Unit 3
Answers
AQA Unit 3 ‘analyse’ style questions which are based on calculations and which carry 10 marks are marked as follows:
Level 3
Content (C)
2 marks
Application (Ap)
6 marks
6 marks
Candidate carries through calculations correctly
Analysis (A)
2 marks
Level 2 2 marks
Candidate shows good relevant knowledge, e.g. relevant formulae for investment appraisal
5-3 marks
Candidate makes significant progress with calculations
2 marks
Candidate interprets results clearly
Level 1 1 mark
Candidate shows limited relevant knowledge
2-1 marks
Candidate makes limited attempt to complete calculation
1 mark
Candidate makes some attempt to interpret results
In the A2 book, when an ‘analyse’ question carries 10 marks with no calculations, then assume that the marks are split: 2 Content; 2 Application; 6 Analysis. Analysis will be split into 3 levels with the descriptors being:
Level 3: 6 marks. Candidate analyses well developed arguments (on both sides if this is relevant)
Level 2: 5-3 marks. Candidate uses some analysis to develop arguments
Level 2: 3-1 marks Candidate uses limited analysis
AQA Unit 3 style questions which are based on ‘evaluative’ prompt words (discuss, to what extent, assess) are marked as follows:
Level 4
Analysis (A)
5 marks
Level 3
Content (C)
4 marks
4 marks
Candidate identifies two or more relevant factors showing good understanding, e.g. of marketing strategy
3 marks
Candidate identifies two or more relevant factors and shows understanding of, e.g., marketing strategy
Application (Ap)
4 marks
5 marks
Strong analysis of argument, developing points fully
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Unit 3
Answers
Level 2
Level 1
2 marks
Candidate identifies two or more relevant factors OR shows understanding of, e.g., marketing strategy
1 mark
Candidate offers single relevant factor or shows limited understanding
4-3 marks
Candidate applies knowledge effectively to case study
2-1 marks
Candidate attempts to apply knowledge to case
4-3 marks
Good analysis of argument
2-1 marks
Limited analysis of argument
For ‘evaluation’, marks are awarded using the grid below:
Notes: In the final examination, evaluation also assesses candidates’ quality of written communication. When deciding on the level to be awarded, examiners will consider the degree to which the candidate orders and communicates ideas.
Level
E3
E2
Descriptor
Candidate shows good judgement in weighing up arguments/reaching conclusion
Ideas are communicated using a logical structure, with some appropriate use of technical terms. There are occasional errors in accepted conventions of written communications.
Some judgement shown in reaching conclusion
Ideas are communicated with some structure evident with occasional use of technical terms. There are some errors in accepted conventions of written communications
Marks
5
4-3
E1 Limited judgement shown
Ideas are communicated in a simplistic way with limited use of technical terms. There are noticeable errors in accepted conventions of written communications
2-1
In AQA unit 3 style questions that require a ‘report style answer’ as in Question 4, marks are awarded as follows:
Level 3
Level 2
Level 1
Content (C)
6 marks
6-5 marks
Candidate offers arguments on both sides with development
4-3 marks
Candidate offers two or more arguments on both sides
2-1 marks
Candidate identifies single relevant argument
Application (Ap)
10 marks
10-8 marks
Candidate’s arguments are consistently rooted in case material
Analysis (A)
8 marks
8-6 marks
Good analysis: arguments well developed on both sides of the case
7-4 marks
Candidate makes good attempt to use context to develop arguments
5-3 marks
Reasonable analysis of arguments
3-1 marks
Candidate makes very limited attempt to apply knowledge to the scenario
2-1 marks
Limited analysis of argument, failing to develop points
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Level
E3
E2
E1
Unit 3
Answers
Descriptor
Candidate shows good judgement plus full justification
Ideas are communicated using a logical structure, with some appropriate use of technical terms. There are occasional errors in accepted conventions of written communications
Candidate offers judgement plus limited justification
Ideas are communicated with some structure evident with occasional use of technical terms. There are some errors in accepted conventions of written communications
Marks
10-8
7-4
Candidate offers undeveloped judgement based on evidence
Ideas are communicated in a simplistic way with limited use of technical terms. There are noticeable errors in accepted conventions of written communications
3-1
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Unit 3
Answers
Case study: Greater output frames company strategy (page 6)
1 (18m)
Distinguish between corporate and functional objectives – with the RR example of: Corporate objective – enhance competitiveness; functional objective – ‘leaner and more flexible support structure’. So the latter will help reduce costs and give flexible responses to changing market conditions which will increase competitiveness, i.e. make RR more able to compete effectively with other leading aero engine makers.
But, a leaner and more flexible support structure will not be the only factor determining competitiveness. The value of the pound and the dollar will influence the price competitiveness of
RR and the ability of new ‘graduates and apprentices’ to continue the company’s record of developing first rate, innovative engines at competitive prices will also be important factors.
2 (10m)
Distinguish between objectives and strategies. ‘Leaner and more flexible’ will mean: smaller permanent office and support workforce; more temporary, part-time staff; increased outsourcing of services such as administration, HR functions, IT support etc. Explain how these will produce leaner (lower cost but same level of service) and more flexible (able to respond quickly to changing demand or external factors) support services.
3 (18m)
Explain the link between objectives and appropriate strategies and between functional objectives and corporate objectives. Coordination is essential – and should start with the mission and long term objectives of the whole company. The functions/departments of the business should coordinate their objectives and strategies to meet the company objective – or else there will be a lack of effectiveness and potential clashes between them, e.g. the RR operations objective of innovation through R and D needs to be coordinated with the finance department as long-term finance will be needed for this. If this is done, then the company has a much higher chance of meeting its overall corporate objective. Answers should contain other examples too.
But even effective coordination will not guarantee that the corporate objective will be achieved.
External factors such as the success of competitors’ strategies and political/economic changes will have a considerable impact too.
4 (10m)
There will always be conflicts between departments which need to be resolved through coordination. For example, marketing and operations may be competing for limited budgets; cost cutting objectives may conflict with the targets for developing and testing more innovative products; cost cutting objectives in operations through setting up new overseas locations may conflict with the HR objectives of effective communication and common sense of purpose in the workforce. Meetings of senior executives – even at board level – will be needed to try to achieve coordination between functional objectives – but this will become more difficult as RR develops into a much more geographically dispersed MNC.
Summary questions (page 7)
1 Student Book – an example would help too. (2C)
2 Functional objectives should be geared towards helping to achieve overall corporate objectives.
(2C)
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3 Outline SMART (2C); explain the benefits of objectives having these features, e.g. reviewing actual performance is much easier and less subjective when a clear and measurable target has been set.
(2A)
4 Achieving growth through increasing market share will require coordinated functional objectives
(and strategies). Operations should set objectives about stock delivery dates (to ensure stocks are available when required), quality levels (to reduce return rates); finance will set budgetary limits for all departments to try to ensure no overspending during expansion; marketing will set sales objectives for each region/store; HR will need to review workforce plan and achieve levels of staff retention and low absenteeism that will allow good customer service to be offered so that market share is more likely to be increased. (2C; 2Ap; 2A of objectives selected)
5 Explain distinction between corporate and functional objectives (2C). These objectives are not necessarily incompatible – growth in the global market can be achieved through both increased sales of drugs in developing countries and increased sales of cosmetic-based products in countries with an ageing population, e.g. developed countries. (3Ap or for similar points applied to pharmaceutical business). But were these functional objectives agreed at board level and is there coordination between them? For example, has finance been arranged for the strategies needed for both of these objectives? Does the HR department have objectives that are coordinated with both of the targets set for the other departments, e.g. is there an objective to recruit and retain scientists who can help develop drugs against curable diseases? Without such coordination there may be a conflict of interests between departments and this will reduce the chance of achieving the corporate objective. (5A)
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Unit 3
Answers
6 (4m – 2C +2Ap)
Define ‘financial objectives’ – give examples from the case. Internal factors include: a) plc status so there are shareholders to keep happy! Hence the need to sell the proposal carefully to them – there might be a risk of short-term profits falling but could long-term profits rise with a more committed workforce? So short-term financial objectives might be reduced but long-term ones increased. b)
The workforce – a skilled and flexible workforce is probably essential to the success of this technically focused business. The need to retain and motivate good staff will be key to success.
Therefore, there could be a need to revise the financial objectives on cost (i.e. labour cost) minimisation.
7 (6m – 2C + 4A)
Economic factors: rate of inflation; level of average wage rises; level of (local) unemployment (will it be easy to get another job?), income tax rates. Competitors: How much are similar firms paying?
Other local employers (may not be direct competitors): what wage rates are being offered by local businesses?
8 (10m – see Chapter 1)
Short term: raising costs in the short term – higher pay will lead to costs rising but the percentage in costs may not be great as it is a capital-intensive company. This will be likely to lead to lower profits in the short term – this must be explained to shareholders carefully.
Long term: increasing pay could increase staff retention and reduce labour turnover – reducing HR costs. Also, staff may feel more appreciated for their contribution to the company’s success and this could increase motivation and staff involvement in problem solving. So long-term profits could increase.
9 (18m – see Chapter 1)
The main shareholders of most plcs are pension funds, investment trusts etc. and the managers of these groups are keen to maximise short-term shareholder returns so that their own ‘customers’
(pension holders and savers in investment trusts) see a higher return too. Optical will have to explain carefully that (hopefully) the potential reduction in profits should be very short term and the shareholder loyalty will be rewarded quickly with higher profits and a rising share price. If this pay proposal is not communicated in a positive light, then some shareholders may sell shares in the company – and this will also reduce the return to other existing shareholders. On the other hand, the increases in pay might have only a marginal impact on profit so shareholders might not be that concerned.
Summary questions (page 13)
1 Student Book definition of at least three financial objectives (3C) and some explanation of how these can be applied to hotel group (3Ap)
2 Explain any one financial objective (2C) and analyse one benefit of setting this target, e.g. return on capital employed allows managers, shareholders and other stakeholders a clear way of assessing company performance during a particular time period against the original RoCE target. (4A)
3 Explain one possible cash flow target, e.g. keeping an £x balance in the bank account (2C).
Shortage of cash can lead to business failure – e.g. being unable to pay suppliers may result in
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Answers creditors forcing liquidation on the business. Cash is even more important than profit in the short run. So, whereas a long-term financial objective might be expressed in terms of RoCE, an objective regarding cash flow is likely to be of greater significance in the short run. (6A)
4 Cost minimisation objective: keeping all costs of the business, fixed and variable, as low as possible without negatively affecting revenue. (2C). This is a difficult objective to achieve as often excess short-term focus on cost minimisation can be at the expense of long-term revenue. For example, keeping material costs down by sourcing cheaper supplies of wool or cotton may impact negatively on quality – and over time, high street retailers may cut back orders if their own customers show resistance to buying the products. Secondly, cost minimisation might be achieved through unethical practice at work: relocating to low wage cost countries to take advantage of lax employment laws or health and safety laws. Negative customer reaction to these policies may, in time, lead to high street shops refusing to order from this supplier who has put low costs above all other objectives. (2Ap;
6A)
5 Explain shareholder expectations from their investment: dividend growth and share price increase over time. (2C) PLC shares are traded on the Stock Exchange and these companies are more vulnerable to takeover than private limited companies. (1C) If plc is under-performing (i.e. lower profitability and growth than rivals in similar industry) then shareholders will become dissatisfied with low or negative dividend growth and low or falling share price. If shareholders are tempted to sell the shares to seek higher returns with another investment, the company’s share price will fall further. This may make the total value of the company appear ‘cheap’ and predators – competitors or private equity firm – may submit a takeover bid. (5A)
6 Private sector hospitals – driven by profit motive. Public sector – run as a public service but with financial targets to meet, e.g. keep to government-set budget. (3m for introduction – C). Private sector may focus on cost minimisation, sales maximisation and profit maximisation. Public sector hospital may focus on service targets, e.g. hospital waiting list, number of operations performed within budget constraints. So, these hospitals will conduct operations on the basis of patients’ needs but private hospitals will focus on ability to pay and the most profitable treatments. (4Ap; 7A)
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Answers
1 (4m – 2C; 2Ap)
Paying redundancy pay to workers who are likely to lose their jobs as a consequence of these shop closures; getting out of expensive leases on premises, e.g. paying a penalty to landlords for not continuing with rent payments.
