.7 million owed to SuperGroup. This alone is enough
to meet SuperGroup’s immediate debts, even without selling its £52.3 million of stock.
6. Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing ratio from
2010 to 2011. (8)
Answer: The gearing ratio of a company measures its long-term loans as a proportion of the
total money invested in the company. It is a measure of the degree of risk which the company
faces. If all its money is borrowed (i.e. gearing is 100%) then the overhead cost of the
interest payments will be very high and the position of the company correspondingly risky.
The reverse would be the case if no money had been borrowed and the company had instead
been funded entirely by share capital.
In the case of SuperGroup, it had borrowed £16.6 million as of 2010 against a total capital of
£117.1 million, so its gearing was 16.7/117.1 = 14.2%. This is a very low gearing, indicating
that the company was being financed almost entirely with shareholders’ money rather than
bank loans. By 2011, borrowings had more than doubled to £38.9 million while
shareholders’ investment in the company had risen less sharply, so the new gearing was
38.9/189.7 = 20.5%.
This indicates that the company has taken a slightly more risky position in 2011, with a larger
percentage increase in borrowing than in shareholders’ funds. However, the gearing ratio is
still very low, with only £1 in every £5 of company funds being borrowed. We may therefore
assume that the company still represents a very safe investment. Indeed, looking at the
financial side of the company, there is plenty of scope to borrow more money for expansion
and let the gearing ratio rise to 30% or so. However, just because banks are willing to lend
money it does not follow that companies should take up the offer. They also need the
opportunities to use the money profitably.
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SECTION B: about 55 minutes, 2 questions, 50 marks
These questions involve extended writing, and the total of 50 marks is split roughly 6 for
Knowledge/Understanding, 6 for Application, 18 for Analysis and 20 for Evaluation. Note
the strong contrast with Section A, where two-thirds of the marks were for
Knowledge/Understanding and Application.
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
7. The retail industry tends to have higher labour turnover than other industries.
*7a Assess the usefulness of labour turnover and labour productivity calculations in
monitoring a company’s organisational effectiveness.
(20)
Answer: Labour turnover measures the proportion of a company’s labour force which leaves
each year. Sometimes a distinction is made between ‘voluntary’ labour turnover where the
member of staff makes their own choice, and ‘involuntary’ labour turnover caused by
redundancy, dismissal or retirement. We read in Evidence J that voluntary labour turnover in
the UK was 10.4%, that is, roughly 10% of the entire UK workforce chose to leave their jobs.
Part of being an effective organisation is having managers whom employees wish to work for.
It has often been said that employees do not leave organisations, they leave managers. The
general rule, therefore, is that effective organisations will have a lower-than-average labour
turnover because their staff will like working there.
However, staff turnover will be a measure of many, interlocking features of working life, and
not just organisational effectiveness. For example, voluntary labour turnover normally falls
during a recession because people have fewer alternative employment opportunities. So a fall
in labour turnover might not be due to an increase in organisational effectiveness at all. It
could just be that employees’ options have narrowed.
Equally, caution must be taken in comparing one company’s employee turnover with another
in the same industry. A lot will depend on the market structure of the industry in question.
So in competitive industries like retailing mentioned here, we might expect a relatively high
turnover among the sales force as they switch from one company to another. On the other
hand, the specialists maintaining and repairing railway tracks have no-one to work for in the
UK except Network Rail, which owns the entire system. Their labour turnover will be much
less.
Even within an industry, labour turnover will generally be higher in the highly-populated
South-East where there are likely to be more alternative employment opportunities and slower
in the less-densely populated areas like Scotland and Northern Ireland.
However, working for an effective organisation where management is fair and friendly is a
great reason to stay with the company you work for. The opposite is also true: a poorly
managed outfit with an arbitrary and incompetent boss is a good reason to leave. So when a
new manger is appointed, he or she should in part be judged on whether the people working
for him (or her) want to stay or start applying elsewhere. On the other hand, sometimes an
organisation needs to be shaken up. A really good boss may demand a lot from employees,
and ones least able to rise to the challenge may decide to quit to everyone’s benefit.
