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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

GCE Advanced Subsidiary Level and GCE Advanced Level

MARK SCHEME for the May/June 2011 question paper

for the guidance of teachers

9707 BUSINESS STUDIES

9707/11 Paper 1 (Short Answer/Essay), maximum raw mark 40

This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers.

Mark schemes must be read in conjunction with the question papers and the report on the examination.

• Cambridge will not enter into discussions or correspondence in connection with these mark schemes. Cambridge is publishing the mark schemes for the May/June 2011 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

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Mark Scheme: Teachers’ version Syllabus Paper

GCE AS/A LEVEL – May/June 2011 9707 11

© University of Cambridge International Examinations 2011

This mark scheme includes a summary of appropriate content for answering each question. It should be emphasised, however, that this material is for illustrative purposes and is not intended to provide a definitive guide to acceptable answers. It is quite possible that among the scripts there will be some candidate answers that are not covered directly by the content of this mark scheme. In such cases, professional judgement should be exercised in assessing the merits of the answer. Examples of possible answers may also be included in this mark scheme. Again, it should be emphasised that this is for illustrative purposes and the examples chosen represent only some of the many possible responses that would merit reward.

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Section A 1 (a) Two objectives of a private sector business could include:

• make a profit

• satisfy shareholder demands

• grow the business

• increase market share

• provide employment

• survive. ARA ONE relevant objective stated. [1] TWO relevant objectives stated. [2]

(b) Two methods of measuring the size of a business could include:

• market share

• level of sales turnover

• number of employees

• value of capital employed (cost of replacement)

• the value of a business/market capitalisation. Do NOT accept profit. Partial description of ONE method OR two or more methods listed/stated. [1] Sound description of ONE or partial description of TWO methods. [2] Sound description of TWO methods. [3]

2 (a) 100sales) (or turnover

profit netmargin profit Net ×

Correct formula gets 2 marks.

Net profit is the amount of profit earned by a business after taking into account the cost of sales, administration costs, selling and distribution costs and all other costs. A definition that indicates limited understanding. [1] A definition that indicates full understanding. [2]

(b) Ways in which profitability ratios could be used to measure the performance of a business:

• provide important financial signals for a business

• one measure of the efficiency of a business

• indicate aspects of current performance and can be compared with previous performance ratios (trends)

• compare with competitor ratios

• indicate issues such as possibility of dividend distribution, need to reduce costs (or raise prices), overheads

• profitability ratios are only one set of ratios used to measure the performance of a business.

Very limited reference to profitability ratios. [1] Sound understanding but explanation is limited. [2] Sound understanding with developed explanation. [3]

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3 Reasons why a mobile phone manufacturer might use a penetration pricing strategy:

• A penetration pricing strategy may initially be used to: – gain market share – establish brand loyalty – attract new customers.

• Candidates may recognise that this is a highly competitive market.

• In areas such as banking, utilities, telecommunications there is much customer inertia and hence markets may be very attractive to new and existing players to pursue a penetration pricing strategy to capture and retain market share.

• Establish habit in the mind of the consumer.

• PPS is often used by large companies in mass markets to maintain established products and to break into new product areas.

Limited knowledge of a penetration pricing strategy. [1] Limited explanation of why a penetration pricing strategy might be chosen. [2–3] Full explanation of why a penetration pricing strategy might be chosen. [4] Full explanation with an appropriate contextual reference to a mobile phone company. [5]

4 (a) Definition of batch production:

• a production process where several identical items are made simultaneously

• one part of the process is completed on each product before the next process is started

• completing one operation at a time on all units before going on to the next. A valid example may clarify a weak definition. Partial definition given. [1] Full definition given. [2]

(b) Two benefits of batch production might include:

• more flexible than flow production

• each batch can be changed to meet customer requirements

• settings on machines can be changed according to different specification sizes

• employees can concentrate on specific operations

• reduced need for expensive skilled employees

• possible to use standardised machinery

• partly finished items can be processed quickly through final production stages to meet urgent orders

• more interesting work for employees than flow production. Partial description of ONE benefit OR two or more benefits listed/stated. [1] Sound description of ONE benefit or partial description of TWO benefits. [2] Sound description of TWO benefits. [3]

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Section B 5 (a) Ways in which a business might segment its market might include:

• Segmentation is dividing a market into distinct sub-groups using either the product or the consumer as the basis for segmentation.

