1.
Examine the reasons why so many vehicle manufacturers are now acting in joint ventures or
looking to acquire or merge with other manufacturers.
(Total 6 marks)
Throughout the world vehicle manufacturers are looking for partners or suitable business to
acquire. Recent examples have included Volvo, Ford and Mazda and Volkswagen, Audi, Seat
and Skoda. Some of the reasons include:
• The desire to reduce research and design costs and lead times. By sharing these costs and by
incorporating the design in a number of models the costs are spread over a larger number of
units.
• The manufacturers are seeking to obtain economies of scale in both manufacture and
distribution. It is clear that there are presently too many car manufacturers for the available
demand.
• The desire to establish competitive advantage through global marketing and reduced costs.
2.
As a representative of a pressure group concerned with the power and the record of unethical
behaviour of some MNCs, prepare a briefing paper to send to LDC governments assessing
potential problems that an overseas investment may cause.
(Total 8 marks)
Potential problems:
• poor record on health and safety controls to cut costs e.g. Bhopal;
• unethical marketing policies e.g. cigarettes and baby milk;
• technology introduced may be unsuitable for the local population;
• profits may be repatriated to home country;
• MNC may take advantage of cheap resources and return little to the host country;
• evidence of bribery of local officials to “overlook’ certain behaviour or to provide favours;
• possible pollution of the environment;
• negative effects on local culture and language;
• may put local firms out of business and create unemployment;
• may create a balance of payments deficit by importing large amounts of raw materials;
• may simply up and leave when the time suits the MNC, causing chaos to the local economy;
• transfer pricing may reduce tax liability in that country.
3.
As the Chief Executive of an ethical MNC hoping to set up a new factory in an LDC, reassure
the government of your good intentions by drawing up a code of practice and procedures for
employees, to regulate the business in two of the following areas:
• environmental behaviour
• local community relations
• employment policies
(Total 6 marks)
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Environmental behaviour
Local community relations
Employment policies
Environmental behaviour:
• strict controls on emissions of materials and noise;
• minimise the use of energy and scarce resources;
• use as many recyclable materials as possible in production and ensure that the end product is
recyclable;
• work with suppliers and customers to ensure environmental rectitude throughout the supply
chain;
• ensure the aesthetic nature of the site and its environment through appropriate design and
maintenance policies.
Local community relations:
• involve the local community in decision making and listen to their views;
• employ as many of the local community as possible with at least some at managerial level;
• use local suppliers wherever possible;
• provide appropriate levels of training and technology transfer;
• encourage and sponsor sports and other leisure pursuits;
• let local community use firm’s resources;
• provide facilities for education and produce materials for the classroom;
• set up health programmes;
• create an open door policy wherever feasible.
Employment policies:
• employ as many of the local community as possible with at least some at managerial level;
• provide appropriate levels of training and technology transfer;
• pay acceptable wages and provide a range of benefits;
• provide a safe and healthy working environment;
• treat local staff with respect and train expatriates to be aware of social, cultural and religious
beliefs.
4.
Explain what a franchising arrangement is and why the Bank Manager suggested Wayne
purchase a franchised printing business rather than start his own new business.
(Total 6 marks)
Franchising is the purchase of a licence to use the name, logo and trading method of an existing
successful business such as McDonald’s or Burger King. This will require the payment of an
initial fee, an annual royalty based upon profits made and the signing of a strict franchise
contract laying down strict guidelines on operations.
Advantages of a franchise to Wayne:
• provision of training and advice by the franchisor in areas where he lacks knowledge;
• selling a recognised product with existing customer loyalty and goodwill, reducing the
chances of failure and ensuring adequate demand from the start of trading;
• marketing carried out by the franchisor;
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• Wayne has capital to purchase the licence and the bank would feel more secure lending on a
recognised format.
5.
Why does Joseph Obeng believe the best growth strategy for Open Views is organic growth,
rather than going public or merging with other companies?