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Turning to labour productivity, this measures the output per employee, and is worked out by
dividing total output (whether measured in physical units or in financial terms) by the number
of employees. This may be an excellent measure of organisational effectiveness. If
SuperGroup’s employees average £200,000 of sales whereas Gap manages £350,000 then the
obvious question to ask is why Gap does so much better.
Once again, while the difference may boil down to organisational effectiveness, there may be
many other reasons too. For example, Internet-based businesses often have very few
employees and correspondingly high levels of labour productivity. This may reflect a more
effective business model – but equally the gains from having fewer employees might be
balanced out by having lower net profit margins on the goods that are sold.
Then again, capital-intensive businesses tend to have higher labour productivity because
fewer people are needed to get the job done. But it doesn’t follow that unit costs will be
lower. The capital equipment may fail to live up to its promise and often be out of order and
awaiting repair. In such circumstances, the company with the lower labour productivity may
actually be the most effective.
In conclusion, labour turnover and labour productivity are both very useful figures for
comparing the effectiveness of one company with a rival, or the progress of a company over
time. But they need to be used in conjunction with a whole range of other variables too. No
one set of figures is going to tell you anything like the whole truth about a company’s
performance.
*7b To what extent do financial data enable us to judge the performance of a company such
as SuperGroup? (30)
Answer: Financial data is the lifeblood of any commercial enterprise. Annual or six-
monthly profit-and-loss accounts and balance sheets, such as those recorded in Evidence H
and Evidence J are just two examples of financial data. An enterprise such as SuperGroup is
likely to record turnover on a daily basis, broken down by each product line, and by each
store and concession. Modern computer systems have made this easier to do than ever
before. Each time an item is scanned at the till at the point of purchase, SuperGroup will
know a) what has been bought, and b) where it has been bought. If, in addition, it operates a
loyalty card scheme then it may well know who has bought it as well. This will be true for all
Internet sales where the credit or debit card details will reveal the identity of each buyer.
SuperGroup managers will produce daily, weekly and monthly reports, with very fast
feedback. Is a new design not selling well? Or in danger of running out? Is a new store
manager getting up to speed? Or falling behind? How have sales been affected by a new
special offer? Or a new store layout?
Financial data will give precise answers to all these questions and dozens more like them –
every day. For operations management, financial data is, therefore, indispensable. It would
be impossible to run a fashion company like SuperGroup without it.
However, such detailed management accounts will not be available to the public, who are
likely to see only the annual report. The breakdown of sales by country may well be kept
secret, and no commercial enterprise would ever release detailed store-by-store information
because of the help this would be to competitors. Financial data will, therefore, be much less
help to members of the public in judging company performance than it will to SuperGroup’s
management.
Indeed, there is a case for saying that published financial information will, by its very nature,
be out of date when it is available. If you were wondering whether to buy or sell SuperGroup
shares, you would ideally know about sales prior to published results. One way to do this is
just to visit stores and see how busy they are. Such informal, qualitative research may give
you the answer you need before everyone else finds out. A lot depends, therefore, on who
you are and why you want to know about SuperGroup’s performance. For financial
journalists, the annual publication of its financial data will enable them to judge past
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performance. But for investors who are seeking to find out before everyone else, financial
data far from being the only line of enquiry.
Performance is not just about daily sales, however. Most investors are looking for a company
that will do well in the coming years, and for this past financial results are not necessarily the
best guide. This is certainly the case with SuperGroup which, after a stunning rate of
expansion in 2010 and 2011 has done much less well in 2012 with suggestions that the
management overstretched itself.
Instead, more sophisticated analysis will be needed. One of the key criteria to future
company profits will be the extent to which its innovations may be copied by rivals. A
company with a great new idea might make enormous profits for a year or two only to see
them dwindle away when rivals get in on the act. On the other hand, if the new idea can be
successfully patented then government-approved monopoly profits may be possible for years
to come. In the case of SuperGroup, nothing can be patented as it is not a high-technology
company. Its products will always be vulnerable to imitation, and stunning financial data for
a year or two does not necessarily say much about its long-term prospects.
Instead, an assessment needs to be made about its brand strength. Plenty of market research
companies are engaged in finding out month-by-month which brands are up and which are
down in terms of public perception. Both the proportion of a population who has heard of a
brand, and what they think about it, will be significant figures. This data is not financial data,
but nonetheless is valuable for making estimates as to what future financial data might look
like.