2 (6m – 2C; 2Ap; 2A)
Gross profit and operating profit – Student Book definitions and student’s own numerical example.
Clear explanation of the difference.
3 (8m – 2C; 2Ap; 4A)
The business needs to keep tight control over costs as a loss was made in 2007 and shareholders of a plc will expect management action to achieve a quick return to profit. Controlling costs while maintaining or increasing revenue should achieve this. A ‘difficult trading period’ suggests that stocks may be left unsold in shops – raising concerns over the level of working capital. So, control over working capital will be needed to help prevent cash/liquidity problems.
4 (8m – 2C; 2Ap; 4A)
Gross profit margin: 2007 = 55.58%; 2006 = 56.9%. A small reduction – perhaps the company lowered prices in some of the branches it closed to sell off stock. Operating profit margin (before exceptional/one-off items): 2007 = 0.5%; 2006 = 7.5%. Even without the large exceptional items in
2007 caused by branch closures, the operating profit margin has fallen substantially. The management seemed to have allowed the overhead expenses of the business to rise at a faster rate than sales – which hardly increased over the year reflecting ‘difficult trading conditions’.
5 (18m – see Chapter 1)
Closing 45 stores has had an initial negative impact on operating profit due to the substantial exceptional item of the closure costs. In future years, the labour costs of the business and its overhead expenses will fall and this should help to increase operating profit – as long as tight control is maintained over cost of goods sold and prices are not reduced because of difficult trading conditions – made worse, no doubt by the 2008/2009 recession.
But improved performance, i.e. increased profitability, will depend on many other factors too.
Reaction of competitors to recession and trading conditions will be important. If they reduce their prices substantially then Blacks may be forced to follow – leading to a negative impact on profit margins. The decision making ability of Black’s management will also be important – have they closed the ‘right’ 45 branches? The depreciation of the pound could also be important if many of
Black’s products are imported – increasing import costs will raise the cost of these goods.
Summary questions (page 21)
1 Student Book (3C)
2 Student Book, but a simple example would help to illustrate the point about low quality profit
(unsustainable in the long term such as surplus made from the sale of assets) and high quality profit
(sustainable – e.g. profits from a new investment project). (3m knowledge)
3 Student Book (3C)
4 Definitions (2C). Appropriate examples and explanations (4C)
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Unit 3
Answers
5 Definition (1C). If not taken account of the income statement will over-record profits until the year in which the asset is sold – example too. If not recorded on balance sheet then the non-current assets will be over-valued, and this will lead the users of accounts – example too. (2Ap through examples;
3A)
6 Define the two terms (2m). M & S will use intra-firm comparisons to assess the performance of different branches and different product ranges – on the basis of these comparisons of sales, contribution, profit etc. management decisions might be taken, e.g. to stop selling a product range.
M & S will use inter-firm comparisons to help highlight and explain why (in 2009) its sales and profit performance is worse than that of ASOS (clothes) and Morrisons (food). On the basis of this comparison, e.g. gross profit margin and sales per square metre, management decisions might be taken e.g. lower prices of some product ranges. (2Ap; 4A)
7 Published accounts can be used for trend analysis (over time) and comparing performance with other companies in the same industry. Potential investors are likely to be interested in: profit margins and return on capital employed, profit quality, gearing (non-current liabilities as a percentage of capital employed) and liquidity – relationship between current assets and current liabilities (4C). Profit margins and RoCE will indicate effectiveness of management in earning profits; profit quality will be important as an indicator of whether current profits are likely to be sustained in the future; gearing will indicate the degree of risk taken by management and liquidity will indicate whether the growth/performance of the business is taking risks with the ability to pay off short-term debts. (6A)
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Unit 3
Answers
Case study: Thomas Cook Group (page 25)
1 Calculate the Thomas Cook Group’s liquidity ratios for 2007:
Current ratio = Current assets / Current liabilities
Current ratio = 2,321.4 / 3,737.9
Current ratio = 1:0.62
Acid test = Current assets – Inventory / Current liabilities
Acid test = 2,321.4 – 27.4 / 3,737.9
Acid test = 2294 / 3,737.9
Acid test = 1: 0.61
2 Liquidity seems to be acceptable (comparison with previous time periods or other similar companies would have been useful) and the company should be able to meet its overall objective.
3 When the two liquidity ratios are similar it means that inventories are a low proportion of current liabilities. For a travel company this is to be expected.
4 Businesses in industries with high inventory values, e.g. furniture retailing or shipbuilding would have big differences between acid test and current ratios. Businesses that have a constant and regular flow of cash flowing into the business, such as supermarkets, may be able to remain quite liquid and able to pay off current liabilities with low liquidity ratios.
Persimmon Homes (page 30)
1 a) Operating (net) profit margin % = Operating (net) profit x 100
Revenue
(1 mark if no correct result)
December 2005: 23.1 % = Operating (net) profit x 100
1,192.7
(2 marks if no correct result)
Therefore, Operating (net) profit = £275.51m
(3 marks) b) OPM = OP x 100
Revenue
(1 mark if no correct result)
December 2006: OPM = £343.6m x 100
£1591.9m
(2 marks if no correct result)
Therefore, OPM = 21.6% (3 marks) c) £1314.5m = £189,265 average price (3 marks)
6002
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Unit 3
Answers
2 (8 marks – 2C; 2Ap; 4A)
Interim accounts are accounts calculated and presented during the financial year – e.g. after 6 months of trading. These accounts can be used by managers, investors, potential investors and other stakeholders to assess the performance of the business on a more regular basis than by just having access to the end of year accounts. If mid-year performance looks promising, then this could benefit the company in terms of investor confidence. If mid-year performance looks disappointing, then management could make and announce decisions that should improve performance – again, perhaps, restoring stakeholder confidence. So, the fall in number of homes sold in 6 months to June
2007 could be explained to the users of accounts and the action to be taken to reverse this downward trend announced.
Students may recognise that these are published accounts and that Persimmon management would have access to much more detailed and up-to-date internal management accounts – to aid decision making – and these would not be published.
3 (18 marks – see Chapter 1)
OPM has fallen slightly since 2005 – this could be a sign of more competitive conditions in the housing market meaning that prices of new homes cannot be increased at the same rate as costs are rising; it could mean that the company has allowed overheads to rise at a faster rate than sales revenue – perhaps promotion costs have increased? RoCE has also fallen slightly since 2005. This might be due to lower operating profit as capital employed remains constant or, perhaps more likely in this case as the company increased borrowing in 2006, capital employed has increased but this has not yet been reflected in higher operating profit figures.
But the chairman – as with all other users of the accounts – really needs to look at a wider picture before making a judgement about the performance of Persimmon. Ration results from other similar house building companies should be compared with those of Persimmon – are they all experiencing the same competitive and cost pressures? Trend analysis of these other companies’ results is essential to put Persimmon’s results in a wider context. Also, economic data would help to explain the profitability of this company. Data such as house prices, GDP growth, interest rates – all of these would help to explain and put into an economic context the profitability trends of this one company. Perhaps the ‘investment in land’ referred to in the Chairman’s report will be reflected in increasing profits in future years? Students may also refer to the recession and the sharp fall in house prices after June 2007 – trend analysis of Persimmon’s results in 2008/2009 may indicate a more worrying picture for the Chairman.
4 (6m – 2C; 2Ap; 2A)
Define gearing and give formula. Higher non-current liabilities (long term loans) are likely to have been the major cause of this increase in Persimmon’s gearing ratio in 2006. Without further accounts details it is impossible to tell exactly why this might have occurred or what the extra capital was invested in – but the clue in the evidence is that the company may have borrowed capital to ‘invest in land at sensible prices’ as directors may have been expecting a further increase in demand for houses and higher house prices (as was occurring in 2006).
Higher gearing can result in higher profitability in the future if the capital is effectively invested in profitable projects.
5 (8 marks – 2C; 2Ap; 4A)
So far in 2007 (and the December results are not available) sales of houses in terms of units and revenue have fallen – so the marketing measures have not yet been effective it seems. These marketing measures might, though, have added to the overhead costs of the business which is possibly why RoCE and OPM have fallen slightly. Firm control over building costs should help to increase GPM and OPM, but these measures might take some time to take effect and they could be more than cancelled out by house price reductions if the market is becoming more competitive.
Investment in land at ‘sensible prices’ should yield future profits if the houses built on them can be
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Answers sold at a profit – which from 2008–09 onwards is quite doubtful. It may be too early to judge how effective these ‘disciplines’ have been.
Summary questions (page 31)
1 Give formula for both ratios (2m). Explain that although they are both liquidity ratios the difference between them is that the acid test ratio excludes inventories. This makes it a tougher test of liquidity and leads to it always recoding a lower numerical result than the current ratio. (3m)
2 The value of inventories (both in total terms and as a proportion of current liabilities) would be very different between these two businesses. The current ratio and acid test ratio for the health and safety business are likely to be similar. High inventory levels for a retailer of ladies’ fashions would mean that the current ratio could ‘appear’ satisfactory but the acid test result could still be much lower and at a level that suggests low liquidity. (3m)
3 Student Book
4 Define/state both ratios (2m). This situation would improve the firms cash flow – by delaying payment to creditors (increasing ‘creditor days’) and insisting on early payment from debtors the firm’s cash flow would improve. This might reduce the need to increase the firm’s overdraft. (4m)
5 State ratio (1m). The higher this level is the less capital tied up, relative to sales, in inventories. A fish shop is likely to have higher inventory turnover (one hopes!) than a furniture store. Freshness is obviously important but so is fashion. ‘Fast fashion’ shops such as Zara aim to turn most inventories over in two weeks to create fresh and up-to-the-minute fashion image. Other more traditional clothes stores may just change stock over 4 times a year. Other examples are possible.
(2m application; 3m analysis)
6 Definition – the manipulation of accounts to improve the apparent performance (income statement) or value (balance sheet) of a business (1m). Examples include: sale and lease back of assets before publication of accounts (to boost liquidity but they might have to be bought back later or the leasing charge will increase overheads and future profits); amending depreciation assumptions (e.g. increasing length of useful life to reduce annual depreciation charge which raises recorded profits and net book value of assets). These and other examples make the comparison of ratio results over time (trend analysis) and with other businesses (inter-firm comparisons) much less useful and meaningful. This shows that a more detailed analysis of a company’s accounts and accounting practice is needed than just comparing key ratios. (5m analysis)
7 Define both ratios or state formulae. (2m). Dividend per share indicates the monetary value of dividends to be paid on each share so a shareholder can assess the total income on his/her total shareholdings. But this does not tell whether, in relative terms compared to other potential investments, holding shares in the company gives a good percentage return or not. Dividend yield does this and can be easily compared with the same ratio for other companies. This ratio is affected not just be the dividend per share but also movements in the share price. (6A)
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Answers
Red Square Industries plc (page 36)
1 (10m – see Chapter 1)
Definition. This business clearly has well-defined divisions which lend themselves to having their own income statement, i.e. revenue and costs allocated to them. Some of these divisions operate in quite different markets, e.g. domestic heating and brick making (and effluent treatment!) so do not separate out the revenues and costs applicable to each division would make the assessment of performance of each section impossible. Poor profitability in any of these divisions can be identified and appropriate management action taken. Each section of the business can be given separate targets and performance reviewed against these. Greater delegation can be offered to managers of each division and this will help to motivate each management team. Each profit centre can be given cost targets (as well as profit targets) and this would help Red Square to keep to its overall strategy of cost minimisation.
2 (8m – 2C; 2Ap; 4A)
Cost minimisation – reducing unit variable costs and total fixed costs to the lowest possible level whilst still achieving other objectives, e.g. quality of product/customer service. Reducing costs should help to increase profit margins and total profits – assuming prices are not cut and sales do not fall. This should provide additional internal finance for expansion of the business. Cutting costs could also be used as a basis for a price cutting programme which would increase the firm’s market competitiveness.