(Total 3 marks)
Organic growth is natural growth, funded by increased sales revenue, which is then reinvested
in the business in the form of additional assets. Joseph wants to retain control of his business
and is proud of the personalised and bespoke service offered. It would be difficult for a larger
company to address this niche and to offer a similar service. Neither McGregor nor Blue Seas
have found it possible to offer an exact service.
Joseph has a “hands-on” leadership style and wants to take all major decisions. If the business
grows much bigger he will lose this control. Similarly, if growth is too quick it may result in a
loss of financial control if the business overtrades.
He has rejected going public, because there is a risk that he will lose control of the business if
shares are bought by other people, and possibly companies, wishing to launch a takeover.
Similarly, a merger would involve a reduction of his control and decision making opportunities.
6.
Analyse whether small and medium-sized firms, such as Open Views, have commercial and
competitive advantages over multinationals like McGregor’s and Blue Sea.
(Total 8 marks)
Potential commercial / competitive advantages of small / medium-sized firms:
• personal service: customers may be prepared to pay a higher price for a personal service
• flexibility: small firms can react more quickly to changing services as they often have less
bureaucracy and quicker decision making
• innovation, dynamism and creativity: small firms are often more entrepreneurial and willing
to be creative
• employment legislation only covers firms with larger numbers of employees. Wage rates
may be lower and contracts may be restricted
• niche services and products: small firms may be able to cater for specialised demand. They
may become monopoly suppliers within a niche as large firms could not survive on the low
level of total demand
• many governments may offer financial assistance and grant aid to small firms
• large firms may suffer diseconomies of scale.
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Potential disadvantages of small / medium-sized firms:
• less economies of scale: increased unit cost
• restricted division of labour and lack of specialist advice
• problems raising finance and more costly loans
• less diversification and higher risk: reliance on single products or small markets may be
dangerous if these markets contract
• capital is harder to obtain for future expansion
• recruitment of skilled personnel may be more difficult.
7.
Missan Motorcare in Mozambique is sold as a franchise operation.
(i)
Explain what is meant by a franchise.
(2)
(ii)
Discuss three advantages and three disadvantages for the distributor of this arrangement.
(6)
(Total 8 marks)
(i)
A franchisor sells the rights to use/sell a product to a franchisee in return for a fixed fee
and/or a percentage of the turnover.
Award up to [2 marks] for a suitable explanation.
(ii)
Advantages
Disadvantages
Day to day management is the franchise’s
responsibility
Loss of control
Quicker growth of distribution outlets
Poor management may affect other outlets
Can share costs e.g. marketing more
widely
Quality control more difficult
Increases funds available for expansion
Managers more motivated as they benefit
from increased sales
8.
Describe, with relevant examples, three internal economies of scale and consider how these will
apply to Open Views as it grows in size.
(Total 8 marks)
Possible examples of internal economies of scale:
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• purchasing economies – bulk-buying discounts and favourable credit terms
• technical economies – larger-scale production reduces unit cost and allows for division of
labour
• marketing economies – specialist advertising is possible and adverts reach larger audiences
and cover more production reducing unit cost
• financial economies – easier for larger firms to get loans and often granted at lower interest
rates
• managerial economies – increases specialisation and division of labour
• risk-bearing economies – larger firms can diversify reducing reliance on single products
• increased capital utilisation – using productive facilities more effectively, thus reducing unit
cost.
For Open Views it means they can buy hotel rooms and accommodation more cheaply, and are
able to get charter rates on aircraft. The division of labour can be used throughout the
organization e.g. specialist buyers, accountants, computer staff. The opening of Warm Breezes
is an example of diversification. Loans to finance such expansion may be cheaper and easier to
arrange.
9.
Discuss the relative advantages and disadvantages for Chissano Prints of the merger and
franchising options, and consider which of the two options the firm should select.
(Total 6 marks)
Mergers
Advantages
• survival
• a fast form of growth
• economies of scale, lower costs and higher profits
• synergy 1 + 1 = 3
• greater market power and a larger customer base
• diversification and reduced risk
• control of supply and retail channels through vertical integration
• access to new technologies.