• Consumers can be segmented according to such characteristics as age, spending and saving habits, gender. Some products are gender influenced (cosmetics).

• Socio-economic status e.g. income levels, tastes, leisure etc.

• National, regional, local cultural factors.

• Products can be segmented e.g. cars for safety, economy, power, capacity, price, perceived quality.

Analysis of how market segmentation might be achieved. [7–8] Good explanation of how market segmentation might be achieved. [5–6] Limited explanation of ways of segmenting markets. [3–4] Little understanding of market segmentation. [1–2]

(b) Benefits to a business of segmenting its market could include:

• opportunity to identify your most and least profitable customers

• focus your marketing on those customers most likely to buy your products or services

• avoid unprofitable markets

• build loyal relationships with selected customers by offering them what they really want

• get ahead of the competition in specific parts of the market

• identify new product opportunities

• lower marketing expenses with more effective marketing campaigns

• improve competitive position and better serve targeted customers

• increase responsiveness to market demands. Some evaluative comment on the potential benefits of market segmentation (is it always positive?). [11–12] Analysis of a number of segmentation benefits. [8–10] Shows understanding of a number of segmentation benefits. [3–7] Limited understanding of market segmentation benefits. [1–2]

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6 The discussion may describe different types of cost information and relate them to general business situations as well as to the food processing company:

• The production, classification and interpretation of costs allows a business to analyse the current cost situation and also trends.

• Such analysis can relate to key performance issues and indicators such as: – product pricing decisions – payments for resources – valuation of stock – relative profitability levels of product lines – absorption of overheads – break-even for new products.

• Raises key performance questions such as: – cost effectiveness – opportunity costs – management controls to monitor costs – cost reduction initiatives – benchmarking with industry levels – planning and reviewing policies to optimise performance

• Cost information is at the heart of business improvement generally – in a food processing company specific costing issues will include: – resource costs (especially raw material costs) – pricing of food products – mix of machinery and staff.

Evaluative reference to use and importance of cost information in monitoring and improving business performance with an attempt to apply to the specific context of food processing company. [17–20] Analysis of the use and importance of cost information with examples of how performance can be monitored and/or improved – answers towards the top of this band will include context. [14–16] Good understanding of how cost information might be used to monitor and/or improve performance. [11–13] Some understanding shown of cost information and use in assessing business performance. [5–10] Limited understanding of cost information. [1–4]

7 (a) Explanation could initially define HRM – using and managing staff as a strategic resource to

improve business performance to meet business objectives. Reference may be made to the key areas of responsibility e.g.:

• recruitment and selection

• workforce planning (e.g. redeployment, redundancy, succession planning)

• training and staff development

• appraisal

• welfare

• consultation and negotiation.

• In the context of a large business significant issues might well be: staff needs, turnover, complexity of workforce etc.

Analysis of HRM issues and responsibilities in a large business. [7–8] Good explanation of HRM issues and responsibilities generally. [5–6] Limited explanation of HRM issues and responsibilities generally. [3–4] Little awareness of HRM issues. [1–2]

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(b) Discussion might well initially distinguish between internal and external recruitment choices generally before focussing on this particular job position:

• Internal recruitment has advantage of: – candidates known to the organisation – motivates internal staff with possibility of promotion – less expensive to recruit internally – possibility of ‘acting up’ etc.

• External recruitment has advantage of: – more choice for business – there may not be any suitable internal applicants – specialist roles may require external recruitment – company may want to bring in new and fresh thinking and ideas and different

experience – opportunities to head hunt from competitors.

• Internal and external are options – may depend on situation internally and the market situation externally. In this case the head chef is a very vital role – specific expertise is required – if no mentoring or succession planning may well have to recruit externally.

Some evaluative comment on the internal/external recruitment choice with specific reference to the context of this job. [11–12] Analysis of the internal/external recruitment choice with some reference to the job context. [8–10] Shows understanding of internal/external recruitment decisions. [3–7] Limited understanding of recruitment and selection issues. [1–2]

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This mark scheme includes a summary of appropriate content for answering each question. It should be emphasised, however, that this material is for illustrative purposes and is not intended to provide a definitive guide to acceptable answers. It is quite possible that among the scripts there will be some candidate answers that are not covered directly by the content of this mark scheme. In such cases, professional judgement should be exercised in assessing the merits of the answer. Examples of possible answers may also be included in this mark scheme. Again, it should be emphasised that this is for illustrative purposes and the examples chosen represent only some of the many possible responses that would merit reward.