As well as brand strength, the future performance of Julian Dunkerton, major shareholder and
Managing Director, will also be key. At the end of the day, the performance of the chief
executive is the single most important determinant of success for any enterprise – just like the
performance of the football coach or the head teacher determines the success of the team or
the school. There is no escaping the responsibility which goes with being in charge. And in
the case of rapidly growing companies, past success is no guarantee of the future. At the time
of writing in the summer of 2012, after Face Book’s share slide following its flotation, it is
being openly asked whether Mark Zuckerberg, the brilliant founder and first CEO of the
company, is really the right person to run a mature, multi-billion dollar enterprise.
Finally, it should be noted that financial data is not always accurate, and may even be
fraudulent. Although auditors have to sign off company accounts, it is possible for them to be
misled. Sometimes the chief executives of major companies like Bernard Madoff Securities,
Enron and the Mirror Group have successfully concealed the true state of their companies
through the publication of false accounts, and have faced long jail terms when their theft
and/or dishonesty have been discovered.
In conclusion, financial data should – if it is accurate – be a good guide to the past
performance of a company. It is a less good guide to future performance. This will depend
on the character and the skills of management, and the nature of the business in which they
are engaged. Those vulnerable to technological change or with low entry barriers may see
their profits vanish almost overnight. By contrast, well-run family businesses in specialist
niche markets like cricket bats or large companies with unassailable brand equity like Coca
Cola appear to have the capacity to churn out profits for decades regardless of the political,
economic, social and technological changes that wipe out their more exciting growth-
orientated contemporaries on the business scene.
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Instructions
Use black ink.
Fill in the boxes at the top of this page with your name, centre number and candidate
number.
Answer all questions in both Section A and Section B.
You may use a calculator.
Information
Total marks for this paper is 80.
Quality of written communication will be taken into account in Questions 7a and 7b
in Section B. This is indicated with an asterisk*. You should take particular care on
this question over spelling, punctuation, grammar and clarity of expression.
Advice
Read each question carefully.
Keep an eye on the time.
Try to answer every question.
Check your answers if you have time at the end.
Write your name here
Centre Number Candidate Number
Unit 4a Topic Tests based on
2012 pre-release, Section 4
Surname Other name
Unit 4a: Making Business Decisions
Section 4: Company growth
Date:
Time: 1 hour 30 minutes
Paper Reference
6BS04/01
You need the pre-issued Evidence A to I for this
examination paper
Total Marks
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SECTION A
Evidence A to I was pre-issued before the date of the examination.
Using the evidence and your own knowledge, answer all six questions (total 30
marks).
Time allowed (35 minutes).
Additional Evidence J
How are the mighty fallen: share price collapse at Superdry
In the year to April 2012, Supergroup, owner of the fashion label Superdry, saw
profits fall to £43 million. This profits warning, delivered in advance of the
publication of the figures, saw shares lose one-third of their value. They now stand at
just 25% of their value a year ago.
In a research note, Numis Securities said “We think today’s statement brings into
question the long-term sustainability of profit growth if the brand is, as we believe, in
decline”.
Earlier in the year, chief executive Julian Dunkerton had commented on deep
discounting by rivals, as well as the one-off costs associated with building up the
management team. He was, however, hopeful that margins would rise in 2012-13
following an expected decline in the price of cotton.
Superdry’s turnaround in fortunes has been swift. In 2010-11, profits more than
doubled from the previous year to £47 million, driven by huge organic and external
growth.
Sources: media reports in 2012
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1. What is meant by ‘franchise’ (Evidence D, paragraph 1)? (2)
2. What is meant by ‘external growth’ (Evidence J, final paragraph)? (2)
3. Explain the likely impact of competition law on Superdry. (4)
4. Briefly comment on the growth of Superdry’s internet business (Evidence C).
(5)
5. To what extent is Superdry’s success due to its ‘expanding retail estate’
(Evidence C)? (8)
6. Analyse the likely benefits to Superdry of growing externally, for example by
acquiring CNC (Evidence D). (9)
SECTION B
Decision-making report
Using ALL the evidence and your own knowledge, answer both parts of the
question (total 50 marks).