Disadvantages
• loss of management control by Winnie Chissano
• changes to the corporate culture to adapt to the new merged organization requiring
possible change to core values
• potential arguments and disagreements between the two parties
• difficulty of employees adapting to new working approaches and management styles
• possible rationalisation leading to redundancies
• diseconomies of scale and bureaucracy leading to slower decision making
• loss of customers who saw personal service and individuality as a vital element of their
purchase decision.
Franchising
Advantages
• a fast form of growth at a lower cost and less risk than organic growth
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•
•
•
•
•
economies of scale, lower costs and higher profits
greater market power and larger customer base than organic growth
diversification and reduced risk
control of the business remains with Winnie Chissano
keeps the business entrepreneurial and flexible to market change.
Disadvantages
• less control over the business as franchisees may not following guidelines and poor
service standards may adversely affect reputation
• growth is not as quick as through a merger
• possible cash flow issues as the business expands.
Both options offer growth, wider customer base and lower costs through economies of scale.
The merger option would result in faster growth, but may dissipate the competitive advantages
Chissano Prints has from its unusual prints and personal service. Mass production may not be
appropriate for such a business and the target audience may be very different. Franchising will
allow Winnie to maintain control of the business, achieve growth, but retain the firm’s
individuality and USP.
10.
McGregor’s and Blue Sea are attracting some of Joseph Obeng’s target market. Explain how a
small business such as Open Views can offer a more client-centred service than a multinational
company.
(Total 4 marks)
Customers of Open Views will get to know the staff personally and not feel that they are talking
to a different person each time. This is important to the customers who are spending a lot of
money and wish to know that everything will be organized properly.
Joseph has personal experience of the holiday experience and this will reassure customers.
Joseph sees customers as individuals and this will come across in the service offered. Open
Views has all the advantages of a small firm in responding to customers needs e.g. faster
decision making.
11.
Discuss the potential advantages and disadvantages for CMA of establishing joint ventures.
(Total 4 marks)
Potential advantages include:
• cost savings (since resources may be shared)
• local knowledge (local conditions are likely to vary)
• maintain identity (since it is not a merger or takeover)
• may reduce competition (since those in the joint venture are co-operating)
• the exchange rate currently works to their advantage too.
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Potential disadvantages include:
• lack of control (and subsequent damage to CMA brand)
• passing CMA product information to a competitor
• resolving disputes (for example cost allocation)
• profit sharing
12.
(i)
What is a multinational company (MNC)?
(1)
(ii)
Suggest two reasons why L’Oreal chose to enter the Chinese market.
(2)
(Total 3 marks)
13.
(i)
Definition: an organization that operates production or services facilities outside the
country in which it is based [1 mark].
(ii)
Possible relevant reasons:
• the size of the Chinese market;
• government policies – privatization, financial incentives;
• economics: market liberalisation;
• cultural reasons;
• cheaper costs;
• lack of competition;
• market opportunity;
• any other relevant factors.
(a)
Explain what is meant by a strategic alliance.
(2)
(b)
Analyse why the airlines decided to join together to form a strategic alliance.
(5)
(Total 7 marks)
(a)
A strategic alliance is formed by firms working together on specific projects. They can
share costs and profits and benefit from economies of scale, marketing and purchasing
power.
The businesses do not lose their legal status and do not form new companies.
Award up to [2 marks] for a suitable answer.
(b)
The airlines joined together to form a strategic alliance to enable them to keep their
independence but to also benefit from economies of scale in terms of purchasing power
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and marketing. They were also able to target customers collectively by encouraging them
to collect loyalty points by flying with airlines in the group of companies. This is
particularly useful for airlines which may cover more destinations if they join together
strategically.
14.
(a)
Explain what is meant by a franchise.
(2)
(b)
Assess the advantages and disadvantages of the decision to take up a franchise rather
than to operate as a sole trader.
(6)
(Total 8 marks)
(a)
A franchisor sells the right to use/sell a product or service to a franchisee in return for a
fixed fee and or percentage of the turnover
Award up to [2 marks] for a suitable explanation.
(b)
Advantages
Existing established brand name / product
or service
Cheaper market research and advertising
costs
May receive help and training from
franchisor
Can share marketing costs, research
findings, new product development costs
Lower start up costs
15.