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Section A 1 (a) Advantages of secondary market research data might include:

• secondary is likely to be less expensive than primary research – it could be free

• it may be readily available in government publications, trade/professional journals and newspapers

• may already be available within a business

• obtainable from competitors (sales figures)

• international availability. Award 1 mark for EACH acceptable advantage stated up to a maximum of 2 marks.

(b) Reasons why a business might choose to conduct primary market research might include:

• a new business might want to collect its own detailed intelligence rather than rely on secondary data which may be out of date

• new to the market – primary research might help to reduce business risk

• more detailed and current information on competitors, the market, and consumer requirements

• might allow market advantage to be gained – establish a competitive edge etc. An alternative (and valid) approach might be to focus on the limitations of secondary research, e.g. its general nature, less specific. Very limited response, possibly little more than a repeat of information in part (a). [1] Sound understanding demonstrated but explanation is limited. [2] Sound understanding with developed explanation. [3]

2 (a) There are several alternative ways to access full marks:

• current ratio is measured as current assets divided by current liabilities

• a calculation of whether a business has sufficient working capital

• a measure of business liquidity (a current ratio of 1.5:1 and 2:1 is considered to be a safe liquidity position)

• correct formula. Partial definition given. [1] Full definition given. [2]

(b) Reasons why liquidity ratios are important to the management of a business might include:

• Liquidity ratios (current ratio and acid test ratio) measure how capable a business is of paying its short-term liabilities. They are calculated from the balance sheet.

• These ratios give an indication of the financial well-being of a business in the short-term.

• A low liquidity ratio may mean the business is overstretched; a figure too high means that the current assets are under-used.

• Indicates to a business if it is overtrading – i.e. in the longer term it may be profitable but in the short-term expanding could put pressure on working capital.

Very limited reference to liquidity ratios. [1] Sound understanding but limited explanation. [2] Sound understanding with developed explanation. [3]

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3 Explanation could include the functions traditionally referred to as the main functions of management:

• planning – e.g. setting goals, objectives, business planning, project planning

• organising – e.g. designing structures, mobilising resources, defining tasks, roles, systems

• leading – e.g. setting direction, defining vision, values, mission, motivating

• co-coordinating/controlling – e.g. monitoring systems and processes to reach goals, financial controls, performance management.

Explanations could include reference to more modern models of management e.g. Mintzberg’s management roles: interpersonal roles (figurehead, leader, liaison); informational roles (monitor, disseminator, spokesperson); decisional roles (entrepreneur, disturbance handler, resource allocator, negotiator). A limited knowledge of management functions or explanation of only one function. [1] Clear understanding and limited explanation of at least TWO management functions. [2–3] Well-developed explanation of at least TWO management functions. [4–5]

4 (a) A job production process involves the output of a single product at a time according to

individual specifications. Answers may be based on examples e.g.:

• can be production on a small or large scale e.g. an individual birthday cake or a specific house extension or a bridge/tunnel

• can be found in both manufacturing and service industries. Partial definition given. [1] Full definition given. [2]

(b) Benefits to a business of using job production might include:

• the production of a single high specification product, possibly leading to high profit margin

• ability to hire and develop highly skilled and versatile craftspeople

• establish reputation for high quality and precision

• workers more likely to be motivated – more demanding and interesting work

• organisation of job production – easy to organise, monitor and solve problems

• attractive to start-up businesses. Partial description of ONE benefit. [1] Sound description of ONE benefit or partial description of TWO benefits. [2] Accurate description of TWO benefits. [3]

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Section B 5 (a) Explanation of the stages of a product life cycle, using an appropriate diagram:

• the diagram should show an appropriate shape and stages of a product life cycle: introduction (or launch), growth, maturity (or saturation), decline – or their equivalents

• the stages through which a product passes from its initial market introduction to its final withdrawal

• product life cycle can be quite short or very lengthy depending on the type of product and on the market strategy used to sell it.