Time allowed (55 minutes).
7*(a) Evaluate the extent to which Superdry’s ‘continually evolving brand’ (Evidence
F) might be the reason for its rapid growth over 2003-11. (20)
7*(b) Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence
J). (30)
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Unit 4a, Section 4 – Company growth: mark scheme Note: Any acceptable answer which shows the range of skills required may score full marks
Q. 1 What is meant by ‘franchise’ (Evidence D, paragraph 1)? Mark
Knowledge up to 2
1 mark for basic idea – sale to franchisees of right to sell franchisor’s
products
1 mark for any extension/example e.g. with reference to Superdry’s plans
via CNC
1-2
Total: 2
Q. 2 What is meant by ‘external growth’ (Evidence J, final paragraph)? Mark
Knowledge up to 2
1 mark for basic idea – expanding through mergers and acquisitions
1 mark for any extension/example e.g. reference to acquisition of CNC
1-2
Total: 2
Q. 3 Explain the likely impact of competition law on Superdry. Marks
Knowledge up to 2
1 mark for basic idea of competition law; prohibition of collusion, and of
anti-competitive acquisitions
1 mark for any extension/example e.g. reference to OFT or CC
Application up to 2
1 mark for basic point: Superdry operates in a competitive market
1 mark for any extension/example e.g. why CNC acquisition will be of no
interest to the competition authorities
1-2
1-2
Total: 4
Q. 4 Briefly comment on the growth of Superdry’s internet business (Evidence
C).
Marks
Knowledge up to 2
Some understanding of growth e.g. annual percentage growth rate; growth
of one segment of the overall business
Application up to 2
e.g. internet growth here measured as a percentage of total Superdry sales;
while growing, target for 2011 still under 10%
Analysis up to 1
Despite planned internet growth, success of business firmly tied to its
‘bricks and mortar’ performance – not its internet sales
1-2
1-2
1
Total: 5
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Q. 5 To what extent is Superdry’s success due to its ‘expanding retail estate’ (Evidence
C)?
Level Marks Descriptor Possible content
1 1-2 Knowledge
/understanding:
Traditional retail growth requires a greater ‘footprint’
Sales can only rise if either you have more square
footage or if you achieve more sales per square foot
2 3-4 Application:
Roughly 50% pa increase in footprint every year
between 2007 and 2011
3 5-6 Analysis:
An essential part of Superdry’s expansion, given that it
is not primarily an internet business
4 7-8 Evaluation:
some balanced
wrap-up
But retail expansion no good without rising brand
awareness leading to these new stores having shoppers
Q. 6 Analyse the likely benefits to Superdry of growing externally, for example by
acquiring CNC (Evidence D).
Level Marks Descriptor Possible content
1 1-2 Knowledge
/understanding:
Benefits of external growth, e.g. speed of growth,
ability to crack new markets
2 3-4 Application:
CNC currently Superdry’s major franchisee, so
acquisition marks a move to bring these stores under
Superdry’s direct control
3 5-7 Analysis:
External growth the fastest method of growing, and
culture shock less of an issue as CNC already runs
lots of Superdry’s franchises
4 8-9 Evaluation: some
balanced wrap-up
On the other hand, not actually winning new
customers as CNC already sells Superdry clothing
through their franchises;
have to ask whether the price paid (€40 million)
works for Superdry – or have they paid too much?
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*Q.7a Evaluate the extent to which Superdry’s ’continually evolving brand’ (Evidence F)
might be the reason for its rapid growth over 2003-11.
Level Marks Descriptor Possible content
1 1-2 Knowledge and understanding
present
QWC :struggling with
business terms, frequent
errors in spg
Benefits of wider product mix; reference
to Ansoff – product development
2 3-6 Application: e.g. use of
Evidence or own knowledge
to make relevant links to
Superdry
QWC: uses some business
terms, weak style, some spg
errors
Benefits of expanding portfolio,
leveraging the brand image of Superdry
3 7-13 Analysis
7-10: elementary discussion
attempted but lacks depth /
development
11-14: clear analysis with
some depth / development
QWC: comfortable use of
business terms, appropriate
style, reasonable-to-good spg
Greatest asset is the brand: the goods
themselves will be very similar to those
of their rivals;
consumers like choice: with their own
stores, need to have a wide and varied
product selection;
without a wide product mix, will end up
selling through supermarkets at greatly
reduced margins
4 14-20 Evaluation:
15-17: some evaluative
summation
18-20: informed, realistic and
personal conclusion
QWC: effective use of
business terms, organised,
coherent and fluent response,
good-to-excellent spg
On the other hand, product development
has to be matched by market
development;
Superdry would not have got anywhere
without rapid expansion of own stores
and concessions – both in the UK
(Evidence C), and overseas (Evidence D)
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*Q.7b Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence J).