3 (12m – 2C; 2Ap; 4A; 4E)
Long-term finance is likely to be necessary to fund an expansion programme, e.g. to purchase further non-current assets or to fund the takeover of another business. The business is a plc so sale of shares is one option – especially to finance for larger expansion plans. But this may have an impact on the degree of control of existing shareholders/directors over the business. Long-term loans is another option –which would not affect control of the business. But it would have been helpful to have the company’s gearing ratio to assess whether this would be wise or not. Sale of existing assets to fund an expansion programme is also possible – perhaps if the brick division cannot be made more profitable the brick works could be sold for development to finance expansion into other product areas.
Final judgement needed – but much will depend on other data that is not actually provided.
Summary questions (page 37)
1 Student Book
2 Any two strategies identified (2C).They can have a big impact on the future control over and profitability of the business. Profit centres could have a considerable impact on delegation and target setting for managers. Cost minimisation could have a big impact on profits – but care has to be taken that product quality or customer service are not compromised. (2 x 2m = 4A)
3 Define profit centre (1m). By creating each branch as a centre to which costs and revenue can be identified. The profitability of each coffee shop can be calculated. Profit targets/budgets for future time periods can also be set. This helps to provide an effective review measure of success and gives the team working in each branch a target to work towards – which can be motivating. Reasons for under or over achieving branches can be assessed – to help underperforming branches in the future.
(3Ap;4A)
4 Student Book definitions (2m) plus examples (2m). Some understanding of distinction between them, e.g. by knowing how they are treated differently on balance sheet/income statement. (1m)
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Answers
5 Definition (1m). They can determine, to a large degree, the future success of the business. Poor capital spending decisions, that often involve large sums of money, can damage a firm’s reputation and profit prospects. Successful capital spending decisions e.g. on new product development, can influence a firm’s profits for years in the future. (5m)
6 Cost minimisation would help to keep prices low – which is a major factor in Primark’s success.
Capital spending, e.g. in new premises would help to increase sales potential as long as prices remained low! Perhaps, cost savings could be used to help finance capital expenditure programme?
Final recommendation? (1m for all of the skills)
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Answers
Payback:
1 Payback for Machine B = 2 years 8 months (allow 9 months as students may round up to end of this month even though it is 2 years 8.448 months).
2 Based solely on the payback period, Machine B is the better investment as a quicker payback time has several advantages – but it does not consider the overall profitability of the investment.
ARR:
3 ARR for Machine B = 17.9%
4 The higher the ARR the more profitable the project is – and 17.9% is substantially higher than the
ARR for Machine A.
NPV:
1
NPV for Machine B = £133,110
2 The higher the NPV the better – but it is difficult to compare NPVs when the capital cost is so different. However, an NPV of £133,110 based on a capital cost of £310,000 is a better investment than an NPV of £81,875 based on an investment of £750,000.
Case study: Lowfare Airways plc
1 Capital investment is the purchase of capital assets with the expectation of future returns/profits.
(2 m)
2 (10 m – 2K; 3Ap; 5A)
Marketing objectives could be: extend into new market sector (long haul); increase total sales; financial objectives could be: increase profit margins; increase total profitability.
Long-haul market could be less price elastic than low cost short distance routes; scope to increase prices per passenger/mile compared to short haul routes. There might be less competition than in the markets the business currently operates in. By taking a ‘low cost’ approach to long-haul routes this could create a niche market – but others could quickly join if it was successful.
3 (8 m – 2C; 2Ap; 2A; 2E)
Define investment criteria (1m). ARR criteria should exceed 10% by a big margin (to allow for the risk of cash flow uncertainty) as this is the cost of borrowed capital. This should be based on likely return from other similar projects. Payback is already given – is this too long given that the uncertainties concerning the airline industry (oil prices, competition, environmental concerns)?
NPV should be as positive at a discount rate of 10%. Perhaps the business should use a higher rate of discount too to allow for increases in cost of capital. Will NPV still be positive at 12% discount?
Final recommendation necessary to earn both evaluation marks.
4 ( 6 m)
ARR = Average annual profit x 100
Capital investment
(1 mark if no calculation)
ARR = (£45m – £25m)/4 x 100
£25m
(2 marks if result is incorrect)
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Answers
ARR = £5m x 100 = 20%
£25m
(3 m)
NPV:
Year
0
1
Net cash flow (£m)
(25)
5
Discount factor
1
0.91
Discounted cash flows
(25)
4.55
2
3
10
15
0.83
0.75
8.3
11.25
4 15 0.68
Net present value
10.2
£9.3m
(1 mark for some knowledge of discounting)
(2 marks for NPV figure without subtracting capital costs)
(3 marks – correct result – but encourage students to lay out their workings as in table above)
5 (18 marks – see Chapter 1)
ARR is substantially above the current cost of capital so this project should be profitable even using borrowed capital. Once the capital cost has been paid back (payback period) higher profits will be made as interest will no longer be payable. NPV is positive and looks high compared to the original investment. On financial grounds the project seems to be worthwhile assuming the business can raise the necessary capital.
These results should be compared with those of other potential investment projects too – such as expanding the short-haul routes offered by the company – before making a final decision. In addition, the reliability and accuracy of the cash flows needs to be questioned – what was the source of these and have they been checked or assessed by other sources? How long is this project planned to last for? Are the airport licences to operate the flights for a long period of time – much longer than the payback period?
Qualitative factors might be important too – does the project fit in with the objectives of management? Are airports used by Lowfare appropriate for this type of route? Are suitable staff available in the right locations?
(Much additional data would have been useful – this is an important evaluative point. Overall conclusion needs to be clearly made.)
Summary questions (page 45)
1 Student Book
2 Financial objectives could be, for example, cash flow target or return on capital employed target
(2m knowledge). Investment will involve capital outflow but with expected/forecasted cash inflows.
Example: purchasing a new labour saving computer-controlled machine should: reduce variable labour costs during its operation – this should help to improve net cash flow. It should also lead to higher profit which will help to increase RoCE (if the ARR is higher than existing RoCE of the business).
(2Ap; 2A)
3 Payback: The length of time needed to repay the original investment. (1m) Advantage: Very useful measure for firms with potential cash flow problems or when investment is funded from external
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Answers sources. Disadvantage: Does not use the cash flows after payback period so takes no account of profitability. (up to 3m)
Average Rate of Return: Average annual profit expressed as a percentage of initial investment.
(1m). Advantage: It gives a rate of profitability that can be compared with other projects or a target
RoCE. Disadvantage: Takes not account of the speed of return or timing of cash flows and therefore does not take the time value of money into account. (up to 3m)
Net Present Value: The total net return on an investment stated in today’s monetary value. (1m)
Advantage(s): Recognises the time value of money and allows a simple ‘accept/reject’ decision on whether the project is worthwhile depending on whether the result is positive or negative at the chosen discount rate). Disadvantage: It is difficult to choose the most appropriate discount factor.
(up to 3m)
4 Time value of money: A sum of money is worth more today than the same sum in the future due to the existence of interest rates.
5 Define ARR (1m). Define RoCE (1m). Compare with interest rates: The business will want the rate of return on the investment to comfortable exceed the likely rate of interest on borrowed capital.
This will be the case even if the business does not require a loan as the interest rate becomes the
‘opportunity cost’ of the investment. Compare with RoCE because the business will not want the return on the new investment project to earn a rate of return less than the present or targeted RoCE.
(up to 3m for each comparison)
6 Definition of qualitative factors and at least one example (2m). Impact on existing workers if the new warehouse is far from the existing one. Image of the firm and environmental considerations – it is likely to be large building so will it destroy a large area of farmland once built? Impact on local community – there are likely to be many truck movements into and out of this warehouse and this will add to traffic noise, pollution and congestion. Availability of suitable staff – this large warehouse may require many workers so will a rural area be appropriate? (2m Ap; 6m A)
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Answers
7 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) Explain how marketing objectives are linked to corporate objectives. Students may be able to explain the
‘safe but boring’ brand image that Volvo once had with the ‘sophisticated lifestyle’ that they now want to be associated with. On the one hand, this is not a typical marketing objective as it does not have any measurable goals or targets. How will the success of ‘brand reappraisal’ be assessed? On the other hand, brand reappraisal may be a common objective – take the case of McDonalds and the need to present a more socially responsible image (and menu!) – in order to enter a new market segment, appeal to other consumers and increase sales. So, when this objective is combined with other, more specific and measurable marketing objectives, it might be a common objective for firms to set.
8 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) These are internal factors.
Finance: an ambitious marketing objective would require substantial marketing budgets; shortage of finance would restrict the marketing objectives that are likely to be achieved. The ‘reappraisal of the brand’ will not be an easy or cheap objective to achieve – sponsorship of TC channels and the making of road test videos for example – so the finance department will have to provide the necessary capital. Operational issues: A reappraisal of the brand might need a reappraisal by the company of the products it designs and sells. This will only be possible if the products are
‘sophisticated’ and of high enough quality to lead to this brand reappraisal. Capacity must also be available to be able to increase supply should the marketing objective be achieved effectively, leading to increased sales.
9 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) This is an external factor.
Market factors include consumer taste changes, economic climate, legal and social changes.
Increasing incomes (up to 2008) and higher consumer expectations for quality and image might have forced car companies to change their marketing objectives. Aiming to sell standard cars with low brand image at low prices would not be appropriate for Volvo – especially when incomes are rising. The 2009 recession might change car companies’ marketing objectives as consumer incomes fall. Tax and legal changes are forcing car firms to put the environment as a higher objective. The marketing objective of selling more environmentally-friendly cars might be the consequence of this.
10 (18 marks: see Chapter 1) It would certainly be very important. Actions by competitors that lead to new products, more aggressive marketing and entry of new firms to the market are likely to have a big impact on car companies’ own marketing objectives. The new objectives might need to focus on
‘maintaining market share’ or ‘entering new markets’ or ‘changing the brand image’ to remain competitive with other businesses. This is a very competitive market, after all. Other external factors are also significant, however – examples, such as technology and market factors, focused on car industry. In addition, internal factors will also influence the marketing objectives – finance, human resources and operational issues – examples based on the car industry. So, competitors’ actions will be very important but not the only factor influencing Volvo’s marketing objectives.
11 This could be explained to students as being like a BUSS3 report-style question. The mark scheme for these questions is shown at the start of Chapter 1 answers.
1 (2 marks) Student Book.
2 (2 marks) Should be linked in with corporate objectives and should be measurable.
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3 (6 marks: 3 marks for examples; 3 marks for application to given retail business) Increasing market share is the overall marketing objective – and should be a measurable target. Other marketing objectives that might be set in order to achieve this overall aim include: increase consumer awareness of the brand by a given percentage; increase the number of stores stocking and selling the product by a given number; achieve a ‘reappraisal of the brand’ by a given percentage of existing consumers.
4 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) In more than one way. Falling profits could make it essential for the firm to redefine the market segment it is aiming at and to amend the market image of the company and its products. Also, falling profits could lead to lower budget for marketing spending (although this might be an inappropriate response!) and this might have an impact on the promotional objectives that are set.
5 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Define ‘marketing objectives’ and give relevant example(s) for this club (which is run as a profit-making business) (1 mark
Content; 1 mark Application). This signing might mean that the marketing objectives need to be made more ambitious in order to reflect the extra capital spending on the player and the need to repay this investment. Raise the target for season ticket memberships? Raise the target for programme and merchandise sales? (1 mark Content; 1 mark Application; up to 3 marks Analysis).
Other factors might also influence these objectives, e.g. can the suppliers of shirts, etc. provide the additional stock that the marketing objectives assumes can be sold? (Up to 3 marks Analysis)
6 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Define ‘marketing objective’
(1 mark). The marketing objective in this case is to launch a new product – but there should be sales targets set too for this product. This objective cannot be set without discussion with the operations function. How long will it take to develop this shoe and build up necessary stocks? This will affect the time element of the marketing objective. How much will they cost to produce? This will affect the pricing of the shoe and, therefore, the potential sales target. Is capacity limited and what is the total capacity available? Clearly, the sales target cannot exceed the maximum output level. What level of quality will be reached? This will affect the brand image and consumer reaction to this product and also the market segment being aimed at.
