ocr business studies as f292 prerelease toolkit june 2014

OCR AS Business Studies (Unit F292)

All About the Baby Ltd (AAB)

Summer 2014

Pre-release Case Study: Support Toolkit

OCR AS Business Studies – Unit F292 June 2014

© Tutor2u 2014 www.tutor2u.net

Contents

AAB - Putting the Business in Context .................................................................................................................................................................................... 3

Introduction ............................................................................................................................................................................................................................ 3

Key topics ................................................................................................................................................................................................................................ 5

Specification Notes ................................................................................................................................................................................................................. 5

Reality Check ........................................................................................................................................................................................................................... 5

Exam Overview ....................................................................................................................................................................................................................... 6

Specification map .................................................................................................................................................................................................................... 7

Marketing ................................................................................................................................................................................................................................ 7

Accounting and Finance ........................................................................................................................................................................................................ 13

People in Organisations ........................................................................................................................................................................................................ 16

Production ............................................................................................................................................................................................................................. 18

Application Analysis & Evaluation ........................................................................................................................................................................................ 22

Key case study issues: potential exam style questions – application, analysis and evaluation .......................................................................................... 23

Exam Technique Advice ........................................................................................................................................................................................................ 27

Case Study Terms .................................................................................................................................................................................................................. 32



AAB - Putting the Business in Context Introduction

Here are some key features and perspectives on AAB which you should bear in mind as you revise for Unit F292 and prepare notes on the case study, and work through this revision toolkit. OCR F292 is concerned with the key functional areas of a business - and the way in which they interact. Let's look at the key business issues, as they relate to the four main functional areas (marketing, accounting and finance, people and operations):

You will quickly appreciate that marketing is fundamental to the success of AAB. The company operates 60 branded retail stores (line 5) and its products are also “stocked by over 200 independent and national retailers, in the UK” (lines 5-6). It also has “a significant international presence” (line 8). Successful marketing is central to the company’s success. Although “it made a pre-tax loss of £1.4m” (line 10) last year, the problem seems to stem more from rising costs than falling revenues. Nevertheless, if the firm is to achieve its goals of “a return to profitability in the next 12 months … and that growth will continue into the future” (lines 12-14), the company will need to address its marketing mix. Your discussion of marketing in the exam is almost certainly going to talk about the importance of place in that mix. For the first half of its life as a company, AAB had no retail presence, but this is now a crucial side to its business, having just opened its “61st store in Northampton, the eighth new store in 12 months. Over the next year the plan is to open a new store in the UK every month” (lines 26-27). These are challenging times for ‘bricks and mortar’ (i.e. traditional) retailers. AAB’s expansion is against a backdrop of severe problems for some competitors – the firm’s “main UK competitor has closed a quarter of its stores” (lines 27-28). AAB are committed to internet sales and “now have a very strong online presence, where our full range of products can be bought” (lines 28-29). Every three months the senior directors of the company carry out a “review of the AAB product portfolio. This consists of hundreds of different products” in the baby care market (lines 32-33). This process is more than just a review of products – it examines the firm’s “market share, market growth and all aspects of the marketing mix” (lines 36-37). You will need to look at a small slice of AAB’s product portfolio too, and make reference to the Boston Matrix and Product Life Cycle (table 1) in your answers.

AAB have some tough decisions to make about the future direction of their marketing mix, and it’s highly likely that you will offer advice in your exam, based on this case study. It doesn’t help that “there is a bit of guesswork in terms of each product’s market share … (furthermore) we know how difficult it is to identify the competitors for each product, never mind their sales” (lines 39-41). This realistic uncertainty about market data will boost your evaluation of the next steps AAB should take when adapting their marketing mix to support sales of both new (line 52) and existing products.



Although “the products (designed and marketed in Plymouth) … are produced by sub-contracted firms in the Far East” (lines 3-4) there are many operations management issues that are worth your consideration. The complexity of their operations is increased by the firm’s network of overseas links. A growing proportion of the brands sales are being generated abroad, “about 12% of AAB’s sales” and “there is a five year plan to increase this to over 20%” (line 72). There is a complex web of “retail stockists … franchise stores in Europe, the Middle East and Japan. There are also distribution partners in Russia, South Africa and China” (lines 73-75). Design of products starts in Plymouth and “they are then produced by many sub-contractors in the Far East … these finished products are delivered to a central distribution depot” (lines 76-78). “This is a huge logistical exercise and one in which AAB has recently invested heavily … this is just one example of AAB’s recent strategy to improve all aspects of its business, in terms of waste management and efficiency” (lines 80-83). This topic emerges as an important area for your thought and discussion, especially as the firm’s efforts in this area have not run entirely smoothly. “There continue to be problems with the distribution system … some stores regularly ran out of stock of key items” (lines 84-85). This is bad for business on several fronts. The company “carries well over £20m worth of stock on its balance sheet” (lines 86-87, Fig.2). This is obviously a significant and on-going problem, since despite some improvements in this area, “all this investment (in distribution) is taking some time to bed in” (line 93), according to AAB’s Logistics & IT Director.

“Another feature of AAB which is quite complicated is its organisational structure” (line 103). You will be challenged in the exam to talk about people in organisations. This toolkit will take you through the structure of AAB and the potential advantages and disadvantages of being made up of “three interlinked companies” (line 104) of almost 1,500 people. Although AAB has remained a family business that operates as a private limited company, “its continued expansion and success has placed a strain on the organisational structures. A management consultant has recently been contracted to advise on the suitability of the current structures as part of a review of efficiency across the whole business” (lines 115-118). You might like to imagine yourself in the role of that consultant.

There is of course an interesting finance and accounting dimension to the success of AAB. Remarkably for such a large business “each stage of AAB’s growth has been financed organically, without any external equity funding” (line 121). Nonetheless, the company has certainly borrowed a lot of money, and not every part of the company’s balance sheet is healthy. Recent losses will draw your attention to the firm’s profit and loss account, since although the company has emerged “from the latest recession in a much stronger position than most of its competitors … things have been tough and margins continue to be affected by the rising costs of raw materials” (lines 126-128). Quite a lot of financial information is provided in Fig.1 and Fig 2 that you may wish to comment on, as understanding the firm’s financial position is critical when offering effective advice on the next steps it should take, and how to respond effectively to current challenges. External stakeholders - especially the banks - will want detailed data and financial reassurance in the form of accurate accounts, and effective plans for the future.



All told, AAB face a wide range of issues that need to be successfully addressed. This toolkit is designed to help you understand and appreciate these issues in more detail.

Key topics

We have summarised below what we believe to be the main Unit F292 topics addressed in the AAB case study. These are:

How should the firm manage its product portfolio and marketing mix in order to return to robust profitability? To what extent will further growth be constrained by problems with quality and supply chain issues? What recommendations should be made about adjusting the company’s organisational structure to cope with further growth? Why is it important for AAB to have accurate accounts, and what do the accounts tell us about problems the firm might face in the near future?

Specification Notes

Several themes emerge in this case study that are examined in the F291 exam. The stand out examples are sources of finance (AAB’s organic financing), legal structure (the franchise model of growth, and the company’s private limited Ltd status), AAB’s need for effective market research and analysis and the importance of providing financial details to key stakeholders. AAB is a growing business, so the concepts of economies and diseconomies of scale are also highly relevant. Although these concepts may not be examined directly, they serve as a reminder that the F292 exam(s) build on the knowledge you gained from the first unit of the AS course, and you may wish to (briefly) refer to these topics in your answers.