Level Mar
ks
Descriptor Possible content
1 1-2 Knowledge and understanding present
QWC :struggling with business terms,
frequent errors in spg
Profit = profit margins x sales
Profit = revenue minus costs
2 3-6 Application: e.g. reference to Evidence H
QWC: uses some business terms, weak
style, some spg errors
Doubling in 2010-11 followed
by slight reverse in 2011-12;
but share price collapse shows
concern about future
3 7-17 Analysis:
Low level 3: 7-10 marks – basic analysis
Mid-level 3: 11-13 marks – looks at a
range
High level 3: 14-17 marks – looks at a
wide range
QWC: comfortable use of business terms,
appropriate style, reasonable-to-good spg
Margins under attack from
‘deep discounting’ by rivals
sales always at risk in high
fashion businesses
caught between ‘young
fashion’ and ‘mainstream
fashion’
4 18-
30
Evaluation:
Threshold Level 4: 18-19 marks; some
evaluative summation
Low Level 4: 20-22 marks; a narrow
range of evaluation
Mid Level 4: 23-26 marks; a wide range
of evaluation, if not at the highest level
High Level 4: 27-30 marks; informed,
realistic and personal summation based on
detailed consideration of a variety of
points – at the highest level
QWC: effective use of business terms,
organised, coherent and fluent response,
good-to-excellent spg
Dangers of external growth,
leading to expansion into
businesses they do not fully
understand; diseconomies of
scale;
matched with volatile nature of
brand loyalty in fashion
anyway;
competitive response of rivals;
relatively weak internet
presence;
looking for one or two key
points that are of most
significance
Question Know-
ledge
Appli-
cation
Analy-
sis
Evalu-
ation
Total Specification coverage (all
4.3.4a)
1 2 2 Organic growth
2 2 2 External growth
3 2 2 4 Competition law
4 2 2 1 5 Organic growth
5 2 2 2 2 8 Organic growth
6 2 2 3 2 9 External growth
*7a 2 4 7 7 20 Different types of growth
*7b 2 4 11 13 30 Problems of growth
Total 16 16 24 24 80
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Unit 4a, Section 4 – Company growth: suggested answers
SECTION A: about 35 minutes, 6 questions, 30 marks
The total of 30 marks is split roughly 10 for Knowledge/Understanding, 10 for Application, 6
for Analysis and 4 for Evaluation:
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
1. What is meant by ‘franchise’ (Evidence D, paragraph 1)? (2)
Answer: A franchise is a right to sell a set of branded products in your own business. The
owner of the branded products is the franchisor, and the businesses that acquire this right are
called the franchisees. Many franchisees own just one shop, but in the case of CNC it
manages multiple franchises of Superdry, and possibly other brands too.
2. What is meant by ‘external growth’ (Evidence J, final paragraph)? (2)
Answer: External growth is that form of expansion that is achieved by buying up (or
merging with) other companies. Also known as ‘inorganic growth’ or ‘mergers and
acquisitions’, it is the fastest way to expand a business although it often leads to difficulties in
the integration of the two companies.
3. Explain the likely impact of competition law on Superdry. (4)
Answer: Competition law is designed to ‘make markets work well for consumers’ in the
words of the Office of Fair Trading (OFT), whose job it is to oversee competition law.
Action that lessens competition, such as rivals secretly agreeing to charge the same high
prices is illegal. Mergers or acquisitions between market leaders is often prevented too on the
grounds that competition would be reduced.
However, Superdry is unlikely to be affected. The fashion industry is intensely competitive,
and it is highly unlikely that any of its acquisitions (such as of CNC) will be prohibited.