A total of 8 marks are available: Analysis of all stages of a product life cycle. [5–6] Explanation of at least 3 stages of a product life cycle. [3–4] Some understanding of a product life cycle. [1–2] PLUS 1 or 2 marks for the diagram: [PLUS 1–2] - 1 mark for a correct shape - 1 mark for writing all the correct stages on the diagram. Candidates do not need to label axes. Ideally the diagram will show sales on the vertical axis and time on the horizontal (but this is not required for the award of the 2 marks for the diagram).

(b) How a business might use a product life cycle to plan the marketing of a product:

• The discussion might examine how each stage or particular stages of a product life cycle might be used to plan marketing campaigns for particular products/services.

• How the features and characteristics of each stage may act as signals for marketing action. A marketing stimulus might be required to: – introduce a new product into a market – ensure steady growth – freshen up a product in a highly competitive mature market – manage the rate of decline (extension strategies).

• Some candidates may link the 4Ps or 4Cs to the stages of a product life cycle (4Cs = customer solution, cost to customer, communication with customer, convenience to customer).

• A product life cycle might be used to identify the strengths and weaknesses of a product portfolio and indicate marketing initiatives.

• Some candidates may well see the limitations of a product life cycle approach: a fall in sales does not necessarily indicate a product is in decline; some products hold a unique product life cycle shape; product life cycle only a rough guide. These may be examples of evaluative comment.

Evaluative comment on the usefulness/limitations of the product life cycle for a business. [11–12] Analysis of a good range of marketing uses of the product life cycle. [8–10] Shows understanding of how product life cycle might assist marketing of products. [3–7] Limited understanding of the application of the product life cycle. [1–2]

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6 Ways in which airline management might motivate cabin crew, with reference to relevant motivation theories, might include:

• The discussion may suggest a range of financial and non-financial motivational methods and approaches and may make reference to a number of motivational theories.

• The context is an airline cabin crew – opportunity to reward staff/satisfy needs (perhaps a combination of financial/non-financial and tangible/intangible rewards) – e.g.: – pay higher than competitor airlines (industry pay is generally not high) – incentives to sell products on the plane e.g. food/drink/’duty free’ (tax-free products) – quality of hotels at stop-overs for rest days – increase rest days – attractive fringe benefits such as free or discounted flights – develop a satisfying teamwork approach with emphasis on customer care culture.

• Question requires proposals for specific motivational approaches linked to and supported by specific motivation theories/theorists, e.g. Taylor and money, Maslow and needs, Herzberg and hygiene/motivators, Mayo and teamwork.

Evaluative comment on possibility and likely impact of specific measures linked to motivation theory in context. [17–20] Analysis of motivational methods and theories related to the context of cabin crew. [14–16] Good understanding of motivational methods and theories. [11–13] Some understanding shown of motivational methods and theories. [5–10] Limited understanding of motivation/motivation theory. [1–4]

7 (a) Usefulness to a new business of cash flow forecasts might include:

• cash flow forecasts are a prediction of the timing and amount of cash moving in and out of a business over a given period of time

• used to predict cash imbalances (amount and duration)

• a crucial aid to business planning – cash flow forecasts convert business strategies into cash requirements along with an assessment of the ability to fund future expenditure

• a new business may have a weak liquidity position with small cash reserves – may need to pay suppliers promptly so need to plan cash flow carefully; may have a significant overdraft

• if a new business plans for fast growth there is a danger that the business may overstretch itself and run out of cash

• forecasts will aid potential backers to assess financial needs and requirements of a new business and its ability to service debts.

NB the question is about cash flow forecast, not cash flow statements. Analysis of role and use of cash flow forecasts for a new business. [7–8] Good explanation of role and use of cash flow forecasts for a new business. [5–6] Limited explanation of potential use of cash flow forecasts for a new business. [3–4] Little understanding of cash flow forecasts. [1–2]

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(b) Candidates should identify the stakeholder groups, the importance of performance indicators (from published accounts) that are relevant to each of the stakeholders, and in the context of a business that is going to expand.

• Published accounts give quantitative results and those from the balance sheet are only a snapshot in time.

• The following are examples of relevant stakeholders and performance indicators that may be important in this context: – venture capitalists considering financing any expansion will examine existing long- term liabilities, sales growth in recent times and net profit margins – banks will review accounts carefully in assessing risk involved in any future lending – competitors will take an interest in the potential capability of a business to expand,

as evidenced by the financial performance as reported – managers will be interested in issues such as profitability, cost control, ability to

service future debt etc – shareholders may use the accounts to calculate ratios to indicate performance

levels and capability to support expansion (risk).