Reality Check

The firm’s “main UK competitor has closed a quarter of its stores” (lines 27-28). Although the case study is fictional, you may well have guessed that this rival business is likely to be Mothercare. Although it would be wise not to refer to this similarity in the exam, you might want to take on some outline research into that company to familiarise yourself with the type of market AAB operates in.



Exam Overview

Unit F292 - Business Functions

AAB Pre-Release Case Study Toolkit

Exam Structure:

You will be issued with a clean copy of the case study in the exam. The paper is broken up into two sections, A and B:

Section A This will consist of a number of short-answer questions (totalling 18 marks) on any topics from the F292 specification. These questions will not relate to the pre-released case study on AAB.

Section B This will consist of one ‘calculation/numbers’ question likely to be worth 4 marks and then four essay questions (likely to be worth 16-20 marks each). These four questions will test the four ‘functional areas’ of business set out in the F292 specification and will be specific to the case study and AAB

Operations Management

Marketing

Accounting and Finance

People in Organisations

Module Length Raw Marks UMS

F292 2 hours 90 120



Specification map

The AAB case study can be broadly mapped with the Unit F292 specification as follows:

Specification Topic Case Study Topic

Marketing

Marketing Objectives

.

Marketing objectives – indeed any objectives – are likely to be more helpful if they follow SMART principles. That means that they should be specific and measurable (rather than vague). In addition, it helps if they are achievable and realistic (rather than just hopes or aspirations). Effective objectives are also likely to be time specific and be matched against dates and deadlines.

AAB have marketing objectives that meet some of these criteria. Consider the aim for “the business to return to profitability in the next 12 months” (line 12). This helps us understand what AAB are trying to achieve, and it’s clear how effective marketing could help the company reach that goal, basically by boosting revenues faster than costs. The next stated aim, expressed in the latest company report that “growth in the business will continue into the future” (lines 13-14) is rather more vague. But we can see that AAB are committed to growth as a fundamental corporate aim. Specifically, we are told that “about 12% of AAB’s sales come from abroad and there is a five year plan to increase this to over 20%” (lines 71-72). That is a marketing objective.

There’s some evidence that AAB breaks down these longer term, broader goals into other more specific and focussed short term marketing objectives, primarily through their quarterly review process that feeds through to adjustments in the marketing mix for hundreds of product lines. That would seem to suggest that the firm has a clear process in place for setting marketing objectives and then using these to inform effective decision making.

A good example is provided in the discussions around the “new mattress, currently nicknamed the ‘HealthySleep’ and due to be launched in February 2014 … (a) potentially ground-breaking product for AAB” (lines 56-58). The objective (launching this product) is almost certainly a considered contribution to AAB’s wider aims – a return to profitability and continued growth. The marketing director is keen on the new mattress and he hopes that once “the product (has) the final ‘green light’ (the company can) agree a pricing and marketing strategy” (lines 67-68). That strategy will be made up of a smaller set of steps, or objectives.




Market Analysis including segmentation, share and growth

There can be little doubt that AAB are heavily committed to a customer orientated approach to marketing. AAB isn’t a business with product lines to push, so much as one that is looking carefully at consumer trends and tastes, and then seeking out products that meet that wants and needs of that group of customers.

The fundamental basis of marketing is to understand the concept of market segments – groups of consumers with the same buying habits. Those different segments will have different wants and needs, meaning that the marketing mix (see below) will need subtle adjustment to ensure that AAB meet those needs effectively. You might argue that basically, AAB’s market segment is obvious – mothers. Yet it’s almost certain that AAB will take a much more nuanced approach. For a start, not all products have to appeal to just mums. Both parents often make joint purchasing decisions, especially concerning more expensive items. Grandparents are also significant consumers in the nursery market, as are other family members and friends. The market is further divided between products for new-borns, toddlers and infants too.

You could perhaps understand this market mainly in terms of big market segment called ‘parents and carers’, but then spilt that segment in various smaller market niches. The wide array of mattresses available (see Table 1) serves to emphasise the fact that the child mattress market itself splits according to the amount of money people are prepared to pay - for what you might have assumed is a fairly standard product. We know this since the director of design refers to “the bottom end of the market” (line 49).

AAB’s target market segment is also probably characterised by consumers who are in the market for “high quality and stylish products” (lines 1-2) and those looking for “fashion and emotion” (line 19), which doesn’t describe all parents and carers. Many (particularly those raising a 2nd or 3rd child) are comfortable with cast-offs, hand-me-downs, charity shop and eBay purchases.

Finally, it’s also crucial to remember that “about 12% of AAB’s sales come from abroad and there is a five year plan to increase this to over 20%” (lines 71-72). It’s certain that customers in Japan and the Middle East will have different buying habits, as compared to those in Europe – after all, even German, French and British markets will be slightly different.

Product, including product life cycle and Boston Matrix)

You can’t expect to be an expert on the “hundreds of different products” (line 33) that make up the complete AAB product portfolio, so it’s perhaps best for you to focus on the two products that the case study discusses in more detail: AAB’s range of mattresses for standard-sized baby cots sold in the UK (Table 1), and the new and “potentially … ground-breaking product” (lines 57-58), the ‘HealthySleep’ mattress.




You can anticipate writing about the product life cycle in your exam, since it’s clearly referred to in the case study, and it’s such a helpful concept that will add depth and quality to the analysis and evaluation portion of your answers. Be sure to have this topic revised and ready to incorporate into your responses. Your key challenge is to form links in your mind between the concept of the product life cycle and the marketing mix (see below). The marketing mix needs to be adapted to reflect the product’s position in its life cycle.

Firms like AAB think carefully about the product life cycle when planning their product portfolios and supporting marketing mix. The example of the mattresses illustrates the case perfectly. The firm’s existing mattress products will have been gradually introduced partly to replace existing products that had gone into decline. One of the reasons for firms to develop a diverse product portfolio is to protect themselves and prepare for this (almost) inevitable process. The ‘Supreme’ mattress is a recent launch and “it has made a good start, there is certainly a lot of potential there” (lines 44-45). The ‘Pocket sprung’ mattress is probably a bit older and is becoming better established. The 3 lowest priced mattresses are all very well established, to the point that one, the ‘Basic’, is said to be in a market saturated with rival products. That starts to be a problem, and one that requires action – most obviously through the release of new products, and/or other tweaks to the marketing mix.

However, understanding and interpreting the life cycle process isn’t easy. It isn’t always obvious how long a product will stay in each phase of the life cycle, nor the total length of the product’s ‘life’. Furthermore, it can be difficult to read the signs that indicate when one phase is ending and another starting. Falling sales don’t necessarily mean that a product is going into decline, for instance. These difficulties are all too apparent with the “previous top priced mattress, the ‘Ultimate’ (that) has lost a lot of market share. It’s only been on the market for three years and it’s already in the decline phase” (lines 46-47). That might be true. But falling sales and market share doesn’t prove that the product is in decline – it might yet have potential for growth. That means it could be too early to be planning a replacement, when changes to the product’s marketing mix might yet see it recover.