Additionally, there are so many fashion retailers that any attempt on their part to form a cartel
would probably never get off the ground.
4. Briefly comment on the growth of Superdry’s internet business (Evidence C). (5)
Answer: Evidence C shows that Superdry’s internet sales rose from 4% to 8% of the total
between 2010 and 2011. Given that the company as a whole was enjoying record growth at
the time, this probably represents a threefold or fourfold increase in actual internet sales.
While this is impressive, it is still a relatively minor channel of distribution for Superdry
which has, since its foundation in 2003, followed a traditional ‘bricks and mortar’ expansion
path.
The future success of Superdry is likely to be bound up with traditional retailing for some
time to come. If the brand succeeds, so will the internet business; but if the brand goes into
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decline then it will be unlikely that the internet can save it. This may change in the future, but
at the moment shopping for clothes is still dominated by physical stores and Superdry has
gone along with this traditional business model.
5. To what extent is Superdry’s success due to its ‘expanding retail estate’ (Evidence C)? (8)
Answer: Evidence C shows that Superdry’s square footage expanded by roughly 50% every
year from its foundation in 2003 up until 2011. For a traditional bricks and mortar retailer
like Superdry, the total space you have to sell your products in is absolutely vital. Without a
rapidly growing number of places in which to sell their goods there is no way in which they
could have enjoyed the rapid growth in sales and profits which they have. England, where
most of their UK stores are located according to the maps we are given, enjoys a relatively
homogenous culture. What sells well in London is likely to sell well in Birmingham and
other big cities too. By contrast, the internet has played a relatively minor part in Superdry’s
expansion with internet sales just 4% or less of total sales up until 2011, when they jumped to
8%.
However, while an expanding retail estate was necessary for Superdry to grow, it would not
have been sufficient by itself. A chain of shops creates the supply of goods, but the demand
has to be there too. From its student beginnings, it then attracted celebrity endorsement, as
we read in Evidence A. Above all, it is probably the wearing of its clothes by the likes of
David Beckham and Justin Bieber that enabled it to expand beyond its student origins. The
expanding retail estate was necessary – but it would have counted for nothing without the
brand strength to pull shoppers in.
6. Analyse the likely benefits to Superdry of growing externally, for example by acquiring
CNC (Evidence D). (9)
Answer: External growth is by far the fastest way to grow, because the company acquires
everything in the one purchase: staff, customers, and premises – the lot. In this respect,
external growth is quite like franchising, an expansion method that has also been used
extensively by Superdry.
Fast growth is necessary because, once a brand has taken hold of the popular imagination,
there is no way that this brand recognition can be monetised unless there are plenty of
opportunities to buy. While Superdry has opened its own stores and concessions in the UK
with impressive speed, when it comes to overseas sales it almost certainly lacks the expertise
to grow a retail operation very quickly in strange surroundings. External growth should – so
the theory goes – provide that ‘one-stop-shop’ for the emerging brand looking to conquer new
territories.
However, external growth brings with it its own problems. If overseas companies are bought
up, then those companies are likely to have a shrewder idea of what they are really worth than
Superdry. There is therefore a considerable danger of paying too much for these hurried
acquisitions. As with anything, eager buyers tend to get overcharged.
Then again, the new acquisitions have to be integrated into Superdry’s management structure
and this is easier said than done. In the hyper-competitive world of fashion, organisations
need to react very quickly. This is only possible if they are very well managed, and it is open
to question whether this level of management can be sustained during an acquisition spree.
Stagnating profits in 2012, mentioned in Evidence J, suggest that Superdry may have
expanded too fast, particularly in the area of external growth.
Perhaps a better approach would have been to consider a joint venture with an overseas
partner. This alternative method of external growth leaves the new partner with an equity
stake, and this may prove to be a more secure method of retaining the loyalty and expertise of
the staff in question.
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SECTION B: about 55 minutes, 2 questions, 50 marks
These questions involve extended writing, and the total of 50 marks is split roughly 6 for
Knowledge/Understanding, 6 for Application, 18 for Analysis and 20 for Evaluation. Note
the strong contrast with Section A, where two-thirds of the marks were for
Knowledge/Understanding and Application.