7 (18 marks: see Chapter 1) Define ‘marketing objectives’ and explain external factors that influence them (2 marks). Explain why this is an example of an external factor – and the impact it might have on existing marketing objectives, i.e. make it more difficult to achieve the advertising sales growth or listener numbers growth that might have been the original objectives (2 Application and Analysis marks). Other factors will influence marketing objectives too, both other external factors and internal factors – apply and explain (2 Application and Analysis marks, plus Evaluation if these are weighted or assessment is shown).
8 Further evaluation: Might be a short-term problem – celebrity status can be short-lived! So it may not be necessary to change marketing objectives. Other factors might be even more important so this one factor might not require a change in objectives.
9 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Define ‘marketing objective’
(1 mark). Fair Trade movement is an external ‘market factor’ that could influence marketing objectives (1 mark). The Fair Trade movement is increasingly popular due to changing consumer attitudes. Failure to reflect these in marketing objectives could lead to disappointing sales/profits for certain businesses, e.g. clothes retailers. If the retailer agrees to source supplies from ethical Fair
Trade sources (cotton and finished clothes from suppliers who pay fair wages, etc.) then the marketing objectives should reflect this: Aim to achieve a certain percentage of fair trade sales; aim to change the public image of the retailer and its products; aim to increase sales by using the fair trade link as a marketing ‘tool’. It might require the business to go ‘up market’ as Fair Trade products are often more expensive than non-ethically sourced products (8 marks but must be applied to clothes!).
10 (18 marks: see Chapter 1) Define ‘marketing objectives’ (1 mark). State/outline internal/external factors differentiating between them (3 marks). Examples of likely marketing objectives for a bank:
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Answers increase market share of current accounts to/by certain percentage; increase sales of investment/insurance products by certain value or percenage; increase potential customer awareness of bank and its products. Internal factors: finance – this is a potential limitation even for banks!; human resources – staff will need specialist training in selling investment/insurance products and customer service; operational issues – is the IT system able to cope with increased customers and transactions? (2 marks Application, plus Analysis marks). External: competitors’ actions as it is a very competitive (oligopolistic) market; technological change – but the bank should be able to afford specialists to keep on top of this; market factors – are consumers more or less willing to trust banks now? Legislation over selling financial-based products is very strict. (2 marks Application plus Analysis marks).
11 Evaluation: Weighing up the factors, relative importance of factors might change over time, e.g. banking crisis might change consumers’ attitude towards banking services. An overall conclusion is needed.
12 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Covered by previous answers
– students should be encouraged to put answers into a business context to earn Application marks.
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Answers
1 (6 marks – 2 marks Content; 2 marks Application; 2 marks Analysis) Define ‘correlation’ (1 mark).
This is a weak positive correlation as sales increase slightly in response to an increase in the marketing budget. For example, when the marketing budget was £500,000, sales reached £250m but when the budget was nearly £800,000, sales rose to £380m. The positive correlation was not consistent and is becoming weaker– but overall the increase in budget led to an increase in sales.
Firm could decide to limit spending to around £530,000 as correlation weakens after this level.
2 (12 marks: 2 marks Content, 2 marks Application; 4 marks Analysis; 4 marks Evaluation) Define
‘market analysis’. In changing markets this helps to guide marketing decisions and make them more accurate – give details of how this market is changing. This business needs analyse how its own sales are changing and how they might change in the future due to market changes (give details from case study)– the business may need to take important decisions over what flowers to sell and through which channels – there will be opportunities. Market analysis very important in this process, especially as flowers are a global market now.
3 Further evaluation: It is important but the correct decisions have to be taken too – and the firm’s ability to respond to market analysis depends on finance available and management skills too.
(10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Statistical analysis, e.g. times series analysis; analysis of own marketing data, e.g. from test markets. Risks of using statistical analysis based on past results, e.g. previous sales figures: future market and other external conditions may make the past a poor guide to the future, e.g. sales of flowers from overseas might be affected by high transport costs if price of oil rises. Using test market data and market research results raises questions about the accuracy of these forms of trying to forecast based on limited samples, etc.
4 This could be assessed using the mark grid for Unit 3 report style questions – see Chapter 1.
1 (2 marks) Student Book.
2 (6 marks: 2 marks Content; 4 marks Analysis) Based on past data, e.g. sales figures (1 mark
Content). Moving averages smooth out seasonal fluctuations in data (1 mark Content). This allows the average seasonal variation to be calculated and the trend to be extrapolated – these can be used for forecasting. The method of moving averages allows a more accurate extrapolation from the trend than just using the actual data which is distorted by seasonal fluctuations. More accurate extrapolated data can then be used to assist with business planning.
3 (2 marks) Student Book.
4 (4 marks) Student Book definitions (2 marks) plus sketches of these two concepts (2 marks).
5 (2 marks) Student Book.
6 a) (6 marks: 3 marks Content; 3 marks Application) Definition of ‘market analysis’. Market size of wellington boot market and closely related markets; market share of major competitors (imports or domestic producers?); market growth; market segments (traditional and fashionable segments? b) (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Benefits: This will allow the firm to assess the market potential, its own performance and help in the setting of realistic marketing objectives. Particularly useful in this case as the new marketing manager may lack
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Answers knowledge of this market and will need to take key strategic decisions to ‘revive the fortunes’ of the company. Explain benefits in detail. c) (6 marks: 3 marks Content; 3 marks Analysis) Moving average – explain briefly how this can be used; extrapolation – explain briefly how this can be used; correlation, e.g. sales and marketing budget – explain briefly how this can be used.
7 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Define ‘test market’ (1 marks
Content). Explain how test markets operate. Problems with test markets: cost, time consuming, gives competitors access to the new product or marketing strategy – scope for copying. Apply to this product.
8 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Explain what marketing data might be collected in this case. Explain and develop the problems of trying to analyse it in this case, e.g. accuracy of test marketing with music products; speed of change in this industry making secondary data quickly out of date; primary data collection might not be accurate due to the unpredictable nature of this market and the risk that consumers may not behave in predictable ways.
9 (18 marks: see Chapter 1) Define and explain all three techniques. Apply and evaluate in the context of this business: new to market so what sales data will be used in moving average analysis?
If potential competitors data is used how appropriate will this be? Is extrapolation from past data likely to be accurate in this case? Could changes in customer buying habits or changes in economic conditions make extrapolation a risky method? Test marketing – cost of this? Which area/region of the UK? How accurate are regional data likely to be for sales forecasting demand for the whole country? An overall judgement is needed – importance of some form of forecasting is clear in this case, would test marketing and detailed primary research be most appropriate in this case?
10 (18 marks: see Chapter 1) Explain ‘market analysis’. Explain use of IT in market analysis. Apply to this business – how important is it for a specialist travel company to use market analysis? New opportunities in travel – very important for a specialist business to be area of these; likely developments in the travel market, such as new competitors, cost of oil impacting on demand for flights, etc. – very important to be aware of these for market planning. Most important influences on demand in specialist travel (e.g. establishing correlation between incomes and demand for travel) – important to identify these and predict likely changes. Limitations: may be a small business so cost and time of this analysis might be a factor. How much past data has the business available for analysis? An overall judgement is needed.
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Answers
1 (12 marks: 2 marks Content; 2 marks Application, 4 marks Analysis; 4 marks Evaluation) Explain
‘differentiation strategy’ – creating an actual or perceived difference between the company’s products and those of competitors. This is being adopted by Hilton to create a distinctive brand image for its Worldwide Resorts hotels. This will give benefits when promoting the brand and will possible allow high premium prices to be successfully charged. The article claims that the
‘packaging of the properties had to be unique’ which certainly suggests that the aim was differentiation. Other hotel chains may claim to offer similar levels of service, however – but do they also provide the four examples of product development that are listed?
2 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Define ‘marketing strategy’ – the plan of marketing actions to be taken to achieve marketing objectives. The market research suggested an increase in demand ‘among high-spending travellers for the resort experience’. If this research is well founded and considered to be reliable, then Hilton is likely to: build and open more resort hotels in existing markets (market penetration); build and open more hotels in new locations
(market development) and possible develop the ‘product’ (as indicated in the case study to achieve some product development). These marketing strategies will need careful planning based on market research findings, coordination with all departments of the business and integration between the 4Ps to ensure a consistent and unique image is created for this type of demanding traveller.
3 (18 marks: see Chapter 1) Define/explain ‘Ansoff’s matrix’. Classify Hilton’s strategies according to the matrix. The strategy they are not using is ‘unrelated diversification’. Classify strategies according to risk involved. Assess the potential benefits and risks of these strategies.
4 This could be marked as a Unit 3 report style question – see Chapter 1. a) Use Student Book to analyse the usefulness of Ansoff’s matrix – apply to this case study. b) Objectives should set specific targets (SMART) and these could be used to assess the effectiveness of the marketing strategy – but how realistic are the targets? Variance analysis could be used to analyse the key differences between budgeted data based on objectives and actual results. c) Actual results compared to budgets/objectives; compare market share and sales growth with rivals; research undertaken within the market e.g. qualitative research and focus groups; internet feedback. Assess the relative importance and value of these and other methods.
1 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Low cost: aim to sell at lower prices than competitors – this can be in either a niche or a mass market. Give an example.
Differentiation: making the product appear different enough to competitors’ offers to support a higher price. Give an example.
2 (4 marks: 2 marks Content; 2 marks Analysis) Explain the matrix – the quadrants identify the main aim of different strategies and objectives can be set in terms of each quadrant, e.g to increase market share by a given percentage (market penetration); introduce one new product each year
(product development).
3 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Student Book. Answer needs supporting examples.
4 (2 marks) Student Book.
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Answers
5 (Should be 6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Student Book.
Answer needs supporting examples.
6 (2 marks) Market penetration – same product, same market but trying to increase sales.
7 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Explain Ansoff’s matrix. If
Virgin believed that this was appealing to existing consumers, then it would be market penetration.
If the company believes that they are targeting a new consumer group with a different profile to existing subscribers, then it would be classified as market development. Explain difference between two strategies. How could Virgin find out if market development was being achieved with this strategy?
8 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Marketing strategy used by
Tesco is one of market development. Benefits: expanding in new, fast growing markets (UK market for groceries is ‘mature’ or saturated); spreads risk, e.g. one country might be less affected by world recession than other countries that Tesco operates in. Risks: unknown market conditions
(expenditure on market research essential); may need to establish new marketing strategy to suit local conditions/tastes (as in Thailand) so the benefit of a ‘pan-global’ strategy might be lost.
9 (18 marks: see Chapter1) Explain marketing strategies – give examples of those that could be adopted by mass market footwear retailer. Effectiveness needs to be assessed by referring to the objectives set for these strategies. Using Ansoff’s matrix and sales data, the success can be monitored and assessed.
10 (18 marks: see Chapter 1) Explain marketing strategies and objectives. Strategies are designed to achieve the marketing objectives of the business. Marketing objectives for this car manufacturer might include: (a) maintaining or increasing market share – strategies could be based on marketing mix decisions based around price, promotion, credit terms, some product adaptations, selling through greater number of distributors, etc.; (b) targeting a new market, e.g. export sales – strategies include setting up agents abroad, adapting products and marketing to suit local conditions and consumer tastes. Other objectives and strategies are possible. The key point is to link the strategies to the objectives to increase the chance of a successful outcome.
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Answers
1 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Define ‘marketing plan’ and outline main components. Technology is a key part of the product offering – and this is, perhaps, the most important component of the marketing mix. By creating a USP in video/film downloads and the ‘world’s thinnest computer’, consumers should be attracted towards these products – technological developments have created a competitive advantage for Apple. The new technology will have to be promoted effectively – consumers need knowledge about the products in order to buy them.