A decision to launch the new ‘HealthySleep’ product will be made after careful consideration of the product life cycle. If indeed the ‘Ultimate’ is coming to the end of its life, the HealthySleep product, priced for a similar market segment, might fit the bill nicely. This is an issue that will be discussed in further detail in the potential exam-style questions presented on page 23.




Another way of analysing the product portfolio to inform marketing strategy is to use the Boston Matrix.

Analysis using the matrix triggers alarm bells for the ‘Dog’ products – the Basic foam and ‘Ultimate’ mattresses. They have been described as being in decline, or in saturated markets. It would probably require huge investment to turn around the fortunes of these products, and so it may be more cost effective to delete them and seek out alternatives in their niches.

The Sprung interior and ‘Supreme’ mattresses are perhaps the ones to watch – Question Marks. They currently have low market share, but the ‘Supreme’ probably has a lot of growth potential yet.

The Deluxe foam mattress may be nearing the end of its time as a star (before settling down to life as a possible ‘Cash Cow’), but its current market share and sales growth are still solid. The Pocket sprung mattress is the stand out success in this analysis. It has a high market share, it is still only in the growth phase of the product life cycle and its sales volume growth (5.7%) is outpacing growth in the mattress market as a whole (which is 3%, line 48).

It’s up to you to think how you might respond to this analysis if you were in charge of marketing strategy at AAB. Some suggestions are offered in the potential exam-style questions presented on page 23.

We already know that “AAB’s adaptability has given it a competitive advantage on the high street, emerging from the latest recession in a much stronger position than most of its competitors” (lines 126-127). Their product mix is flexible. “Product ranges have been adjusted … to recognise that most customers are still trying to keep their expenditure under control. AAB has accommodated this by producing more non-premium products but without reducing the high quality standards for which the brand is known” (lines 129-131). That statement links directly to the next topic: pricing.




Price

(including price and income elasticity)

Pricing is obviously a key component of the marketing mix. Prices are charged to reflect the perceived quality of the product being sold (the price should almost always cover the cost of the stock, of course). Prices, like products, are also varied to meet the willingness to pay of each market niche being targeted. The retail prices presented in Table 1 clearly indicates how AAB are trying to target a variety of mattresses to a variety of niches, using a variety of prices to match. It’s interesting to see that their main problems are in their bottom-of-the-range Basic foam product and towards the top, the ill-fated ‘Ultimate’ mattress – the two ‘Dogs’ of the Boston Matrix presented above.

Now is a good time to recall AAB’s marketing objectives. They want to grow sales and boost revenue (and hence profit). Careful pricing could be a very effective way to achieve this goal.

Price elasticity of demand is often presented as a complex concept, but it’s really very straightforward. Even if you don’t feel confident handling the calculations (though you really should try), it’s an idea that you can very easily express in words anyway. The idea of elasticity is to consider how consumers respond to price changes. Do they make a big (‘elastic’) reaction? Or a smaller (‘inelastic’) response? If AAB had data to answer this question they would be in a good position to price even more effectively.

Consider those products where demand is relatively elastic. In these cases, discounting makes sense. If consumers are sensitive to prices, then a 10% price cut (say) would increase demand by more than 10%, generating additional revenue. That might boost takings for those products reaching into maturity and saturation in the product life cycle. Other products, in less cluttered niches, with effective branding (and with customers who have relatively higher incomes) might show more inelastic demand. Here, premium prices make sense. A price increase of 10% (say) would reduce demand, but by less than 10%, thereby generating more revenue in total. Since increasing revenue is a key route to higher profitability, if “the business (is) to return to profitability in the next 12 months” (line 12), then constant adjustment to pricing in this way will be crucial.

You will want to discuss pricing in the potential exam-style questions presented on page 23, perhaps referring to the launch of the new ‘HealthySleep’ mattress with the idea that “AAB can set the retail rice somewhere between £250 and £300” (lines 69-70). That price point would be similar to the unsuccessful ‘Ultimate’ mattress, which is worth your consideration and comments.




Place This is a very interesting component of the AAB marketing mix. For the first half of its life as a company, AAB had no retail presence, but this is now a crucial side to its business, having just opened its “61st store in Northampton, the eighth new store in 12 months. Over the next year the plan is to open a new store in the UK every month” (lines 26-27). These are challenging times for ‘bricks and mortar’ (i.e. traditional) retailers. AAB’s expansion is against a backdrop of severe problems for some competitors – the firm’s “main UK competitor has closed a quarter of its stores” (lines 27-28). The retail side to AAB is also complex and diverse, with sales channels including AAB branded stores in the UK, other UK retail stockists, overseas franchise holders and other ‘distribution partners’. The advantage to this approach is that this degree of diversity probably helps the firm reach out to many potential customers, in a variety of economies. The risk lies in their exposure to the tough retail environment.

AAB are obviously strongly committed to retail and believe that they have a very strong retail offer, with products and brands that work even when their goods are sold via other retailers, stockists and distribution partners. It’s not obvious to see how they could readily improve or accelerate their retail expansion. The risk may be that it is taking the firm in the wrong direction, or growth is at a rate that is faster than distribution systems can handle. The toolkit returns to these questions in the sections on finance and operations.

Unfortunately, no figures are provided to show the share of sales made through each sales channel, so we can’t judge the relative importance of each. It would be especially interesting to see what proportion of sales are made via the internet, since AAB “also now have a very strong online presence, where our full range of products can be bought, and we have just launched a Eurozone website” (lines 28-29). Most observers might be expecting online sales to rise as a proportion of total sales. With that possibility in mind, the rapid growth in retail outlets looks very ambitious, although it may be justified.

AAB may have other, more minor channels of distribution, such as catalogue sales.

Promotion There’s obviously a bewildering array of above the line and below the line promotional techniques that AAB could use to support their enormous product range across so many markets. This toolkit isn’t going to address this issue. Instead, you might like to propose a few ideas yourself, perhaps reflecting on the reality check mentioned on page 5.




Accounting and Finance

Budgeting A budget is a planned spending total for a department, action or process. Budgets are set in advance so that a firm can plan out its spending priorities as financial resources are always limited. For most companies it’s important to budget carefully as the company advances through its objectives. More significant objectives may be given a higher budget priority and allocated more generous resources. Later on, the firm can then carefully investigate and consider reasons for budget variance so that at the end of a budget cycle, ‘actual’ spending can be compared to the ‘budget’ figure and enquiries can begin into the reasons for over- or under- spend.

The issue of budgeting is definitely worth your consideration, and it clearly links to the other topics in this section of the toolkit. Effective budgeting could really help AAB, since careful financial management will be needed for the launch of new products, new stores and further improvements to distribution systems. We are told that “the pace of growth at AAB has been controlled … and they have tried to ensure that it has not had a detrimental effect on the workings of the business” (lines 119-120). The business “has always seen opening stores as a very big step” (line 123). The track record of AAB suggests that they take the budgeting and review process very seriously: “we made mistakes along the way, that’s how we learnt” (line 125). Although AAB have expanded without additional equity funding (by selling more shares in the company), they have clearly borrowed heavily, partly to cover recent losses, but partly to fund expansion. Lenders will be looking for reassurance that effective budgeting is in place before they commit any more money to the company.