Disadvantages
Have to pay royalty to franchisor
Rules usually be set in terms of layout,
products, marketing and franchisee has to
comply with these
May only receive supplies from
franchisor and may therefore not be able
to shop around for best value
May lose trade if reputation of other
franchisees causes dissatisfaction
Degree of control of franchisor
Analyse the potential benefits and problems associated with Tesco’s and Carrefour’s decision to
expand their businesses in overseas locations, rather than seek expansion in their own countries.
(Total 8 marks)
Potential benefits of expansion overseas:
• larger market and sales potential, especially if the domestic market is saturated
• the spreading of risk by not relying on any single economy
• greater opportunities for economies of scale
• location costs may be lower
• lower wage rates in countries with lower standards of living may provide higher profit
margins
• restrictions on development may be less and the employment opportunities sufficient to
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persuade governments to offer grants and tax breaks
• competition may be less intense and existing competitors may be forced out of the market by
their lack of efficiency, especially in previous command economies, such as those found in
Eastern Europe
• the foreign nature of the company may provide competitive advantage and exclusivity,
positioning the business in a different market segment
• first mover advantages
Potential problems of expansion overseas:
• lack of experience in, and knowledge of, the new market
• the advantages of customer and brand loyalty and recognition are lost
• distribution may be more costly
• distribution may be lengthy requiring greater costs in specialist equipment and storage, with
higher possible risks of damage and/or loss
• PEST factors may make operations problematic e.g. legal restrictions, language and cultural
differences
• the infrastructure may be less developed
16.
Assess the competitive advantages that multinational companies have over smaller national
cocoa producers in less economically developed countries, and comment on whether small
producers can have a viable future.
(Total 6 marks)
The advantages that multinationals companies have, include:
• economies of scale in production, distribution, marketing and administration leading to lower
costs
• knowledge of world market conditions and the technology to predict future supply and
demand patterns
• research and development programmes and technology to improve yields
• the opportunity to source cocoa from a number of countries, which may enable them to bid
prices down
• vertical integration allowing control over the distribution of cocoa
• the economic power to “encourage” national governments to allow them access to markets
and production advantages
• buffer stocks to regulate pricing
• the ability to cross subsidize if losses are made in one or more years
• well-known brand names.
These are significant advantages in a global market and are likely to lead to greater market share
for MNCs. The only way that small producers can survive is to act together to achieve
economies of scale, or to provide some form of unique selling proposition, such as organic
products. This may be in the form of better quality products, unusual and superior varieties,
financial and trade support from national governments or concentrating production for domestic
markets.
However, producers of commodities are usually found in LEDCs and they do not have the
financial clout to invest in new technologies and are rarely supported by governments under
pressure to pay off large international debts. The future of most smaller producers is certainly in
doubt.
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17.
Define a “joint venture”, and discuss the advantages and disadvantages of using joint ventures
to expand Rainbow Club Ltd.
(Total 4 marks)
A joint venture is a business owned jointly by two, or more, independent firms, which
continue to function separately in all other respects, but pool their resources in a particular
line of activity. Rainbow Club Ltd is planning a joint venture with a local hotel to expand
its site.
The hotel and ice hockey club are involved in the “people business”. The combining of
resources through either a joint venture may provide economies of scale and synergy
(2 + 2 = 5). Growth and market power is also the desired result. It would be useful to discuss
the relationship between leisure and sport.
Joint ventures are usually a cheap way of expanding a firm’s business interests. The
arrangement is normally easy to withdraw from if it is unsuccessful. Staff may not feel
threatened by the new arrangement as it is entirely separate from the existing business, and
since it may be temporary.
The main problem with a joint venture is that the firms will need to agree on the management
and development of the business, especially if it is a 50–50 arrangement.
There may be some resistance to change from existing employees in both firms, clashes of
corporate and management cultures and a lack of experience in new markets opened up by the
joint venture.
18.
Explain four advantages to the franchisee, of taking out a franchise with Home Before
Midnight.