2 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Identify the internal influences on marketing plans – finance, operational issues and human resources. Marketing plans cannot be developed in isolation to internal issues. The marketing budget for the MacBook Air will need to be agreed with the finance department – this could be a crucial factor in the nature and scale of the marketing plan. However, Steve Jobs is very good at getting free publicity for new product developments! HR are likely to be adequate to support an ambitious marketing plan – Apple are well known for major product launches and should have the skilled staff to deal with the launch of these new developments. Operational issues will be important to the marketing plan – can sufficient supplies of the MacBook Air be made available for a full-scale global launch – or should just certain countries be targeted to start with? Is the product likely to be so reliable that there will be no bad publicity about product failures (which will require a rapid marketing response)?
3 (18 marks: see Chapter 1) Identify and explain the external factors which influence marketing plans.
(Technology is already considered in question 1, but if this was an examination question then technology would have to be considered too as these two questions would not appear on the same examination paper.) The computer industry is competitive but Apple operates in its own segment, given the operating system used by its machines. The company would still have to be aware of, and possibly respond to, product developments in ultra-thin PCs though. Download technology might change too so Apple might need to respond to competitors’ developments either by accelerating its own product development programme or by increased promotional activity. Market conditions are also important – but is Apple selling virtually income inelastic products? Have the 2009 global recession and economic slowdown led to reduced demand for innovative computing products?
Apple has cut prices on its basic iPods – will it have to do the same with the two new developments covered by the case study? Even Apple might need to be aware of, and again respond to, significant changes in market conditions.
4 (18 marks: see Chapter 1) Identify and explain the issues involved in implementing marketing plans
– scheduling of tasks, resources, cost of and control over the plan. Scheduling of tasks will be important in such a large organisation and with such an important product launch – the plan must run smoothly to impress the media and consumers. But Apple have had a great deal of experience in global product launches. All resources must be in place so that adequate supplies of the MacBook
Air are available – waiting lists will not be expected by consumers. But Apple is already a major producer of similar products. The cost of the marketing plan should be clearly budgeted for – and in a global economic downturn it might be necessary to restrict the budget more than expected. But
Apple rely heavily on free publicity too – the case study report was based on a media/press launch, for example. Control of the plan must be clearly established and there should be flexibility in the plan to adapt to changing circumstances. In Apple, new product developments are so key to success that the marketing plan is likely to be very closely monitored by Steve Jobs himself.
Overall, these implementation issues will be very important to success of the marketing plan, but the key factor is likely to remain the performance and reliability of the product itself.
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Answers
5 (4 marks) Student Book
6 (4 marks) Corporate objectives are ‘where the business wants to be’ and marketing plans are ‘the details of the activities of the marketing strategy’ directed towards getting it there (together with other functional strategies).
7 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) Define
‘sales forecasts’ and ‘marketing plans’. Students should use some references in their answers to businesses or industries (for Application marks). Explain the importance of sales forecasting to marketing plans – without having some forecast of potential demand, consumer expectations and market segmentation, it would be difficult to create an effective marketing plan that gave details of which consumers to ‘aim for’, with appropriate promotions and price levels. The setting of the marketing budget would also be very difficult. But sales forecasts cannot always be relied on so there should be some scope for flexibility in the marketing plan. In addition, other factors are important when constructing a marketing plan, such as SWOT analysis. Sales forecasting does not guarantee the success of a marketing plan but it will help to make it realistic and appropriate to likely market conditions.
8 (6 marks: 1 mark Content; 1 mark Application for each influence) Student Book – but students should also be encouraged to apply each influence to an actual business.
9 (18 marks: see Chapter 1) Explain the purpose of marketing plans and the key influences on them.
Even banks need marketing plans, especially when they have the aim of rebuilding consumer confidence. Lack of finance would have been a major constraint on Northern Rock’s marketing plan, but perhaps its objectives were more modest than before the ‘crash’ so this might not have been a major problem. Other factors might have been important too – was it forced to make redundant key personnel which could have limited the scope and effectiveness of its marketing plan? Were branches closed, limiting the resources available to achieve marketing objectives?
External factors such as the market (economic) conditions would have been important too – and the actions of competing banks, many of which were in financial problems almost as great as those of
Northern Rock. Sources of finance would have been a major constraint on the bank’s marketing plan – but by no means the only one.
10 (18 marks: see Chapter 1) There is plenty of scope for application in answers to this question.
11 The global economic slowdown (recession in many countries) was not widely forecasted, so the sales forecasts of major car companies would have been unlikely to have reflected the fall in sales for most makes – until the slowdown or recession was a reality. Marketing plans must change to reflect reduced consumer demand for these income-elastic products. But if sales of small cars are less affected, then there might be less need to change marketing plans. How quickly can car manufacturers adapt to these economic/market conditions? Lower prices? Increased promotion or cheaper credit deals? Less expensive versions of existing products – but how long will these take to design and produce? Much will depend on how long the slowdown lasts – or how long it is forecasted to last. The longer and more serious the recession, the greater the need to adapt marketing plans substantially – not forgetting that the finance available to pay for such plans might become much more restricted.
12 (6 marks: 3 marks Content; 3 marks Application) Students should be encouraged to apply these issues to actual businesses.
13 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Explain scheduling of tasks as part of the marketing plan; especially important for large global business such as IBM to ensure coordination and consistency in all regions. Explain one possible problem for IBM’s marketing plan if there is poor scheduling of tasks.
14 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis;3 marks Evaluation) Explain the internal influences on marketing plans, of which human and operational resources are a part.
Subway is expanding rapidly so its marketing plans will be focused on strategies to achieve further
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Answers growth. If appropriate resources are not in place (suitable locations, adequate supplies of food and drink, adequate and suitably trained staff), then expansion plans are unlikely to be realised. Clearly finance is important too as the marketing budget has to be large enough to support the expansion plans – but operational and human resources will be vital.
15 (18 marks: see Chapter 1) Outline the four issues in implementing marketing plans. Apply these to actual business(es). Explain the importance of cost and the need to set marketing budgets with staff involvement –to encourage participation and ‘ownership’. The cost of the plan needs to be kept in focus with the other demands on the financial resources of the business – particularly for smaller businesses or during an economic downturn. Explain and evaluate the importance of the other issues in implementing marketing plans – in the context of an actual business. Weight up the issue of cost against the other factors.
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Answers
Case study: Profit threat for maritime safety, page 87
1 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Define ‘operational objectives’
– low cost and high volume targets are likely to be of great importance in a very competitive market/industry. In the container ships industry, lower costs could be achieved with larger ships
(economy of scale), reduced labour on ships, cheaper ship designs. These operational objectives and the means used to achieve them might compromise safety – or ‘quality’ of service offered by the shipping company.
2 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Larger ships will drive down the unit costs of carrying each container (economy of scale). This could make Maersk the lowest cost operator in a very competitive industry. By taking advantage of this lower unit cost to lower prices, Maersk could force its rivals to amend their operational objectives. The scope for innovation might be low in this industry, so rival companies are likely to set operational objectives based on volume, low costs and ‘service’, e.g. they could agree to carry dangerous cargo in order to attract new business.
3 (10 marks: 2 marks Content; 2 marks Application; 6 marks Analysis) Quality targets are likely to be based on reliability of delivery on time, undamaged containers/contents and safety. Cost and volume are closely linked – expanding the size of ships by a factor of 3 will mean the fixed costs of a ship’s operations will be spread over a much higher number of containers (e.g. will still only need one captain). This will reduce unit costs per container. Will new, bigger ships be slower? Are they safe or has cost cutting led to potentially unsafe ship designs being accepted by shipping companies? Does the trend towards ‘ships being run as hard as possible’ mean that risks are being taken with safety in order to meet tight deadlines?
4 (18 marks: see Chapter 1) Define ‘benchmarking’. Explain how benchmarking with the best shipping practices and shipbuilding standards could help to raise standards and reduce risks of accidents in this industry. Explain potential drawbacks to benchmarking – will evidence be available from competing businesses in a competitive industry? Will the time and resources be found for this benchmarking practice? Will the British Chamber of Shipping be able to make this compulsory or to make compulsory any suggestions for improvement made as a result of benchmarking? Despite best practices and best ship designs, accidents are still likely to occur in this industry – but the practice of benchmarking could reduce the frequency of such accidents.
Summary questions, page 89
1 (5 marks: 2 marks Content; 3 marks Application) Definition of ‘operational objectives’ from
Student Book. Those likely to be applicable to Coca-Cola include quality (particularly important in this case?), cost targets (competitive industry) and volume targets (to help gain market share).
2
(10 marks: 2 marks Content; 3 marks Application; 3 marks Analysis) Definition of ‘environmental targets’ from Student Book. ‘Green consumerism’ is on the increase and the activities of environmental pressure groups are increasing the degree of bad publicity for businesses such as supermarkets that are not setting strict environmental objectives – as with Marks & Spencer’s ‘Plan
A’. Reducing plastic bag usage, recycled packaging and ‘food miles’ could all be operational environmental objectives for supermarkets. They could help to give a business a USP and competitive advantage – increasing brand loyalty and long-term sales.
3 (8 marks: 2 marks Content; 2 marks Application;2 marks Analysis; 2 marks Evaluation) Define
‘operational objectives/targets’ and apply them to a consumer service business, such as insurance.
For example: low costs (competitive advantage to be gained from an online operator); quality of
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Answers customer service, such as speed of online quotation service and claims response service. Innovation in consumer services can be important too, e.g. offering special deals for insuring a car for all members of a family. Evaluation: these targets need to be focused on reinforcing the low cost/convenience and speed benefits of an online insurance provider.
4 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) Define
‘benchmarking’. Apply to hospitals – measures that could be benchmarked include waiting times/lists, death/recovery rates from surgery, hospital infection rates, etc. Benchmarking would identify the best performing hospitals and hospital practices and this would help to set standards for others to aim to attain. Performance could then be monitored and reviewed against these targets.
Evaluation: Is this an effective use of NHS time and resources? Will data used for comparisons be accurate, up to date and collected on the same basis in each hospital?
5
(8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Define ‘innovation’. Students should suggest two industries, e.g. computing, mobile phones, cars, etc. Benefits of innovation need to be applied: competitive advantage; potential for lower costs (process innovation) or higher prices
(product innovation). Apply these benefits to industries selected.
6 (12 marks: 3 marks Content; 3 marks Application; 6 marks Analysis) Define ‘operational objectives’. Examples used should be school/college related, e.g. exam results and ‘drop-out’ rates
(quality of education), innovation targets (e.g. new courses), numbers of students attracted each year (volume target). Internal constraints: finance; staffing levels and skills; buildings. External constraints: actions and policies of local ‘competing’ schools and colleges; demographic changes, e.g. local population might be ageing.
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Answers
Case study: Staying in fashion for centuries, page 94
1 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Smedley: small-scale manufacturer of expensive, high quality knitwear; not focused on market share but survival and adequate profits to invest for the future; not prepared to change standards to deal with market changes. Marks & Spencer: large retailer of wide range of clothes and non-clothes products; focused on sales growth and rising returns to shareholders – prepared to drop existing suppliers if cost reductions are not made.
2
(6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Define ‘purchasing economies of scale’. As one of the UK’s leading clothing retailers M&S can put pressure on suppliers to offer lower costs in exchange for large and frequent orders. These orders will help to reduce costs for the suppliers (they too will experience economies of scale and they will often only be dealing with
M&S as their sole customer) and M&S expects these costs savings to be passed on to it.
3 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation)
Definition of both terms – Student Book. Smedley’s seem to have been using labour-intensive methods – high number of workers compared to sales turnover. A high level of workmanship goes into every garment. Highly skilled staff are required. This results in high cost per unit – hence the high selling price per garment. Is this about to change? Purchase of the new and expensive knitting machines suggest that capital-intensive methods of production will become more important in the long term.