Cash Flow Cash is constantly flowing in and out of organisations, yet the timings of these movements can be awkward. Even a profitable business may find that there are pressure points during the year when cash outflows stay high, but inflows dry up. A rapidly expanding business might be doing really well, but furiously burning through cash as it acquires assets. A forecast of these cash movements guides firms as they raise finance or plan capital expenditure.

Cash flow will be a crucial consideration as AAB moves forwards, and although we don’t have detailed data to work on there are some worrying indications. As you will see in the forthcoming section on the balance sheet, AAB is holding on to very little cash at any one time. If debtors fail to pay up – or worse still – sales slow significantly, the company could be overwhelmed by demands for the money it owes to creditors. AAB don’t want to be in a situation where they are taking out further loans, at short notice.




Costing and Break-Even Analysis

Once AAB have deducted the variable cost from the revenue they make from a sale they achieve a contribution towards their fixed costs. Falling levels of contribution (from rising variable costs and static or falling sales revenue) are driving the company’s falling profit margins; “things have been tough and margins continue to be affected by the rising costs of raw materials” (lines 127-128). This has led to its “pre-tax loss of £1.4m compared to a pre-tax profit of over £5m the previous year” (lines 10-11).

There is no cost data provided in the case study to support break-even calculations, but you will still want to be familiar with the necessary calculation (above) in case the topics are examined in Section A. The topic could appear in the Section B portion of the exam if you are presented with new data, such as cost data to accompany Table 1. With new figures it would be a relatively easy step to deduct the variable cost of producing an item from its intended selling price to derive a contribution figure. Those contributions must go towards the company’s fixed costs.

Investment Appraisal

To appraise something means to determine its value. The main project that has been discussed –is the “central distribution depot a few miles from Gatwick Airport … a huge logistical exercise … in which AAB has recently invested heavily” (lines 78-81). Was this investment appraised before it went ahead? It would seem likely, given the close attention given to budgeting and financial control (see previous page). No figures are provided.

No investment projects are outlined in the case study (except perhaps opening new retail outlets) that we can appraise at this stage, but you will still want to be familiar with way to calculate and interpret methods of investment appraisal such as pay-back period and accounting rate of return in case the topics are examined in Section A.

These concepts can still be discussed in answers you give about the wisdom of proceeding with any business investment plans AAB may be considering. You could explain how a decision between rival investment projects might be informed by careful investment appraisal.

Profit and Loss Accounts

You should familiarise yourself with the basic story told by AAB’s profit and loss account data presented in the case study.

Here’s another way of looking at that story, explained in terms of profit margins.




The Gross Profit margin data tells us that out of every £100 in sales in 2012, £41.80 was left as gross profit (41.8%). It therefore follows that for every £100 of sales, £58.20 was spent on stock (or ‘cost of sales’). By 2013, out of every £100 in sales, only £38.90 was left as gross profit. That means that £61.10 was spent on stock. This finding confirms the statement that “things have been tough and margins continue to be affected by the rising costs of raw materials” (lines 127-128). AAB need to reduce these materials costs.

In 2012, the difference between the Gross Profit margin (41.8%) and the Operating Profit margin (4.7%) was 37.1%. That figure tells us the proportion of sales revenue that was eaten up by ‘expenses’. By 2013 the comparable figure was higher, at 38.5%. A small difference perhaps, but proof that AAB’s profit margins aren’t just being eroded by higher materials costs. The business is also being squeezed by higher ‘expenses’ (mainly fixed costs). This is a key finding, and one that we will return to later in the toolkit. Stated simply, AAB’s return to profitability isn’t just about boosting revenue and reducing the costs of stock, it also needs to find efficiencies that will bring down their ‘expenses’ bills. A return to profitability will also reduce the need for further borrowing, which will help control interest costs. Currently these are relatively small – but could rise rapidly in the near future.

Balance Sheets You may have already seen a reference to the balance sheet in the section of the toolkit covering cash flow on page 13. Although the Balance Sheet can seem complex (it’s an area you will look at in much more detail at A2) there are a few conclusions that you should be ready to bring into your discussions.

Take a look at the Total Current Assets entry for both 2012 and 2013. Current assets are said to be ‘liquid’, which means they can be treated like money, to some extent. But only a small proportion of Total Current Assets is in fact cash (8.9% in 2012, 9.3% in 2013). A far higher proportion is debtors who may (or may not) pay back the money they owe.

But the Total Current assets figure is dominated by holdings of stock (67.8% in 2012, 67.4% in 2013). Retailers have to hold lots of stock, and AAB is carrying a very large amount. Two issues arise from this observation: Firstly, if sales of stock start to slow, and stock is not turned into cash, then AAB may struggle to meet other payments. Secondly, such large stock holdings may be a sign of inefficiency, and are unnecessarily contributing to higher costs.

Creditors due after 12 months have risen from just under £20m in 2012 towards £25m in 2013. This will largely be due to extra loans taken out by AAB to cover investment, expansion – and losses. The figure is not yet alarming, but needs careful consideration. Lenders will be keen to see accurate, audited accounts for reassurance, especially if extra loans are needed.




People in Organisations

Labour Turnover

Labour turnover (and a general trend, carried over a number of years) can give a revealing insight into the ‘people’ side of AAB. The value is expressed as the proportion of staff that leaves a business during a year, usually quoted as a percentage. The AAB case study contains very little discussion of the issues of labour turnover and the related topic of motivation. That might suggest that calculating labour turnover is a possible area to be tested in the Section A part of the examination.

Motivation and leadership.

For most firms, the motivation, leadership and management of the workforce are considered crucial to its performance. The AAB case study tells an interesting story of a husband and wife start-up business that has morphed into a £140m a year organisation with 1,500+ employees. It’s really an astonishing success story, in which successful motivation and leadership will have played key part. Management theorists Drucker and Peters might draw attention to the way staff are managed, and their overall role in the organisation. They might identify AAB’s success growing out of the way in which the company itself is organised. Their analysis would almost certainly be based on the degree of delegation and autonomy for workers. De-layering, recognition, job enrichment, with staff working towards their own clear objectives are all ideas that AAB would seem to have implemented. Several of these ideas are discussed on the following page, in the discussion of organisational structure.

“Staying privately owned has allowed AAB to remain a family business” (line 112). That all sounds lovely, but family owned businesses have their problems too (just like families). A husband and wife are in overall control, and half of the directors are family members (lines 110-111). On some levels that’s a huge source of strength. “(Family members) have been part of the business from an early age … eventually they will take over ownership of the business” (lines 114-115) “staying a private family owned business is a key factor” (line 132). That is a strong motivation to plan effectively for long term success. However, the quality of leadership decisions in family businesses can be compromised by loyalties, emotional considerations and an unwillingness to tackle tough decisions or risk confrontations. Could this be a potential problem for a company like AAB if it does tend towards a paternalistic style of management? That label supposes a family style set-up, headed by a man. AAB’s structure may be family (although female) orientated, so it could be vulnerable to similar problems. Small wonder that AAB’s “continued expansion and success has placed a strain on the organisational structures. A management consultant has recently been contracted to advise on the suitability of the current structures as part of a review of efficiency across the whole business” (lines 115-118). That’s where our discussion turns to next.