Knowledge – show that you know and understand relevant business concepts
Application – show that you know how these concepts are relevant to the question
asked
Analysis – show that you can make thoughtful observations about the business
situation, using these concepts
Evaluation – come to a balanced and considered conclusion, showing depth of
understanding
*7a Evaluate the extent to which Superdry’s ‘continually evolving brand’ (Evidence F) might
be the reason for its rapid growth over 2003-11. (20)
Answer: In Evidence F, we are given an insight into brand evolution at Superdry, with the
number of T-shirt graphics rising from six to over 400 during the eight years 2003-2011.
Superdry’s growth story is also charted over the second half of this time period (2007-2011)
in Evidence C, during which their retail outlets (both stand-alone stores and concessions) rise
tenfold from just 13 to 135. Assuming they started off with just one store in 2003, we have a
pattern of a roughly tenfold increase from 2003-07, followed by another tenfold increase over
2007-11.
At the heart of this growth is the brand, the key asset of any clothing retailer. We have little
information about how this brand gained an audience, beyond the reference in Evidence A to
its beginnings in student cities – a pattern also followed, incidentally, by Facebook.
Universities are, in many respects, the cultural heart of a nation, so perhaps it is not surprising
that so many new ideas – including business ideas – have their origin there. Perhaps a student
following drove Superdry from one store to 13. Then the critical exposure to a wider
audience seems to have come through celebrity adoption (again mentioned in Evidence A),
perhaps propelling it from 13 to 135 outlets.
Our question asks us what the role was of Superdry’s continually evolving brand in all this,
and specifically the wider product mix mentioned in Evidence F. This took the form not only
of a burgeoning number of T-shirt graphics, but also expansion from the core range of T-
shirts and hoodies into womenswear and denim, and then on into luggage and fragrance. Any
fashion business has to convey a sense of movement, and this is best achieved by having an
ever-expanding product range. There has to be a reason for existing loyal customers to come
back to you. New collections in spring, summer, autumn and winter form the basis of this
movement; as do surprise moves into new product categories. Repeat business from existing
customers then creates the narrative that prospective customers need to hear, namely that this
is a store that people go back to – time and time again.
It is, therefore, the case that Superdry’s rapid growth over 2003-11 would have been
impossible without a ‘continually evolving brand’. Like riding a bicycle, there is no standing
still in the fashion business. Either the brand goes forward in ‘constant and continued brand
evolution’ or it will fade away to nothing very quickly.
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Having said that, in the competitive world of fashion a lot of things have to be got right
simultaneously if the brand is to have any chance of long-term success. First of all, there has
to be a platform to build on. Without the initial enthusiasm from the student population,
Superdry would have folded within a matter of months. A continually evolving brand is only
possible if the brand itself has proved to be a winner.
Second, the widening product mix has to be matched by a widening geographical spread. In
terms of Ansoff’s matrix, markets have to be developed as well as products. New product
development is an expensive business, and the ability to generate hundreds of T-shirt designs
and diversify into luggage, fragrances and so on is dependent upon a rising volume of sales.
Economies of scale are such that it might be possible to sell a dozen different designs of T-
shirt from a couple of stores, but it wouldn’t make sense to diversify into the full range of
clothing and accessories without several dozen stores to ‘spread the overheads’ of these
development costs.
In conclusion, a ‘continually evolving brand’ is just one part of the formula behind
Superdry’s growth. Product development has to go hand-in-hand with market development.
And both activities rely upon razor-sharp management who need to possess an acute sense of
how fashions are developing on a week-by-week basis, and combine this with the supply-
chain, human resources, PR and financial skills to deliver on time, every time, in a widening
set of locations.
*7b Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence J). (30)
Answer: In 2011-12, Superdry’s profits fell from £47 million to £43 million (Evidence J).
While this is a modest decline, the pattern is in stark contrast to the doubling of profits the
year before. The profits decline led to a huge 75% reduction in the share price, because
previously the share price had factored in continuing growth. Now, as we read in paragraph
3, “today’s statement brings into question the long-term sustainability of profit growth”. In
other words, the share price had reflected a belief that Superdry was going to be the “Next
Big Thing”. Suddenly, it has started to look like just another also-ran, which will never fulfill
its potential.