4 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Define ‘resource mix’. The company’s low-volume, niche market strategy has been an important factor. Hand-knitted or handfinished garments by experienced/skilled workers would be a key factor in developing and maintaining this strategy. The aim of the directors to maintain the local skills base has been a factor too. However, the constant need to be competitive too – against foreign competition and to meet retailers increasingly cost conscious demands – means that the resource mix may, in the future, be driven by other factors. The difficulty of recruiting, training and retaining skilled staff will be a factor also – perhaps encouraging the business to purchase further automated equipment.
Summary questions, page 95
1 (5 marks) Student Book definitions plus diagram of unit costs as the scale of operation increases.
2 (3 marks) Student Book definition – refer to diagram of unit costs as the scale of operation increases.
3 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Student Book definition of
‘economies of scale’. As this business operates a chain of restaurants, there should be opportunities for purchasing economies from suppliers who supply food/drink and other goods to all of the branches. There might be a head office which could employ specialist managers or experts, e.g. accountant, HR manager, IT support, etc. – this will be an economy of scale as it means that each branch will not have to perform these functions which would, potentially, increase the efficiency of the business.
4 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Student Book definition of
‘diseconomies of scale’. A distribution company is likely to have offices/depots in many locations – possible abroad as well as in the UK. Poor internal communication could be a problem even with the latest IT links as ‘information overload’ can be a consequence of intranet use. There may also be language problems if the company has locations overseas. Poor coordination could be another
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Answers diseconomy. Are all depots and offices operating exactly the same systems and procedures? Are all objectives clear to staff in all locations? Are staff members well motivated or is the size of the organisation leading to some alienation from the objectives of the business?
5 (5 marks) Student Book – plus appropriate examples.
6 (3 marks) Student Book definition
7 (10 marks: 2 marks Content; 3 marks Application; 5 marks Analysis) Student Book definition of
‘resource mix’, plus the factors that will affect a resource mix applied to a particular business or businesses. For example, a manufacturer of electronics components will focus on a lowest cost resource mix which is likely to be fully automated production lines producing very high volumes. A customer service provider such as an insurance provider will apply capital to the resource mix in terms of internet and telephone call centre equipment – but contact with actual staff is rated as being highly important by most insurance customers so there should be an adequate supply of well trained and experienced staff to deal with enquiries and claims. Would ‘off-shoring’ the call centre, to cut on labour costs as a proportion of total costs, be a wise move in this case?
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1 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) A trade fair provides access to large numbers of trade suppliers and buyers, as many innovative products have to be sold to the next stage in the channel of distribution and not to consumers directly, e.g. new flavours of cheeses have to be stocked by retailers (often involving the opportunity cost of dropping some existing ranges) and retail buyers have to be convinced that the innovative products are likely to be worth stocking and selling. It may be a more cost-effective means of selling and promotion than advertising in trade magazines or employing direct sales staff.
2
(18 marks: see Chapter 1) Define ‘innovation’. It applies to products and processes – relevant examples needed for Application marks (not necessarily from food industry). R&D is expensive and it can take years before ‘payback’ of the investment. Increased global competition means that many
UK firms must gain or maintain competitive advantage by innovating with new products or processes. This innovation must be: faster (to gain first mover advantage and to beat competitors, adapting to fast changing technology, to market); more consistent (to cut down costs of failed inventions); with greater understanding of consumer needs (to prevent product-orientated approaches to innovation which can lead to technically proficient products which do not sell).
Evaluation: R&D spending does not guarantee success though – other key functional areas must play their part (quality of product and marketing of product must both meet consumer expectations).
In addition, it is not certain that new inventions can be effectively converted into successful innovative products or processes.
3 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) A multidisciplinary approach to R&D means considering the constraints imposed by and the information obtainable from other functional areas. HR, finance, marketing are three of the functional areas that should be included in the R&D process to make it more effective, affordable and, ultimately, more successful. Finance provides capital for R&D and advises on costings of the final product innovation. HR provides the essential scientists and research engineers for the R&D process, as well ensuring that the HR requirements of the innovative product or process are accommodated. Marketing provides the essential research data to help ensure that the innovative product meets likely consumer needs, as well as playing a major role in convincing consumers that they must have it after it has been developed!
4 (18 marks: see Chapter 1) Define ‘R&D’. R&D benefits and potential limitations apply to the food and drinks industry as much as they do to many others. Consumers can be attracted towards innovative products which offer a new experience – and which may be able to be sold at high prices, at least while they are unique or with little effective competition. Consumer tastes change over time, e.g. towards more ethically produced foodstuffs, and industry R&D should aim to meet the newly developing consumer preferences. Process innovations can help to reduce unit costs in a very competitive industry, as well as assist the production of new products. So, R&D can be very important to the success of businesses in this industry. Evaluation: Traditional suppliers of food and drink may not consider R&D to be important; copying the ideas of others (as long as the process is not patented and non-copyright names are used) may be quicker and more cost-effective than researching and developing highly original ideas. Overall, it might depend on the sector of the industry the business operates in, e.g. new ways of cooking, preserving and packaging food are more important in the fast food and convenience sectors than in the mature sectors such as tea and sugar.
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Summary questions, page 101
1 (3 marks) Student Book definition
2 (4 marks) Define ‘R&D’. Patents give the legal monopoly over an invention – this increases the potential value of R&D spending to the business.
3 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Define ‘R&D’. Apply it to at least one business for application marks, e.g. in food industry (Nestlé) or computer industry (Dell).
Benefits: development of USP leading to competitive advantage and an ability to charge premium prices (Apple’s iPhone); increases and improves the innovative reputation of the business (Sony
Blu-Ray) which may attract investors/potential shareholders; process innovations can reduce unit cost and result in higher, more consistent quality.
4 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Students should apply R&D drawbacks to at least one business for Application marks. R&D may not lead to the innovative products or processes expected – there is still no cure for the common cold despite investment of many millions by drug companies, and wave power machines are still not commercially viable.
Competitors may innovate an even more successful product so relative failure can reflect poorly on the firm’s R&D skills (e.g. Toshiba’s HD DVD lost out to Blu-Ray).
5 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) The potential rewards exceed the risks/costs – as in the pharmaceutical and electronics industries. In some industries, future survival depends on developing successful innovative products as the pace of technological change and consumer expectations quickly render existing products out of date, so R&D may not be an option. Legal changes, such as emissions controls for cars, are dictating to car manufacturers that unless innovative solutions to C02 and other emissions are discovered, severe penalties will be imposed by government or the EU. When patents are about to run out, the loss of monopoly power will lead to increased competition and lower prices, e.g. generic drug products, so further R&D will be needed to establish other patents.
6 (8 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) There are many factors: the cost of pure scientific research; the need to meet stricter legal controls over drug safety; the potential profits from new patented medicines can be very substantial; existing patents will run out leading to additional competition so new ‘monopoly patents’ will give competitive advantage for several years.
7 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Students should define
‘corporate objectives’ and ‘R&D’. R&D cannot be a stand-alone function. To be effective R&D needs to be inter-linked with:
8 HR – to ensure adequate researchers are recruited and to make staff aware of and prepared for the consequences of new products/processes a) finance – to provide adequate funding and to assess the manufacturing costs of the new product b) marketing – to provide market research data on consumer needs and then effectively promote new products.
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Activity, page 105, based on Table 14.2
1 (4 marks: 2 marks for each correct answer) Site A: £275,000; Site B: £267,000 (If incorrect, award
1 mark each if some correct calculations are shown.)
2 (6 marks: 3 marks Content; 3 marks Application) Fixed costs might vary, e.g. rent; variable costs might vary, e.g. cost of shop staff wages or cost of buying in stocks; revenue might vary, e.g. recession or local unemployment or a competitor sets up nearby.
Activity, page 105, based on Table 14.3
(12 marks: 3 marks Content; 3 marks Application; 3 marks Analysis; 3 marks Evaluation)
Site X: quicker payback – important as it reduces risk and may reduce interest costs on loans, especially if the Bank of England increases interest rates; slightly lower ARR – need to compare this with the current and expected rate of interest and return on other projects/investments; NPV is lower so future profits in today’s money values will be worth less than for Site Y, but this site costs less too which is a benefit as the company already has substantial loans.
Site Y: more profitable on both measures of return – but additional cost and longer payback may be decisive factors against this site. Other data would have been useful, e.g. existing rate of interest and forecasted interest rates.
Activity, page 106, based on Table 14.4
3 (8 marks: 2 marks Content; 2 marks Application; 2 marks Analysis; 2 marks Evaluation) Breakeven: Site C = 5m litres (safety margin of 1m litres at expected output); Site D = 1.33m litres
(safety margin of 4.67m litres). Results seems to indicate strongly that the overseas location should be selected, on this numerical data alone. Award some credit if the BE formula is stated but the results are incorrect. Award a maximum 6 marks if no safety margin has been calculated.
4 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Break-even calculations/graphs have limitations. They might only be accurate for a short time period as any of the data on which they are based could change, e.g. price, volume, variable costs (e.g. foreign government might introduce minimum wage for the first time), fixed costs (e.g. recession in UK could reduce commercial land costs). If BE is based on forecasts, then the results will be inaccurate if the forecasts are optimistic/pessimistic.
5 (8 marks: 2 marks Content; 2 marks Application; 2 marks Analysis; 2 marks Evaluation) Other factors: other quantitative results, e.g. investment appraisal, qualitative factors such as management preferences, supply of suitably skilled staff, impact on social/public image if it is thought that ICT will be exploiting foreign workers by building and operating Site D. Political stability of the Site D country? Absence of legal controls might mean the overseas site operates less safely than one in the
UK – an accident could be very serious. Perhaps this could be the most important factor in the final decision (or some other judgement about the other factors to consider).
Case study: Is off-shoring best for HiSonic Ltd? page 111
1 (6 marks: 3 marks Content; 3marks Application) Students should give Student Book definitions plus examples from the case study.
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2 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) It is an established business so moving average analysis of past sales results would allow short-term sales forecasts to be made.
Market research could also be used as a basis for sales forecasts – primary research undertaken with existing or potential future customers and secondary research from competitors sales data, economic forecasts, etc.
3 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Disruption of production – will higher stocks have to be held during the changeover period? Communication problems with distance and language barriers Quality problems – existing workforce is loyal and skilled
(increasing the chances of high quality) and will this be the case in Malaysia? Public image and customer resistance to ‘foreign’ assembled products – will the company’s image be damaged by this move, e.g. by redundancies of ‘loyal and skilled workers’. Any two points well applied and analysed for full marks.
4 (18 marks: see Chapter 1) Student answers should consider the quantitative results – the Malaysian site appears to be more profitable but costs more and has longer payback. How important are these factors to this business? Does it have high gearing? Lower BE point means operations should have less chance of making a loss if demand/output falls. Qualitative: staffing issues; quality issues; communication issues; public image issues. Evaluation: Which factor(s) is/are the most important in this case? Would other information have been useful? Clear final conclusion needed.
5/6 Students could be asked to present their findings in the form of a detailed report. To make the task similar to an AQA Unit 3 decision-making question, worth 34 marks, the following question could be set:
 Analyse the case for the company opening further branches in the UK.

Analyse the case for the company opening further branches in non-UK markets.
 Make a justified recommendation for which location the company should choose.
Summary questions, page 113
1 (5 marks: 2 marks Content; 3 marks Application) Students should give the Student Book definition, explained in the context of Tesco.
2
(8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Possible reasons: Tesco’s research indicated a growth market for quality convenience foods; the UK market is saturated; similar consumer tastes to existing markets Tesco operates in; potential for higher profits – high income consumers. Any two points applied/explained.
3 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Problems: finding suitable locations that offered sufficient potential revenue but were not so expensive that high fixed costs eliminated the chance of break-even at a reasonable level of sales; recruiting and training of staff to
Tesco standards in a foreign country; different legal standards for food retailing in the USA; researching and analysing any differences in consumer tastes or expectations. Any two points well applied and analysed.
4 (6 marks: 2 marks Content; 4 marks Analysis) The level of fixed costs will have a major impact on
BE, e.g. a city centre location for a shop will have much higher fixed costs than a suburban location.
Some locations may allow a business to charge higher prices, e.g. a restaurant in a central business district. If this leads to higher contribution per sale/customer, then this will impact on the BE level of sales too.