Organisational Structure

“Another feature of AAB which is quite complicated is its organisational structure” (line 103). The three appendices to the case study lay out organisational charts for “three interlinked companies. All About the Baby ltd is the non-trading parent company. All About the Baby (Product) Ltd employs over 350 people …. All About the Baby (Retail) Ltd employs over 1,100 people” (lines 103-105). What conclusions can be drawn from the information to hand?

The first observation is that AAB are employing a matrix form of organisational structure. The key idea is that managers reach across corporate divisions and are not isolated in their own corner of the company. “In addition to the two owners … there are ten other directors with wide ranging responsibilities across the three companies” (lines 108-110). Ranjit Miner, for instance, is Personnel Director in the parent company (appendix 1), Personal Director in the product company (appendix 2) and Personnel Director in the Retail company (appendix 3). The Finance director is in a similar position.

AAB’s organisational structure has clearly evolved through time and “its continued expansion and success has placed a strain on the organisational structures. A management consultant has recently been contracted to advise on the suitability of the current structures as part of a review of efficiency across the whole business” (lines 115-118). We can tell that the structure is causing problems, and it’s a topic that we return to in the potential exam-style questions presented on page 24.

Unfortunately for AAB (but fortunately for exam candidates) there’s unlikely to be a ‘right’ organisational structure, since such a large and complex organisation, engaged in a range of activities will almost certainly need a flexible organisational structure. AAB will want to retain some of the features of their existing structure. A few assumptions about AAB’s current structure are outlined here:

By splitting the company into separate sections, it would appear that the directors have attempted to decentralise power and authority within the firm. This should speed decision making and contribute to delegation and give workers opportunity for greater autonomy (this was identified in the previous section discussing leadership and motivation). The business does not seem to be highly hierarchical, but instead appears to have a relatively flat structure, making chains of command shorter and de-layering the business. There are only 3 or 4 levels of hierarchy between the ‘top’ and ‘bottom’ of the business. This structure suggests that managers are likely to have quite wide spans of control. If that’s correct, managers may be less inclined to take an autocratic approach to management, with the structure lending itself to more democratic or even laisser-faire management styles. This is conducive to a Theory Y style of management.




Production

Operational Efficiency, Capacity Utilisation

AAB has grown year-on-year, and seeks to continue on this path. Therefore questions of scale are fundamental as the company plans for further growth. Is bigger always better? This is a good time to remind yourself of the concepts of economies and diseconomies of scale. We know that growth presents problems, as discussed on the previous page. The diseconomies of scale typical of larger organisations like AAB are communication and co-ordination problems, reduced flexibility, slowing rates of innovation and employee demotivation. If these problems are arising, they should be closely attended to in the forthcoming review of organisational structure. However, AAB mustn’t lose the economies of scale they have captured as they have grown. These include personnel, financial and marketing economies. Perhaps most relevant to this section of the toolkit are the technical and purchasing economies that are likely to have grown with the company.

We know, for instance, that AAB have recently attained a scale where they have been able to centralise their stock control system with the “central distribution depot a few miles from Gatwick Airport … a huge logistical exercise … in which AAB has recently invested heavily” (lines 78-81). This technical economy would probably have been unaffordable for a smaller scale retailer. Yet the introduction of the new facility has not been trouble free: “all this new investment is taking time to bed in … new systems and a new depot at the same time were never going to create the conditions for a seamless transition” (lines 93-95). If AAB are going to improve their operational efficiency, this is a good example of where attention is needed. It’s also important that where capacity is being installed, either in terms of retail – new shops – or in expensive distribution systems, that capacity is being fully used. Half empty shops and distribution centres would represent highly inefficient capacity utilisation.

AAB have a significant advantage that many specialised retailers seek to gain: their attentions aren’t focused on the physical production of goods. That unlocks another economy of scale in purchasing: as significant bulk buyers it is likely that they can command significant pricing power when negotiating favourable terms with their suppliers who are “subcontracted firms in the Far East” (line 4). One big advantage of this business model is that some of the hassles of having too much/too little production capacity are passed on to these external businesses. If demand rises steeply, more sub-contractors can be brought in. If demand dips, other sub-contractors can be ‘let go’. The issues presented in this case study generally point to a firm that is struggling to handle demand, and AAB needs to work on the problems generated by straining pretty close to – or beyond – full capacity.




Production Methods

This section of the specification is not directly addressed in the case study. The sub-contractors employed by AAB will use a variety of batch and flow production techniques.

Quality

Quality is all about meeting the needs and expectations of customers effectively. We can make some assumptions about the needs and expectations of AAB’s customers, since the firm feels that their customers are in the market for “high quality and stylish products” (lines 1-2) and are looking for “fashion and emotion” (line 19). AAB has shown flexibility “by producing more non-premium products but without reducing the high quality standards for which the brand is known” (lines 130-131). Therefore Quality at AAB does not necessarily mean fancy. Some of their products might be inexpensive, but they will be stylish, safe, and represent good value for money.

Customer perceptions of quality will not be restricted to the physical characteristics of AAB’s products. As a retailer, consumers will experience good quality if they also get good sales service in retail outlets, online or through franchisees and other distributors. For many customers, their perception of quality at AAB will start when they first visit a website or store, continue when they use a product and finish when (or if) they request after-sales care or support.

AAB will certainly draw on different sources of quality. The first, and most important, will be a quality assurance approach that gets ‘built into’ AAB products. Although the firm’s products are manufactured by sub-contractors, the products are made to meet the company’s own designs. Those designs will have been created with quality as a significant product feature. When selecting sub-contractors, AAB will have carefully chosen those that can meet demanding standards for safety and attention to design details. Quality assurance is about getting things right first time. AAB may have even adopted a Total Quality Management (TQM) approach that stresses employee participation, and a philosophy that ‘quality belongs to everyone’. On a day-to-day level, AAB will need to make periodic quality checks, using a quality control approach. This involves expensive checks (that ultimately add no value) but are often necessary, perhaps when dealing with new sub-contractors, taking delivery of a new product, or opening a new store. Other quality initiatives might include benchmarking (comparing AAB’s service to the best rivals) or working towards a quality standard ‘kite mark’ or industry/consumer award.

The key quality problem for AAB seems to stem from their difficulty with “the distribution system which has led to some adverse publicity … as some stores ran out of key items (lines 84-85). The company has “store managers complaining about receiving (inadequate stock) … that’s no use to most customers” (lines 90-92). This issue takes us directly on to our next topic:




Stock Control

Stock management emerges as one of the key quality assurance issues that AAB need to address. Not having the right stock in the right places represents a marketing and quality problem for the business and its customers. The case study describes this as “particularly embarrassing for a company which usually carries well over £20m worth of stock on its balance sheet” (lines 86-87).

But this problem goes beyond a marketing and quality dimension. Effective stock control is an important route to greater business efficiency. The basic underlying principle is to only hold just enough stock (since holding stock is costly) without running into the risk of running out of stock, so that customers are disappointed, or the business doesn’t make a sale.