• Candidates may legitimately apply the same performance indicators to more than one stakeholder.

• Candidates might unpack the accounts and give examples linked to specific stakeholders. Reference may well be made to the limitations of the accounts: they are historical documents, do not reflect qualitative aspects of a business, may be subject to ‘window dressing’ and may not reflect the true performance of individual parts of a business.

Some evaluative comment on the importance of published accounts to 3 specific stakeholders in context of a company planning to expand. [11–12] Analysis of the importance of published accounts to 3 specific stakeholder groups with some reference to a company planning to expand. [8–10] Shows understanding of the importance of published accounts for stakeholder groups. [3–7] Limited understanding of published accounts and/or stakeholders. [1–2]

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General Marking Guidance This mark scheme includes a summary of appropriate content for answering each question. It should be emphasised, however, that this material is for illustrative purposes and is not intended to provide a definitive guide to acceptable answers. It is quite possible that among the scripts there will be some candidate answers that are not covered directly by the content of this mark scheme. In such cases, professional judgement should be exercised in assessing the merits of the answer. Examples of possible answers may also be included in this mark scheme. Again, it should be emphasised that this is for illustrative purposes and the examples chosen represent only some of the many possible responses that would merit reward.

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Section A 1 (a) ● Job enrichment is where employees have their jobs extended (vertically) to get more

experience of the total production/service process. ● Linked to Herzberg and McGregor. ● Work is organised so that workers can use their full abilities/skills. ● Given more responsibility, work made more interesting.

NB sole focus on money = no marks.

A definition that indicates limited understanding. [1] A definition that indicates full understanding. [2]

(b) Benefits may be suggested in terms of employees and/or the organisation. May include:

• provides a new challenge to employees

• allows them to acquire new skills

• become more involved, take more ownership of work

• become more productive, more motivated

• better prepared for promotion

• less absenteeism

• opportunity for mentoring – succession planning etc.

• may reduce labour turnover.

ONE benefit with limited explanation. [1] ONE benefit with good explanation or TWO benefits with partial explanation. [2] TWO benefits with good explanation. [3]

2 (a) Gross profit margin is gross profit divided by turnover/revenue/sales expressed as a percentage and is the profit a business makes on cost of sales/goods sold. A very simple ratio: how much gross profit per $ of turnover a business earns or profit earned before any admin costs are taken off.

GPM = (GP ÷ sales) x 100 = 2 marks. Correct formula gets 2 marks.

A definition that indicates limited understanding. [1] A definition that indicates full understanding. [2]

(b) Answers may initially explain why ratios are used – e.g. to assess profitability, liquidity, measure/indicate business performance. Limitations might include:

• danger of using ratios in isolation

• simplistic approach – need to use in context of strategic objectives and long-term goals of the business

• figures may not be accurate – out of date (best available figures often used, historical data)

• ratios do not take into account the intangibles of a business, such as culture/staff issues

• need to benchmark with market trends and competitor results

• management may already have taken action and made changes

• window dressing.

Partial explanation of ONE limitation. [1] Good explanation of ONE limitation or partial explanation of TWO limitations. [2] Good explanation of TWO limitations. [3]

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3 Answers might interpret the question as a small business (probably so but not necessarily always). Estimated that 60% – 70% of small businesses fail in early years. Reasons given may include:

• lack of focus – unclear objectives – priorities not determined

• failure to deliver a product/service demanded by customers

• business model may be flawed

• poor cash management – inadequate budgeting and planning

• growing too fast

• lack of business and management skills

• under-capitalised

• staffing problems

• environmental/economic conditions. Credit examples and frameworks used e.g. internal v external factors.

Limited response – a few factors identified/stated (possibly a list). [1–2] Identification and explanation of at least two relevant factors. [3–4] Identification and explanation of a good range of relevant factors which clearly relate to early business failure. [5]

4 (a) Flow production is the production (usually large scale) of identical, standardised products

using continuous production methods with highly specialised inputs e.g. vehicles moving from one operation to another on a conveyor belt.