(Total 4 marks)
Potential advantages include:
• established brand
• franchisor provides supplies and shop decor
• franchisor provides marketing support
• responsive and receptive to constructive criticism
• training may be provided
• any other relevant potential advantage.
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19.
Discuss the potential personnel and marketing difficulties multinational companies may
experience when establishing operations in Less Economically Developed Countries. Your
answer should be from the perspective of the multinational.
(Total 6 marks)
Personnel difficulties include:
• language
• culture
• communication
• health and safety – should local regulations be applied
• pay – should pay be based at local levels
• resentment – there may be inadequate numbers of suitably qualified local staff
• any other suitable difficulty.
Marketing difficulties include:
• possible lack of brand recognition
• infrastructure and distribution problems
• low level of income
• promotion – should advertisements feature internationally recognised stars
• any other suitable difficulty.
N.B. Credit should be given if candidates assume multinational companies base their
operations in LEDCs and market to MEDCs.
20.
Explain what is meant by economies of scale and give two examples of how Stella could benefit
from operational economies of scale.
(Total 4 marks)
Economies of scale – advantages of large-scale production, the reduction in average costs as the
scale of production increases.
Stella could benefit from economies of scale in terms of the unit cost of production falling as the
scale of production increases. As the size of the Stella plant grows, they benefit from economies
of scale in terms of labour (better use of specialised labour), capital equipment (specialist
equipment) and stocks of materials (lower stock levels and storage space).
Purchase economies will result due to discounts.
Finance economies from access to lower cost finance.
Marketing economies – can advertise cheaply in relation to sales.
Research and development – classic jumpers and late dyeing lead to low risk and lower
R&D costs.
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21.
Explain three advantages and disadvantages for Pablo Santiago of operating a franchise.
(Total 6 marks)
Advantages
• use of established brand name
• support of parent company
• independence, but able to carry out or improve others’ ideas
• may be able to benefit from national advertising and promotion by the franchisor
• chance of failure reduced
• services such as training and administration may be carried out by franchisor
• maintenance of machines may be provided by franchisor.
Disadvantages
• having to pay to use the name of the franchisor
• less profit, though turnover may be higher
• monitoring of standards to franchisor’s systems
• payment of royalty or franchise fee
• franchisor can withdraw the agreement under clauses in the contract.
22. Evaluate the extent to which globalization is encouraged by the development of new ICT
(information and communication technology).
(Total 7 marks)
Globalization is used to describe the growing integration of the world’s economy, whereby
barriers between national markets and the international community are broken down, creating a
single “global market place” with similar characteristics.
As a result decisions taken in one part of the world will have ramifications in others as firms
operate multi-nationally.
One of the factors facilitating this trend is the increase in the use of modern information and
communication technologies. This has had the following consequences
• integrated computer systems, allowing the transfer of data almost instantaneously and extremely
cheaply
• 24/7 operations
• knowledge of firms, products and services worldwide
• technology transfer between countries
• access to markets previously unopened, which may encourage greater trade between countries and
expansion by multinationals
• cross-cultural transfer, although some may say increased westernization
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• access to world markets creating larger economies of scale
• global marketing and promotion opportunities
• easier transfer of capital.
This has been brought about by many ICT technologies such as the world wide web, the
Internet, satellite communications, global media networks such as Sky, mobile
telecommunications, video-conferencing, wide area networks.
Each successive technology seems to be cheaper, faster and more complex than the last opening
up further possibilities of global links and new products and services. Language and culture
transfers can break down barriers to trade.
However, these factors can be exaggerated. Countries still retain their national characteristics,
language and culture. Product and service adaptations are still necessary, from one country to
another. The cost of the technology may be beyond the poorest countries leading to a further
widening of the wealth gap. Ironically the same technologies that encourage globalization have
also allowed the mobilization of anti-globalization pressure groups.
The extension of free trade associations, such as the European Union, may partially be as the
result of new technologies and their integrating effects.
23.
Explain what is meant by a franchise.
(Total 2 marks)
A franchise is an agreement where a business (the franchisor) sells rights to other businesses
(the franchisees) allowing them to sell products or use the company name.
24.