Running AAB is a “huge logistical exercise” (line 80) and there can be little doubt that the company is absolutely right to heavily invest time and money into this area as part of its “recent strategy to improve all aspects of its business, in terms of waste management and efficiency” (lines 82-83). “All this investment is taking some time to bed in” (line 93). “Remember all the waste management and efficiency improvements which are taking place at the moment … the new systems have already reduced the turnaround time in the depot from four weeks to six days; we are now able to book forward space on cargo ships up to a year in advance; and we have reduced the number of cargo firms from 12 to six. However we still use close to 100 different suppliers across the Far East and the number of outlets and distribution centres we supply around the world seems to grow by the day” (lines 97-102). Phew.

So it’s hard to overstate the importance of AAB getting their stock control systems working effectively. The implications are not just in operations and marketing – there is a direct financial issue at stake. Remember that AAB carries “well over £20m worth of stock on its balance sheet”. That is a vast expense. Here’s a quick reminder from an earlier section of this toolkit covering the balance sheet: AAB’s Total Current assets figure is dominated by holdings of stock (67.8% in 2012, 67.4% in 2013). Two issues arise from this observation:

Firstly, if sales of stock start to slow, and stock is not turned into cash, then AAB may struggle to meet other payments.

Secondly, such large stock holdings may be a sign of inefficiency, and are unnecessarily contributing to higher costs.

Also bear in mind the statement that “things have been tough and margins continue to be affected by the rising costs of raw materials” (lines 127-128). AAB need to reduce these materials costs. Anything that can cut the costs of holding stock will contribute to that objective.




Approaches to Production

Reducing waste emerges as a central challenge for AAB, as discussed on the previous page. Reducing the cost of holding stock will be a vital route back towards profitability. Remember also that that AAB’s profit margins aren’t just being eroded by higher materials costs. The business is also being squeezed by higher ‘expenses’ (mainly fixed costs). Tackling the fixed cost problem may be supported by the proposed re-organisation of AAB’s organisational structure. It may also be helped by continuing to work towards Total Quality Management (TQM), discussed in the previous section.

AAB’s UK work teams might already be utilising a cell production approach, tackling production problems, costs and motivation issues all at the same time. Teams of workers organised into cells could train and work together, enjoy the challenges of bringing new products to market and taking ‘ownership’ over the wastage and stock management problems. Kaizen, which is a philosophy of ‘continuous improvement’, seems to have guided the company throughout its life.

JIT or ‘Just-in-Time’ stock management is used in an attempt to reduce stock holding. AAB are clearly already trying to work towards this goal. Attempts are put in place to take smaller, more frequent deliveries of stock and AAB will be aiming to hold a far smaller buffer stock. This is easier said than done, and is a challenge that is occupying a lot of management time and resources at the moment.

Kanban is a scheduling system that helps determine what to hold, when to hold it, and how much to hold. This might help reduce waste generated by unnecessary stock movement. There is some evidence that some of AAB’s stock movements may be unnecessary: products “produced by many sub-contractors in the Far East … are delivered to a central distribution depot a few miles from Gatwick Airport. Stock is then sorted and repackaged for delivery to AAB’s own UK stores, as well as its UK stockists, international franchises and distribution partners” (line 77-80). That might be the only practical way to address this huge logistical challenge, but there may be ways to streamline distribution, cut out steps and simplify the process.

This issue is returned to in the potential exam-style question presented on page 26.



You should remember that even if a topic may not come up specifically in the pre-issued case study, it could still be tested in Section A of the exam. There is no substitute for learning and understanding the entire syllabus, details of which are available from the OCR website.

Application Analysis & Evaluation

We have developed the key issues raised in the specification map in the pages below. The following analysis is not intended to be an exhaustive list of all the potential issues – everyone reading the case study will identify their own points about issues they believe are important.

The key point to remember: an effective exam answer in part B of F292

(1) addresses the specific question asked (you must answer the question)

(2) is directed to evidence in the case study (application) rather than making general points or lists

(3) develops a small number of well-argued points in sufficient detail (analysis)

(4) expresses an opinion on the question posed, supported by a balanced appraisal of the analysis (evaluation)

http://www.ocr.org.uk/data/publications/key_documents/as_alevel_gce_business_studies_specification.pdf/



Key case study issues: potential exam style questions – application, analysis and evaluation

How should the firm manage its product portfolio and marketing mix in order to return to robust profitability?

Application Analysis Evaluation

AAB have slipped from a profit of almost £5.5m in 2012 to a loss of nearly £1.5m in 2013. They are trying to adapt their marketing mix in response.

AAB should look at their product life cycle and Boston Matrix to see what products they should be supporting and if there are others that should perhaps be deleted. AAB could bring out new products such as the ‘HealthySleep’ mattress.

AAB need to get their pricing right, maybe pushing up prices on some product lines and offering discounts on others.

AAB should look carefully where they open new stores, or license franchisees or other distributors. They could focus more attention on their online business too.

Promotion could be tweaked.

Most of the loss in profitability is due to rising product costs, so sourcing cheaper products is likely to be important.

The ‘HealthySleep’ mattress is designed to fill the gap left by the unsuccessful ‘Ultimate’ mattress. It is likely to be sold at approximately the same price too. Is this wise? Does the failed ‘Ultimate’ mattress show that there is no gap in the market here?

AAB should use price elasticity of demand to inform their pricing policies. The tough economic climate has made demand more elastic, but that might be changing.

Is retail the way forwards for AAB at the moment? With retail competitors struggling, might it be better to focus the firm’s attention on its online business?

The firm has already tried more products at the ‘bottom end of the market’, but it mustn’t do anything to compromise its brand image. New products shouldn’t be tried unless AAB feel confident about design and safety features.

As the economy recovers, consumers might react differently to existing product lines and prices. The ‘Ultimate’ might recover if it is supported and promoted more heavily. What other questions need to be answered before the ‘HealthySleep’ is brought onto the market?

Would a greater focus on online sales help tackle some of the distribution hassles that plague the company, as less effort would go into meeting the needs of other (non-AAB) distributors?

What further questions need to be asked about further overseas expansion?

Potential exam-style questions on this issue:

How could AAB use the product life cycle and Boston Matrix to improve their marketing mix?

Evaluate the changes AAB should make to their product portfolio.

Assess the changes AAB should make to their marketing mix in order to improve their sales revenues.



What recommendations should be made about adjusting the company’s organisational structure to cope with further growth?


AAB has grown very rapidly over several years and the strain of this growth is starting to show, especially in terms of the company’s distribution systems.

The company has quite a complicated structure and is split into different divisions. It also has complex links with distributors and franchisees.

Senior managers are using a matrix form of organisation, to some extent.

The organisation has quite a flat hierarchy, and managers probably have wide spans of control.

The firm needs to re-organise without losing distinctive features that have served it well up to now. The company has proven to be flexible and there are no signs of workforce dissatisfaction.

AAB is a family run business, which has both advantages and disadvantages.

Larger companies are often able to generate cost advantages, or economies of scale. Has AAB grown to a size where these are now diseconomies of scale?

Any reorganisation would want to ensure that some aspects of the firm’s operations remain centralised. A good example would be purchasing, where being big can generate bulk buying discounts in deals with suppliers. Technical economies of scale are also easier to attain with centralised organisations.

Decentralising the organisation may make it more flexible and responsive, but at the risk of hampering overall control and strategic planning.

Family run businesses often plan for the long run, but they can be vulnerable to the weaknesses of paternalistic management, such as misplaced loyalties and a reluctance to take tough or controversial decisions.