Definition indicates partial understanding. [1] Definition indicates full understanding. [2]

(b) Depends on type of product produced or demanded but the following benefits may result:

• unit costs reduced

• economies of scale secured

• process can be highly automated

• production/quality control through computers, or robots

• fewer staff required

• reduced need to stock-pile finished goods. Accept uniformity of quality.

Partial description of ONE benefit. [1] Sound description of ONE benefit or partial description of TWO benefits. [2] Sound description of TWO benefits. [3]

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Section B 5 (a) Strengths might include:

• offers opportunity to entrepreneurs

• little start-up money may be required

• large percentage of revenue can be converted to profit

• flexible business organisation

• quick response to customer demands

• more personalised approach

• managing the assets may not be too demanding

• internal factors such as good internal communication, likelihood of workers feeling ‘included’ and recognised in a small organisation.

Weaknesses might include:

• lack of capital to expand

• difficult to build a customer base

• diseconomies of small scale

• owners may lack core management skills

• customers may prefer to trade with larger established companies

• difficulty with cash flow

• external competition with large businesses.

Analysis of strengths and weaknesses of small businesses. [7–8] Good explanation of strengths and weaknesses of small businesses. [5–6] Explanation of strengths and/or weaknesses of small businesses. [3–4] Some understanding of features of small businesses. [1–2]

(b) Discussion might initially define stakeholders: anyone affected by a business and/or able to

influence the decisions of a business. Accountability:

• the essence of business answerability – possibly the notion of corporate governance

• multiple levels of answerability – legal, financial, ethical; the responsibility and requirement to account to various stakeholders, not just the wealth maximisation of shareholders

• a range of business constituencies are concerned with business performance.

The extent of this accountability depends on a number of factors:

• the activity/influence of various stakeholders and the information made available to them

• the size and nature of the business organisation – different for a plc, private limited company, partnership, and sole trader

• extent to which mechanisms such as published accounts, annual general meetings, annual reports are used; role of media in revealing/exposing activity; inside a business the type and level of communication to staff, trade unions etc.

• the power of an organisation to withhold information or dress up accounts

• passivity of stakeholders etc.

Evaluative comment on the reasons for the ‘why and how’ and the extent of stakeholder accountability. [11–12] Analysis of examples of the ‘why and how’ of stakeholder accountability – answers towards the top of this band will refer to the extent of stakeholder accountability. [8–10] Shows understanding of the ‘why and how’ of stakeholder accountability. [3–7] Limited discussion of stakeholders and/or business accountability. [1–2]

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6 The size of the business – a medium-sized limited business – may be seen to be significant here in that some internal sources of finance might be available, the business may not be completely dependent on external sources of finance. Strong answers might discuss some alternative assumptions before discussing and analysing options.

Whatever the assumptions, the finance for the factory is likely to be substantial so some short-term sources such as overdrafts and debt factoring are not appropriate (do not accept). However, the company may be cash rich with retained profits so internal funding may be possible.

If it is a private limited company, funds could be injected by the owners/shareholders. However, a conversion to a public limited company might also be a possible solution to raise substantial amounts of capital. If it is a public limited company, then a new share/rights issue might be a mechanism deployed. Accept assumption/interpretation by candidates of either or both private limited company or public limited company. Alternatively, substantial medium/long-term loans or lease back facilities may be sought. Current level of liabilities will be a determining factor – possibility of government/development agency grants. This question is clearly more than a descriptive classification of sources of finance – it requires intelligent analysis of the context and for strong answers a suggested strategy. Evaluative comment (perhaps a strategy) on the suitability of sources of finance for this business. [17–20] Analysis of suitability of a sound range of finance source options (with specific reference to this business context at the top end of the mark range). [14–16] Good understanding of sources of finance for a medium-sized company. [11–13] Some understanding of sources of finance options for this or any business. [5–10] Limited awareness of different sources of capital finance. [1–4]

7 (a) Part (a) of question is about why product promotion is important, not just ‘what is product

promotion’. Possible reasons might include:

• product promotion used by a business to convince potential customers to buy a specific product

• one of the 4 Ps of marketing

• important to get the word out to target audience and present an offer and a message that resonates

• take advantage of all various communication channels to persuade new customers to buy and build loyalty in existing customers

• stimulate customer purchasing

• use as a competitive weapon so as to contribute directly to profitability and to differentiate products in the market.