5 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Reasons: avoid import tariff barriers; gain from lower labour costs; gain from government financial assistance aiming to encourage in-country production; reduce dependence on one production location. Any two points applied/analysed.
6 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) A prestige location or a highly convenient one might allow higher prices to be charged; high population location could lead to
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Answers higher volume of sales, non-central location could mean lower rental and labour costs. All of these factors will influence profitability. Any two points applied/analysed.
7 (8 marks: 2 marks Content; 2 marks Application; 4 marks Analysis) Loss of customers will reduce revenue – will this be compensated for by more new customers? Is new location in a higher income area or one with less competition? Either factor could lead to the ability to charge higher prices.
Will the BE number of customers each week be higher or lower than existing location? Cost of relocation. Rental and other fixed costs – how will these affect BE and profitability? Any two points well applied/analysed.
8 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) A high tech business will need a skilled and adaptable labour force – not likely to be available in most developing countries. A high tech business will need close contact with suppliers, design businesses, engineering businesses, etc. – these are benefits that are most likely to be found in a location with a well established technology sector of industry.
9 (6 marks: 1 mark Content; 1 mark Application; 2 marks Analysis; 2 marks Evaluation) Location is a usually a strategic decision – it involves considerable resources, impacts on all functional area and is difficult to reverse. So, it is likely to be taken by senior management unless this is a decision that is taken frequently and is based on well established criteria that are relatively easy to judge – less senior personnel could then be the decision-makers.
10 (8 marks: 2 marks Content; 2 marks Application; 2 marks Analysis; 2 marks Evaluation) Internet selling makes a business less tied to a specific location – especially if existing retail outlets are closed. Students should give actual examples, e.g. ASOS have no shops and Dixons have closed shops to sell only online. Many large companies offer both store selling and internet selling, such as the major supermarkets. Could this change in the future if shoppers buy more through the internet?
Evaluation: If the business sells a service, such as hairdressing or car servicing, then the internet might have very little impact, if any, on location. In the short term, it might be important to keep retail locations too, but in the long term the internet selling warehouse location might become a more important decision than the location of the retail stores.
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1 a) (6 marks – 1 mark deducted for each incorrect result)
Node
1
EST
0
LFT
0
4
5
2
3
1
3
7
4
2
4
10
4
8
9
6
7
6
8
11
14
6
8
11
14 b) (3 marks each) Total float on D = LFT – duration – EST = 11 – 1 – 7 = 3;
Total float on F = 4 – 2 – 1 = 1. c) (2 marks) The critical path is made up of the activities: B E H I J (14 weeks).
2 (6 marks) Although F has a total float of 1 week, if it is delayed by 2 weeks then it becomes a critical activity and a new critical path is created of C F G H I J (15 weeks). To prevent this from happening, one of the later or subsequent activities on this path after F must be reduced by 1 week.
For example, the stocking and displaying of goods in the shop could be speeded up and completed in 1 week – perhaps by employing an additional worker. There will be no point in trying to reduce the time taken by any of the non-critical activities. It is often possible to transfer resources from non-critical activities to critical activities to speed these up – this does not seem to be an option in this case. It might be unwise, for health and safety reasons, to try to reduce the time taken on activity J.
3 (10 marks: see Chapter 1) Define ‘qualitative factors’. Availability of workforce; management preferences; need to meet the (new) objectives of the business to locate in areas that offer a chance of making high profit margins – perhaps areas with above average incomes; room for further expansion if the strategy is successful; environmental considerations – although this would be a local authority planning issue too. Apply to petrol station/convenience store and explain in some detail.
4 (18 marks: see Chapter 1) This could also be set to students as an evaluative question by using
‘Discuss’ rather than ‘Analyse’. Assuming this:
Benefits and limitations are well covered in Student Book – need to be applied to this business and this project. Has the technique been used before by this business? How have the durations forecasted and how reliable are they? Even an accurate network diagram will not guarantee a successful project. It will need effective management of people and resources to make it reach the expected completion date. External factors that might not have been predicted at the time of
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Answers planning the project could delay its completion, such as structural or planning problems with the new sites.
1 (3 marks) Student Book definition.
2 (6 marks: 3 marks Content; 3 marks Analysis) Define ‘JIT’. Lower storage costs, for example less warehousing needed; less chance of stock/inventory going out of date and being wasted (perishable inventories); less working capital tied up in stocks so this might reduce interest charges on borrowed finance.
3 (9 marks: 2 marks Content; 2 marks Application; 5 marks Analysis) Define ‘JIT’. Award
Application marks for some relevant reference(s) to a business/industry. Good supplier relationships means: reliable and rapid response to request for further deliveries; preparedness to use same IT system as the business to allow for immediate communication/orders to be sent and received; willingness to locate nearby to large customer business to ensure problem-free transport links.
4 (2 marks each) Student Book definitions. Students could also demonstrate their understanding of these terms by giving references to a network diagram in their answers.
5 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) The
Student Book covers the limitations and benefits of CPA – need to be applied to new product launch too. For example, launch of new iPhone needed to be as rapid and problem-free as possible to maintain Apple’s competitive advantage – so identifying the correct and logical stages to take in launching this product (including simultaneous activities to save on total CP length) would be vital.
Some time estimates might prove to be inaccurate though, e.g. transport delays preventing the arrival of supplies on time to a country where the launch is taking place. An overall judgement is needed.
6 (10 marks: 3 marks Content; 3 marks Application; 4 marks Analysis) Explain CPA and CP. Explain how using CPA might make it more likely to meet deadlines BUT that it does not guarantee that the deadlines will be met. Poor management of people and other resources, exceptionally bad weather, suppliers’ failure to deliver – all of these could result in the house taking longer than expected as indicated by the length of the CP.
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Answers
1 (18 marks: see Chapter 1) The HR objective is ‘employees delivering the best in a competitive market’ and this is being pursued through the work–life strategy – will this strategy be sufficient to achieve this objective? Analyse the benefits of the policies that form part of the work–life strategies.
Some of them seem to be well geared towards the majority female workforce – have they helped to contribute to the high percentage of women who return after maternity leave? These policies seem likely to achieve excellent working conditions which are part of Herzberg’s ‘removal of dissatisfaction’ approach. Evaluation: It is doubtful if these policies alone will be sufficient to achieve the HR objective: additional HR policies might have to include appropriate selection and recruitment, training, job design to achieve Herzberg’s motivating factors, pay and appraisal systems, etc.
2 (10 marks: see Chapter 1) All the external influences referred to on page 124 could be relevant in this case. For example, until 2008, a growing economy led to shortages of workers in some skilled and professional sectors; increased global competition in publishing makes it essential for UKbased publishers to become even more competitive; technological changes in publishing make it even more vital to attract, train and retain skilled workers. Any three points well analysed and applied for full marks.
3 (18 marks: see Chapter 1) Define ‘“soft” HRM’. Give examples of this HR strategy applied to
Penguin. Benefits of this increasingly technologically-based business are clear – easier to recruit, motivate and retain staff – analyse the reasons why ‘soft’ HR can achieve these benefits.
Limitations might come in the form of the short-term costs involved in training, appraisal, consultation procedures, etc.; it needs full commitment of senior managers and a culture of staff contribution being important to the organisation. Evaluation: Will the long-term benefits of the
‘soft’ approach to this business in this industry outweigh the short-term costs? How competitive is the labour market in this industry? Would it be easier to recruit replacement staff if turnover increased as a result of using a ‘harder’ approach?
4 (34 marks: see Chapter 1) This should be constructed in the form of a BUSS3 report. The arguments for and against these HR strategies are covered in the Student Book – they need to be applied to
Penguin Books. Is keeping control over staff and cutting labour costs more important than developing staff to their full potential and emphasising communication and motivation? Would fulltime, permanent contracts be more appropriate in this industry than part-time and flexible contracts?
There are many issues for students to discuss in this case. The final evaluation and recommendation needs to make a clear and justified proposal for an HR strategy that is most likely to achieve competitive advantage.
1 (4 marks) Student Book
2 (6 marks: 2 marks Content; 4 marks Analysis) Competitiveness in the global markets of the 21st century requires businesses to use all resources as efficiently as possible, including their workforce.
Using the full potential of the workforce will mean higher productivity, improved staff involvement and better staff input in decision-making, matching of staff skills to the needs of the business (audit of skills) and offering flexible working to retain skilled workers.
3 (4 marks) Student Book definitions.
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4 (10 marks: see Chapter 1) This is a form of ‘hard’ HRM. It may well reduce absenteeism in the short term (and the costs associated with this), but will it lead to effective employer–employee relationships which, ideally, are based on trust? Would ‘soft’ HR approaches be more effective in the long term, such as development appraisal systems that offer rewarding jobs that discourage petty absenteeism? Claims of ‘spying’ could damage long-term employer–employee relations and discourage staff from offering good customer service – very important in this business.
5 (18 marks: see Chapter 1) Define ‘HR objective’. Staff need to be skilled, adaptable, able to offer good customer service – selection, recruitment and training programmes will have to be focused on employing and retaining such staff. Internal influences will include the corporate objectives and how they impact on the HR objective; increasing capital intensity may require some staff rationalisation or retraining; the importance of customer service will be reflected in the types of workers recruited and the training of them. External influences include: the location and the availability of staff in the region; local competition for suitably skilled and qualified workers; economic factors, e.g. level of local unemployment; legal factors such as length of the working week. Evaluation: Which are likely to be most important – internal or external factors?
Prioritisation of the individual factors.
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Answers
1 (10 marks: see Chapter 1) Define ‘workforce plan’. HBOS had clear objectives for improving their customer services and this was going to have an impact on the workforce at call centres. The company communicated the need for change effectively. It recruited appropriate part-time staff; it recruited managers who could plan workforce requirements; flexible working patterns were successfully introduced.
2 (18 marks: see Chapter 1) Explain internal and external factors. Internal factors: corporate and operations management objectives were important in this case – the aim was to substantially improve customer service to gain a competitive edge. If this was successfully achieved, the bank could market its call centre activities more effectively. Finance may have been an issue – perhaps this is why they recruited part-time staff to cope with busy periods and not just more full-time staff who might be idle at slack times. External factors: labour market trends – there was low unemployment locally so the emphasis had to be on using existing staff more efficiently (through flexible working) and retaining them as it would be difficult/expensive to recruit additional workers; UK and EU laws might have had an impact on issues such as the length of the working week/number of breaks taken, etc. Evaluation: Both internal and external factors were, and will continue to be, important. Was one issue more significant than others? Was the aim of improving customer service at a time of a competitive labour market the most important issue in HBOS’s workforce plan?
3 (10 marks: see Chapter 1) Benefits are well covered in the Student Book – at least two of these should be explained and applied to HBOS. Limitations (or disadvantages) of the HBOS workforce plan: must be continually evaluated and updated to cope with changing conditions, e.g. different demand levels from telephone banking customers; must be explained and communicated to workforce to gain workers acceptability of any changes that the plan contains; if new workforce plans are always being used as an excuse for redundancies or rationalisation, then workforce acceptance of them will be increasingly limited.
4 (34 marks: see Chapter 1) The case for using the plan is well explained in the case study and using the chapter too will give students a clear range of points to include. The limitations of the HBOS workforce plan (or the case against) are partly analysed in question 3 above but also include the more general point about the increasing use of part-time and flexible labour contracts. An overall judgement is needed.
1 (4 marks) Student Book
2 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Clear HR objective – i.e. improve the ability and motivation of staff to improve customer service. Training and development programme, e.g. in product knowledge to advise customers. Recruitment and selection plan – to ensure that staff of the right skills and motivation levels are employed, perhaps with previous building or retail experience. Any other factor applied to DIY retailer.
3 (4 marks: 2 marks Content; 2 marks Application) Define ‘skills audit’. Needed to identify overlap of skills between the two teams of staff and any skills gaps. This would allow more effective rationalisation of the new, enlarged organisation.