One possible cause for the fall in profits could be lack of focus on the core brand attributes.
The breakneck expansion recorded in Evidence C and D would have consumed enormous
amounts of management time and energy. Julian Dunkerton refers in Evidence J to the “one-
off costs associated with building up the management team”. He is presumably thinking of
employing expensive new managers, and spending heavily on consultants. There is, however,
another cost which may have been equally significant, and that is the opportunity cost of
Julian’s time. Perhaps he switched his focus away from the brand itself, and towards strategic
management issues.
Young people’s fashion is a very fast-moving market, and unless the senior decision-maker
has their finger on the pulse, possessing an up-to-the-minute appreciation of how trends are
developing, then someone else will come along with a product range that chimes more closely
with what young people are thinking and feeling. Superdry is not yet established as a
mainstream brand appealing across the age-range. If university students move on to some
newer, more appealing brand then Superdry’s profits will decline.
A second reason for the fall in profits could be the difficulty of making the transition to a
slightly older age-range, as Superdry’s early customer base progress up through their
twenties. That Superdry is trying to make this transition is shown in Evidence I where they
are described as “desperate” to take a large store on Regent Street. By taking over the retail
space previously occupied by Austin Reed, a much more traditional store catering for an older
age-range, Superdry is clearly seeking to sell youth fashion to the not-quite-so-young as well
as to students.
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The problem, of course, is that well-established competitors are not going to sit back and let
Superdry take their market – especially in a time of recession such as the UK is currently
experiencing. Rather than lose customers, established names might be prepared to cut prices
heavily, sacrificing profit margins in the short-term in return for maintaining sales volume
and their customer base. This appears to be what has happened, with Julian commenting in
Evidence J on “deep discounting” by rivals. Superdry cannot ignore this, as its strategy is
based on providing “affordable” premium quality clothing (Evidence B). If Superdry has
responded to this competitive threat by reducing prices in turn, then this might explain why
profits have declined.
The more general point is that competitors will respond to threats to their position. A
management strategy that does not take into account likely competitive responses is a flawed
strategy.
Finally, profits may have declined because of the acquisition of CNC in Europe. External
growth is the fastest way to expand, yet also brings management difficulties in its wake. In
this particular case, keeping tabs on youth fashion in just one country is a hard enough task:
doing the same across the Continent creates a whole new set of problems. Now it is true that
this responsibility will be shared with CNC’s own management team with their “significant
retail, wholesale and franchise expertise” (Evidence D), but we are not told how much this
expertise is costing Superdry in terms of salaries and daily running costs. It may well be that
the management team at CNC picked up on Superdry’s desperation to expand, and drove a
hard bargain. They might, for example, have insisted on loyalty bonuses for staying on at the
company under new ownership. Since Superdry is buying their management expertise as
much as their business, Superdry may have felt compelled to pay such bonuses. There is
always the fear when you buy a company that the top management will leave to set up a rival
business, taking their customers with them.
In conclusion, the decline in profits may reflect the fact that Superdry has tried to do too
much, too quickly. While an exciting new brand needs to seize the moment and expand while
it can, there will always be a limit to what management is able to do at the level of excellence
necessary to avoid damaging the brand. Superdry has both expanded its product range and
opened lots of new UK outlets and tried to widen its customer base to older age groups and
expanded overseas – all at the same time.
The strategic error is most likely to have been premature overseas expansion. Even well-
established major British retailers find it difficult to establish an effective overseas presence.
Superdry is nowhere near this level of development, as shown by the statement at the end of
Evidence A that it still “flies under the radar”. Furthermore the balance sheet extracts in
Evidence H, with current assets in 2011 of £120 million, show that Superdry is not yet a large
company. So while the decline in profits in 2011-12 is almost certainly due to a range of
factors, it is probable that this is the factor which has not only played the primary role in
reducing profits but has also put the long-term development of the company in jeopardy.
It may well be that this error is fatal, and that the share price never recovers. It is the case that
“nothing succeeds like success”, and equally nothing fails like failure. Once Superdry has
faltered then its reputation as a winner may be lost beyond recall. As Numis Securities opines
in Evidence J, the brand is “in decline”.
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