The priority in the reorganisation is to grapple with distribution problems. Centralising the organisation may be the most effective way to get the necessary degree of oversight, while maintaining the purchasing advantages of scale.

Alternatively, the business could look at breaking itself up even further into more decentralised, smaller units.

The company could consider retreating from some areas, such as having fewer distributors. AAB could make up for falling sales here by expanding their online business. This could be reflected in a new structure.

Reorganisations can be damaging – even catastrophic. Perhaps there is little real need for changes now, as time and patience would allow recent investments to settle in and bear fruit.

The family could look to bring in more outside directors to guard against inefficient paternalistic management tendencies.


Evaluate the option of reorganising AAB into a more centralised, hierarchical structure.

Assess the possible impact on motivation of a change in AAB’s organisational structure.



Why is it important for AAB to have accurate accounts, and what do the accounts tell us about problems the firm might face in the near future?


AAB have grown to their current size by careful budgeting and management of their own financial resources. The company has remained in private hands, but producing accurate financial reports remains essential.

AAB are carrying a large weight of stock on their balance sheet, as is typical of many retailers.

AAB has recently turned from profitability to making a loss, mainly because of increasing stock prices, but also because of rising fixed costs (expenses).

The firm has a very small amount of cash on its balance sheet, so it could run into trouble with cash flow.

Accurate accounts are vital for monitoring the performance of the company and tracking its progress.

Companies like AAB can use budgets as a way of setting targets, priorities and objectives. Progress can then be measured against those targets, supporting the measurement of success. That should be really helpful when launching new product lines, for instance.

Any adjustments to organisational structure will be expensive, so decisions about making changes could be considered using investment appraisal techniques.

The firm knows that if it is to remain solvent, it’s important that stock is quickly sold to generate the cash to cover the firm’s short run financing needs. Reducing stock costs will be the main route back to profitability. AAB will also want to make sure they are not owed too much by debtors.

Tools like break-even analysis can be used to determine which product lines will generate the most contribution towards profit.

Sometimes the judgements firms make are based on subjective opinions, rather than financial analysis. AAB have done things that ‘feel’ right, like remaining in private hands and building the business organically. It might actually be more efficient to go public, raising funds for expansion by tapping external sources like the stock market.

Long run, strategic decisions might also be based on ‘hunches’ rather than detailed and accurate forecasts. Expanding into new markets or online activities might be supported by little more than educated guesswork.

Some financial decisions come with large short run cost implications, but will be to long term advantage, like a review of organisational structure.

AAB are under some pressure from external stakeholders – banks – who need to be confident about the firm’s accounts, if they are to keep lending.

Sometimes too much can be read into financial data. Recent losses may be due to external issues, like recession or the behaviour of competitors.


What is the importance of accurate financial accounting to AAB?

What do the balance sheet and profit and loss account tell us about the performance of AAB?

How can break-even analysis be used to help AAB return to profitability?



To what extent will further growth be constrained by problems with quality and supply chain issues?


AAB have two clear production problems, which are closely related:

Firstly, AAB are holding a large amount of stock, which is a significant factor in the company’s current financial problems. Holding stock is very expensive, and the prices of stock have been rising.

At the same time, AAB are having problems with the massive co-ordination difficulties of connecting hundreds of suppliers across the world with many thousands of customers. This will undermine the quality experienced by the firm’s customers.

AAB have invested in a new distribution centre, but they still seem to be straining at the limits of their capacity.

AAB will already be working hard towards a just-in-time stock control system, to reduce their stock holding costs. They also seem to embrace kaizen, or continuous improvement. The firm might try to work with fewer suppliers, or make even further investments in stock control technologies, and techniques like kanban.

Moving towards a greater online presence might help the firm to co-ordinate orders electronically. This might ultimately develop into a build-to-order relationship with suppliers.

AAB need to embrace a TQM philosophy so that ‘quality belongs to everyone’. The proposed reorganisation needs to empower store managers so that they can place orders to suppliers well in advance, reducing the risk of a ‘stock out’.

Success in handling AAB’s stock and quality assurance problems depends on several factors. Their priority should be to get the stock distribution system working more effectively. This might just be a matter of time, but resources should be allocated there nonetheless.

Deeper, personnel related issues should be handled next, as a way of boosting efficiency. Discussions are already underway to find ways of reorganising the company to help it become more flexible, and better able to match up consumer demands with products that are in stock and ready to ship.

In the longer term, AAB need to look closely at their relationship with suppliers. Can supply chains be shortened? Might some production be moved closer to the relevant markets? Can communication and the order process with suppliers be improved?


Comment on the ways in which AAB could reduce their stock-holding.

Evaluate the ways in which efficiency could be raised at AAB.

Discuss the relevance of the just-in-time approach to stock control for AAB.



Exam Technique Advice

The Case Study

Read it, read it and read it again. Then read it again. Learn it as much as you can – better knowledge of the case study will save you time in the exam and allow you to have a better discussion and understanding of the key topics.

Use the Case Study

The examiner spent a long time writing this case study – so it must be used effectively. Do NOT just give the ‘text-book’ answer, everything you write should be applied and put into the context of AAB.

React to the question set

As an examiner, it is a great pity when we have to write NAQ (not answering question) on a pupil’s work. Make sure you read the question carefully and answer it!

Essay Plans

It is a good idea to make a brief plan – but plans should be brief – allocate a couple of minutes to organise your thoughts.

Timing

Timing is crucially important and this is one of the most common failings of students in the exam hall. Quality not quantity is what counts – it is not a race to fill the answer booklet and any supplementary pages!

Practice

There is no substitute for writing timed answers to practice essay questions and then having them marked your teachers. Knowing what you can realistically achieve for each question in a timed essay is hugely important before you step into the exam hall

Mark schemes:

Well before the exam you should become familiar with the marking schemes of the module. F292 is a well-established and frequently examined module, and therefore has a long back catalogue of ‘past papers’. These past papers (also case study based) are available from the OCR website:

http://www.ocr.org.uk/qualifications/as-a-level-gce-business-studies-h030-h430/

http://www.ocr.org.uk/qualifications/as-a-level-gce-business-studies-h030-h430/



This is a ‘levels of response’ paper – in essays you must evaluate, with reasoned judgment, effectively for the top marks.

Writing

Get a nice pen (splash out!), this will avoid the dreaded writer’s cramp – particularly with long essays as examiners hate illegible work! If possible practice a two-hour mock practice paper, your teachers can help you with this and it will benefit you in the long run.

Levels of Response

Some reminders now about how you are assessed in the F292 exam.

According to OCR, candidates are expected to demonstrate the following in the context of the content described:

AO1 Demonstrate knowledge and understanding

Demonstrate knowledge and understanding of the specified content;

AO2 Apply knowledge and understanding

Apply knowledge and understanding to problems and issues arising from both familiar and unfamiliar situations;

AO3 Analyse Analyse problems, issues and situations;

AO4 Evaluate Evaluate: distinguish between, and assess appropriateness of, fact and opinion, and judge information from a variety of sources.

A typical F292 will allocate the 90 marks on offer as follows:



From this you can see that marks for AO3 (analysis) and AO4 (evaluation) are only available for the four questions in section two of the F292 paper.