4 (10 marks: see Chapter 1) Define ‘workforce plan’. Apply and analyse at least two internal influences: corporate objectives (possibly product or customer service innovations in this case);
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Answers production objectives (possibly introduction of new technology in this case); marketing objectives
(development of new markets overseas as with Vodafone); finance (will this be available for staff training and development programmes?).
5 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Survival in competitive market
– workforce plan may need to make provision for redundancies; retraining programmes to help staff create a competitive advantage for the business; recruitment and selection of staff able to improve customer service. Any two points applied/explained briefly.
6 (10 marks: see Chapter 1) Legal changes are an external influence on workforce plans. Age discrimination laws make it illegal to discriminate in favour of younger job applicants or existing staff; makes it illegal to insist on retirement at 60/65 years. Impact: Need to replace older staff will be reduced and this will have implications for numbers of new staff to be recruited and selected; retraining of older workers might now take a higher priority – as they cannot be forced to retire it will be important to ensure high productivity as they cannot be ‘replaced’ by younger staff who may have been easier to train or more receptive to new technology. Any two points analysed and put into a business context, e.g. retailing – B&Q make a real point of recruiting/retaining and training older staff.
7 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) The focus of the plan might have to change from recruitment to retaining and training existing staff. An alternative would be to recruit unskilled workers and focus on a training programme to bring them to the skill levels required. Expansion plans may have to be delayed in either case.
8 (10 marks: see Chapter 1) Benefits: increased productivity; flexible staff able to perform more than one task; reduces the risk of production delays due to skill shortages in one department; reduced overhead salary costs; improved communication due to delayering. Disadvantages: redundancy of middle manager may reduce job security for other employees; training programmes are expensive and positive returns may take some time to be noticed; multiskilled staff could be poached by other manufacturing businesses. Max 5 marks if only one side is considered. No overall conclusion needed in answer.
9 (18 marks: see Chapter 1) Define ‘workforce plan’. Explain that workforce plan must be related to corporate objectives – these need to be clear before an effective workforce plan can be established.
Positive impact on image: creates UK jobs; invests in UK workforce; might improve customer service. Negative impact: job losses in another (poorer?) country; change-over period needs to be well organised and smooth otherwise customer service could suffer. Evaluation: Might depend on how the job losses are handled in the other country; depends on final impact on customer service; depends on what type of employment conditions/contracts are offered to UK workers – could the bank be perceived as being a low wage/poor conditions employer?
10 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) Costs: additional costs of recruitment and selection, e.g. aptitude testing in these skills; potential employees may be discouraged from applying; existing staff may be more reluctant to work towards
NVQ qualifications. Benefits: greater sense of achievement and motivation for staff; more efficient and productive new employees; better communication with customers; fewer till mistakes. Overall, the need for this programme needs to be carefully communicated to staff to be accepted positively.
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Unit 3
Answers
1 (10 marks: 2 marks Content; 2 marks Application; 3 marks Analysis; 3 marks Evaluation) Define
‘centralisation’. Centralising these two functions will ensure greater global consistency of decisionmaking (e.g. HR strategies would be similar in different countries); decision-making should be quicker (e.g. allocating finance to a profitable banking project); tighter control over budgeting – less risk-taking in regional bank offices. Potential drawbacks: not allowing for regional/local differences
(e.g. should HR strategies necessarily be the same between the UK and Hong Kong, two big offices for Citigroup); diseconomies of scale; lack of delegation to regional managers limits chances for progress and advancement – need to develop senior banking executives for the future? An overall evaluation/decision is needed.
2 (10 marks: see Chapter 1) Define ‘organisational structure’. Apply and explain any two of: leadership style of Chief Executive – he seemed determined to take dramatic and authoritative decisions so may have wanted to more centralised structure; need to save on costs to boost profitability – losing competitive advantage; may need to move away from risk-taking culture in banking (especially after the bank failures and credit crunch!).
3 (10 marks: see Chapter 1) Define both terms. Explain how both approaches could reduce costs, speed decision-making, improve communication within a banking business.
4 (18 marks: see Chapter 1) Analyse the benefits of the changes made – substantial cost savings, delayering and reduced middle managers, centralisation, expanding structure in developing countries and reducing structure in New York and London. Potential disadvantages: impact on staff job security and motivation; need for additional recruitment and training in developing countries; investment in IT to improve communication; redundancy costs, impact on corporate image of these substantial changes. Evaluation: Competitiveness depends on how the competition is also adapting
– Citigroup may find that other banks are making even bigger cost savings; will staff accept and work with these changes?; how effectively have the changes been communicated and explained?
Impact on costs needs to be reviewed – are the forecasted cost savings being realised?
1 (4 marks) Student Book.
2 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Define ‘matrix structure’.
Allows project teams to be established with a specific aim to achieve. Allows cross-departmental liaison and communication. Both of these advantages would be suitable for a drugs company that needed input from different departments to develop marketable new drugs with the minimum of hierarchy and the possibility of quick decision-making.
3 (4 marks: 2 marks Content; 2 marks Analysis) Two points could be identified and briefly explained, e.g. slow decision-making and poor communication.
4 (10 marks: see Chapter 1) Define ‘decentralisation’. Benefits: decisions based on local knowledge and local market conditions, e.g. reduce commission from house sellers in a difficult local housing market with many estate agent competitors. Encourages delegation and taking of authority by local managers – could be a useful way of developing and motivating staff.
5 (18 marks: see Chapter 1) Define ‘delayering’. Give example in context, e.g. removing level of middle management within each country division of this international haulage company.
Competitiveness could be increased by lower overhead costs; increased opportunities for subordinates to accept delegated authority; improved communication as fewer layers for messages
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Answers to pass through. BUT: adds to workload and responsibility of lower level staff and this can reduce efficiency, increase mistakes and increased absenteeism due to stress. Overall impact on competitiveness might depend on whether training is offered; whether remaining staff are assured of job security; whether the extra workload and responsibility of junior staff is recognised.
6 (18 marks: see Chapter 1) Define ‘flexible working’. This can lead to both benefits and drawbacks to workforce – and to company. Allows more flexibility over working hours which suits some workers. May reduce overhead costs and increase staffing levels at key times for Unilever, e.g. making of soaps and cosmetics for Christmas market. Overall impact on competitiveness may depend on: how it is introduced and explained – the evidence in this case suggests that this is being done openly with opportunities for all staff to benefit; whether staff are being forced to accept parttime and temporary contracts as part of this flexible working. This would reduce acceptability to staff and may damage motivation (and thus competitiveness) – not enough detail given on this.
7 (10 marks: see Chapter 1) Define ‘core employees’. Arguments should be applied to a business context – students to choose this. For example: fast food outlet. Little job security for most workers; high staff turnover is likely with high recruitment and training costs; low levels of customer service could occur.
8 (18 marks: see Chapter 1) Define ‘homeworking’ (‘teleworking’ too as in this case all workers are likely to be linked to Pattinson’s head office by IT). Benefits to competitiveness: reduces overhead costs, e.g. rent and other costs of estate agency offices; salary costs as workers are likely to be paid commission as high proportion of rewards. Staff may be very motivated as they are self-employed and independent – this may lead to excellent customer service. Drawbacks might include: lack of job/pay security may reduce motivation; workers’ social needs not being met; lack of control being exercised by Pattinson’s as staff are not working directly with management staff in office. Overall impact on competitiveness could depend on: pay system to be adopted; quality and motivation of staff appointed and the quality of training given; local competition in the market and the services offered by other estate agents.
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Unit 3
Answers
1 (18 marks: see Chapter 1) Explain effective communication. This new strategy has significant implications for employer–employee relations. It could lead – as BALPA are implying – to lower pay for pilots and worse conditions of service being introduced to all BA operations by the ‘back door’. BA may wish to deny this – and may need to offer an agreement to maintain existing pay/conditions for existing staff indefinitely. Poor communication can lead to rumours and incorrect assumptions – these problems could be a major cause of disputes in cases such as these. Should BA involve BALPA in negotiations over this new strategy at all stages? Should all staff including pilots be consulted at all stages? Would it be more effective – in the long term at least – for BA to introduce this strategy as a ‘done deal’ at the last minute in a ‘take it or leave it’ approach, i.e. with no communication at all until the last minute? Other factors will also be important to the implementation of this new subsidiary: how existing contracts are affected, existence of trust (or lack of it) between employers and employees, the precise differences between pay and conditions between Open Skies and existing BA operations.
2 (10 marks: see Chapter 1) Student Book-based answer, e.g. employee groups and works councils – applied to the context of BA (large business, operating in many different countries, employing both highly skilled and less skilled workers).
3 (10 marks: see Chapter 1) Define ‘mediator’ – or ‘conciliation’/‘arbitration’. Conciliation: may be useful to air grievances and improve communication between both sides; can lead to an agreed settlement between the two sides. Could give the impression to the BA passengers that both ‘sides’ have their interests at heart by trying to resolve the dispute. Arbitration: leads to a judgment from a third party – could be beneficial to BA if they believe that the arbitrator is likely to accept their arguments above those of BALPA – this could mean that BALPA would be forced to accept the judgement, benefiting the passengers too.
4 (3 x 10 marks: see Chapter 1) Some repetition of question 3 in a) and b). An alternative question would be to ask students to analyse: a) the arguments that might be used by BA at an ACAS arbitration meeting b) the arguments that might be used by BALPA at an ACAS arbitration meeting, and to recommend, with justification, how an arbitrator might resolve this dispute. This could then be assessed in the same way as a 34-mark report (see Chapter 1).
1 (4 marks) Student Book.
2 (10 marks: 3 marks Content; 3 marks Application; 4 marks Analysis) Define ‘effective communication’. Relocation can be unsettling for all staff/managers – especially if some distance from existing site. Good communication can reduce fear of the move, explain the reasoning behind the move and the company’s policy for staff relocation. Major changes such as this will work most effectively if senior management have the support and understanding of all staff involved – so good communication could be very important. Lack of communication will spread rumours and fear – and could increase the chances of negative industrial action. Answer needs to be applied to an actual business example.
3 (10 marks: see Chapter 1) Tesco employs many thousands of workers in the UK at all levels of skill. Some staff may well find communication difficult – reading and writing skills might be limited, for example, or there might be lack of IT awareness. Effective communication depends on
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Answers the receiver understanding the message and being able to provide feedback – these stages will be more difficult without effective communication skills. Training courses, encouragement to attend literacy classes, exercise in team work and group discussions will all help Tesco engage in two-way communication with staff in its widely dispersed branches.
4 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Explain staff forum (employee groups). Discussion with staff representatives who have been elected by workers will air concerns and fears – these can then be addressed by management. Managers can also use the forum to explain the mutual benefits of IT changes and the staff representatives will then be trusted by workers to relay these communications to them accurately. Will help to reduce fear and anxiety over changes in job/skills needed as a result of IT developments.
5 (4 marks) Student Book.
6 (10 marks: see Chapter 1) Student Book answer, but explain that students must put answer into a business context to be awarded Application marks.
7 (6 marks: 2 marks Content; 2 marks Application; 2 marks Analysis) Student Book answer – some business context is needed for Application marks.
8 (10 marks: see Chapter 1) Explain the role of ACAS. Analyse the benefits of third party involvement – give a business context, e.g. where there is a complete loss of trust on both sides of the dispute. Analyse the risk of accepting arbitration – the final recommended settlement may not be what either side was expecting.
9 (18 marks: see Chapter 1) To be most effective, this question could be set after students have researched and analysed a number of different industrial disputes. Even good communication cannot prevent some industrial disputes, e.g. the closure of a factory or office leading to the loss of many jobs or the introduction of flexible contracts for existing staff. In some cases, though, effective communication can build trust and lead to less chance of industrial action being taken, even where substantial changes are being proposed by management, e.g. when a union wage claim is being rejected.
10 (18 marks: see Chapter 1) Background research is useful for this question to be effective. Whether an industrial dispute can be resolved will depend on: the nature and scale of the dispute; the relative strengths of the two sides; the willingness to use ACAS; the economic situation – are disputes less likely to occur (or more likely to be resolved) during a recession when all staff (and managers!) are worried about short-term job security.
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