With reference to AOL-Time Warner, analyse the advantages and disadvantages of
organizational growth through mergers and acquisitions.
(Total 6 marks)
Mergers and acquisitions involve the joining of two different firms, either voluntarily or forced.
In a merger the two organizations agree to join together. An acquisition may be opposed as it
may involve the existing management of the firm being acquired losing control and/or their
jobs.
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Advantages
• the growth of the organization is instantaneous
• cost savings may accrue from rationalization and economies of scale
• output will be larger allowing for greater market share and power
• diversification decreases dependence upon certain markets and spreads risks
• time is saved in research and development
• synergies (1 + 1 = 3) may occur where the fit of the two firms provides enhanced advantages
over the independent operations of the two organizations
• competitiveness in markets increases and the firm may use its additional muscle to force
competitors out of the market
• brand name enhanced.
Disadvantages
• larger organizations are more prone to diseconomies of scale
• synergies only occur if the two firms integrate after merger. Mergers may be hampered by
resistance to change from one or both of the sets of employees involved
• diversification may be unwise if it moves the management away from their core competence
• key employees may be forced out or resign, following the merger, weakening the pool of
labour available to the new organization
• share values of the joined firm may be lower than the combined values of the previous
independent share values
• corporate cultures may clash, leading to conflicts in the workplace and possibly internal
competition
• customers may not approve of changes diluting brand loyalty.
Whether or not mergers are successful probably relates to the level of planning involved, the
consent of the two firms’ employees and the closeness of the fit. In the case of AOL-Time
Warner, the firms forming the merged organization were led by individualistic entrepreneurs,
who were probably used to getting their own way. The cultures of the two were likely to be
quite different and Time-Warner was actually undermined by the operations of AOL in pirating
music and videos. It appears that the move from core competence was significant.
[1 to 2 marks]
25.
Explain the difference between a merger and a strategic alliance.
(Total 4 marks)
A merger takes place when businesses (directors, shareholders and managers) agree to join
together to operate as one organization under a common board of directors.
Merger implies voluntary agreement and share exchange.
An alliance/joint-venture is formed when two or more companies share the costs,
responsibilities and profit but avoid a full merger. No share exchange is involved and each
company retains its name and its board of directors. It therefore manifests a lesser degree of
cooperation/involvement.
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26.
(i)
Define economies of scale.
(2)
(ii)
Examine two types of economies of scale that KLM may benefit from after forming an
alliance.
(4)
(Total 6 marks)
(i)
Economies of scale/economies of large-scale production can be defined as a fall in
average (or unit) cost of production as the scale of production rises.
(ii)
The possible economies of scale that KLM might benefit from are:
• Specialization/labour economies: with a large workforce it is possible to divide up
the work process according to specific skills that match the job requirements. The
combination of flights and coordination of schedules will increase efficiency and
reduce costs.
• Managerial economies: the employment of different skilled managers for different
functions/departments.
• For both of the above types, efficiency and productivity will increase and, therefore,
unit costs will fall.
• Purchasing economies: the benefit of bulk buying – obtaining supplies of materials
and components at lower unit costs (e.g. fuel, food with regard to materials and
entertainment systems, spare parts with regard to components).
• Financial economies: these stem from a lower cost of capital charged by the provider
of finance. KLM may be able to raise cheaper sources of finance in order to cover its
debt.
• Marketing economies: the costs of marketing will spread over a larger output and
therefore unit marketing costs will be reduced, for example, through combined
promotions.
• any other relevant economies of scale.
27.
Analyse three possible problems that KLM might experience after joining the Sky Team
Alliance.
(Total 6 marks)
Some of the possible problems that KLM might experience after forming an alliance are:
• Operational issues:
– the increased size might lead to diseconomies of scale.
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• Human resource issues:
– redundancy due to reorganization – the effects on trust, morale, costs due to redundancy
payments.
– managerial problems – due to different management styles, experience and culture of
senior managers from the different companies.
– general cultural and linguistic problems
as the employees will come from different countries.
• Marketing issues:
– a loss of KLM national and international brand-image and other intangible assets.
• Any other relevant point.
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