Each of the longer questions in section 2 has substantial marks available if you can effectively demonstrate analysis (22 marks) and evaluation (21 marks).

More on AO3 - Analysis

Analysis involves making well-reasoned, step-by-step arguments using appropriate business studies tools & concepts.

To get your marks for analysis, you will need to:

Make a point

Explain why the point is important

Explain the significance of this to ….

Your examiner will see that you are analysing when you are doing any of the following:

The causes are….the possible consequences are…..



The advantages for AAB are….the disadvantages for AAB are…..

On the one hand AAB may……on the other hand, they may…….

The data for AAB shows that…..on the other had, it may suggest……

This is likely to lead to……..but it may lead to………

In this case…..is an advantage because……

The likelihood of this happening is……Consequently the business must….

The trend in this case is…….shown by…… data

Analysis is about how you consider the ‘ifs and buts” as well as the “however and maybe”. You should view your written answers as your conversation with the examiner. Imagine how it would sound if you read a list of bullet points aloud - is this what you want your examiner to hear?

More on AO4 - Evaluation

Evaluation is the hardest skill of all. Very few candidates develop their skills of evaluation which is why it is awarded the highest grade when examiners see it.

Evaluation means giving your final judgements after dismissing all other arguments and saying why the judgement you have made is superior to all others. To do this, you must be knowledgeable about all the other arguments over which you are claiming superiority.

It is not enough to use a trigger phrase and to expect the examiner to award the highest mark – the examiner wants to see a robust, developed argument that weighs up the critical points and then come to a conclusion as to which is likely to be most significant – given the circumstances of the case study.

You can demonstrate the skill of evaluation when, in the context of the case study, you:

Make a small number of points pointing out the options and/or the issues

Justify which of several arguments are more persuasive and why

Comment on the reliability of data or information given

Support your judgement with evidence and draw conclusions from the evidence

Consider limiting factors e.g. feasibility, impact and internal and external constraints



Consider long term and short term issues

Discuss how objectives, internal and external constraints limit decision making

Examples of trigger phrases demonstrating evaluation include:

• Overall, the greatest effect this will have on AAB is……because…

• The extent of the impact will depend upon ….

• Whether this happens depends upon ….

• In the short run… but in the long run…

• The most important issue/factor is… because… so…

• In addition, AAB needs to consider …. and ….

Remember evaluation means weighing up options and making a recommendation.

There is no ‘one best option’. It all depends on the circumstances of the business in the case study.

Analysis and Evaluation Compared

Candidates often ask what the difference is between Analysis (AO3) and Evaluation (AO4):

• Analysis assesses the causes and consequences of an issue and explains the likely impact and reaction of the firm.

• Evaluation builds on analysis and involves candidates weighing up options and coming to a view on what the firm should do.

For example – the question asks you to “discuss a strategy”:

• Weighing up the evidence upon which a strategy would depend – AO3

• Recommending one strategy based on analysis – AO4



Case Study Terms

This section highlights and defines the key business terms and phrases used in the case. Remember you can demonstrate your knowledge by making effective use of definitions.

Audited final accounts Audited documents have been approved by a specialist with legal authority, so should come with a complete seal of approval. Unaudited documents may be rather less reliable.

Brand, branded Branding is a method of making products or services stand out from rival products. It is a way for a firm to differentiate its products from others in the marketplace. This helps firms, because it often means the product does not sell on price alone. It can also help consumers, since brands often convey information about quality, desirability or other key features, for instance.

Creditors Creditors have provided credit to a firm; they have lent money – either in the short term (less than 12 months) or the long term (more than 12 months).

Equity Equity finance is provided by shareholders. Equity flows into a firm as a source of finance when shares in the company are sold. If firms keep a hold of profit as a source of future finance for growth (rather than paying dividends) that too is a form of equity finance.

Eurozone There are 28 countries in the European Union (EU), an organisation for economic and political co-operation. Britain is one of the main, largest members (alongside France and Germany, with Italy, Poland and Spain not far behind). 18 countries in the EU also share the same currency, the Euro €. Britain and 9 other EU countries still use their own currencies. The Euro countries are often collectively known as the Eurozone.

Franchise Firms can often achieve faster sales growth if they license people from outside the business to operate as a franchisee. For a fee, this franchisee trades under the name of the parent company. They often receive help with set up, promotion and training. In return, a proportion of their revenue is paid as a royalty to the owner of the franchise. Many branches of McDonalds are operated by franchisees.

Logistical, logistics Logistics is the study of supply and supply chains. A logistical problem could well arise if production changes meant big upheaval for delivery schedules and stock management.



Market share Firms don’t talk about the share of the market that they own. Instead, they determine the total sales in a market (by units, or by revenue). Then they work out what proportion of those sales were made by the firm, which was their share of the market.

Net current assets This is the sum broadly reflecting the current spending power of a firm over the short term. The value is calculated first by adding up the total cash and assets that should be readily converted into cash, like stocks and debtors. From this total of current assets you should subtract the current liabilities, which might be described as amounts falling due within one year.

Net profit An almost- final profit total, where interest charges, as well as variable and fixed costs have been subtracted from revenues (see Gross profit and Operating profit below). Tax expenses and dividend pay outs have still to be accounted for before the firm keeps (or ‘retains’) any remaining profit.

Operating profit, Gross profit

Gross profit is a profit figure in which only the variable costs of production have been subtracted from revenues. Operating profit considers other costs too, typically ‘expenses’ or fixed costs.

Parent company Many firms operate as part of a relatively complex family of businesses. For operational and finance reasons these firms may trade as separate entities, but share the same owner or parent company. The parent company itself may be little more than a shell that wraps the separate companies together. The parent will hold a "controlling stake" in the companies it owns (a holding of over 51% of the shares).

Privately owned Companies come in two broad categories. Public Limited Companies (with the suffix PLC after their name) sell their shares publicly (hence the name) on a stock exchange. Private companies restrict the ownership of their shares to known, agreed, shareholders. They have the suffix Ltd after their name.

Product portfolio Firms will typically market a range of products or services to cover different market segments, and to manage sales fluctuations due to the business cycle or product life cycle. A broad portfolio reduces risk, but may raise costs.

Profit margins The proportion of sales revenue that is profit. If out of every £1 of sale profit is 20p, then the profit margin would be 20%.

Quarterly Every 3 months (one quarter of a year).



Recession Total production, output and expenditure across the whole economy is measured by an indicator called Gross National Product (GDP). A common definition of recession is where GDP falls over a six month period.

Sub-contractors Some firms may not want to be responsible for all the operational processes that business organisations depend on. Payroll, cleaning, maintenance and IT may be examples of the type of processes that it might be cheaper or easier to outsource to a sub-contractor. Where the sub-contractor is based overseas, the process is sometimes referred to as offshoring.

Turnaround time The time taken between receiving goods in and then dispatching them out again - either to another part of the company, or to an external client or customer.

Turnover Another term for sales income, or sales revenue.

Wholesale operation Retailers sell products to the final ‘end consumer’. Wholesalers sell to retailers, acting as a bridge between manufacturers and these retailers in the supply chain.

ocr business studies as f292 prerelease toolkit june 2014

Documents

business studies unit

exam overview

key case study issues

prerelease case study

exam technique advice

aab summer

contents aab

key topics