Analysis of the importance of product promotion. [7–8] Good explanation of why product promotion is important. [5–6] Limited explanation of the importance of product promotion. [3–4] Little understanding of product promotion. [1–2]

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(b) Discussion might include a comment on the importance of sales performance in a retail environment that may well be very competitive.

Emphasis should be on HOW to increase sales:

• activities, methods

• campaigns

• to supplement or strengthen and diversify advertising and marketing approaches

• a new focus on market segmentation (domestic/international). Such activities will be best discussed when rooted in the specific retail context: special displays, promotional discounts, storecards/points, gift offers, increased advertising, new pricing strategies, customer loyalty programmes, free delivery, customer/personal service etc.

Some evaluative comment on a range of practical proposals to improve sales in a retail business. [11–12] Analysis of a range of practical proposals to improve sales in a retail business. [8–10] Good understanding of how sales might be increased in a retail business. [3–7]

Shows limited understanding of sales issues. [1–2]

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9707/21 Paper 2 (Data Response), maximum raw mark 60




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1 Loader Lorries (LL) (a) Explain the following terms: (i) Diseconomies of scale [3]

Content: Average/unit costs increase as the scale of production increases (NB scale not level, average not total). Too large to manage e.g. communications, coordination etc. Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark)

(ii) Cost of Sales. [3]

Content: Direct cost of purchasing goods that are sold in a period. Accept formula = opening stocks + purchases – closing stock. Or sales turnover – gross profit. So, different from purchases during the period.

Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark)

(b) (i) Using the information in Table 1, calculate LL’s gross profit margin for 2010. [3]

Sales = 90 Cost of sales = 35 Gross profit = 55 GPM = 55/90 * 100 = 61.1 % (allow sensible rounding)

Correct answer (3 marks) Right method with mistakes (2 marks) Attempt (1 mark)

(ii) The gross profit margin for 2009 was 70%. Using Table 1, comment on the

usefulness of the gross profit margin figures to the management of LL. [3]

Content: Cost of sales up even though sales down. Prices? Diseconomies? OFR ARA

Knowledge and Application

Level 2: Shows understanding of GPM in context (2–3 marks)

Level 1: Simple statement(s) (1 mark)

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(c) Discuss the extent to which the new employment contract has created the motivation problems at LL. [10] Content: Evidence suggests declining morale. New contract seems to have suited the firm more than the employees. Is problem lack of wages (Taylor etc) or redundancies (lack of security)? Non-financial motivators (mainly positive) are important but not without financial (mainly negative) as well. ARA Evaluation likely to come from balancing arguments.

Knowledge and Application Analysis and Evaluation

Level 2: Shows understanding of motivation/problems in context of the business. (3–4 marks)

Level 2: Evaluation of problems/causes in context. (3–6 marks)

Level 1: Shows understanding of motivation/problems. (1–2 marks)

Level 1: Analysis of problems/causes. (1–2 marks)

(d) Using the information in Figures 1 and 2, analyse the differences between the two approaches to managing inventories (stocks). [8]

Content: Could include: Bert’s stocks on upward trend. Not adjusted either reorder quantity or frequency, even though demand slowed down. Is he right to assume everything will improve? Can’t keep on increasing stock levels – expensive. Fred has responded to decreased demand and obsolescence with both reduced reorder level and frequency. Does he risk stock-out? How reliable is new gearbox programme? ARA Evaluation likely to come through prioritising difficulties.


Level 2: Shows understanding of inventory management/diagrams in context of the business. (3–4 marks)

Level 2: Analysis of inventory management/diagrams in context. (3–4 marks)

Level 1: Shows knowledge of inventory management/diagrams. (1–2 marks)

Level 1: Limited analysis of inventory management/diagrams. (1–2 marks)

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2 United Coal (UC) (a) Explain the following terms: (i) Private sector [3]

Content: That part of the business economy owned by individuals/groups other than the state (government/local government etc). May be owned by individuals/institutions. Not to be confused with private as in private ltd co. Example helpful.

Level 2: Good understanding (2–3 marks) Level 1: Partial understanding (1 mark) (ii) Product portfolio. [3]

Content: Businesses often have more than one product. The collection of a business’s products is called product portfolio. E.g. range of Ford cars. Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark)

(b) (i) Using the information in Table 2, calculate the closing balance for 2016. [2]

Opening balance = 48 Sales = 120 Cost = 10 Closing balance = 48 + 120 – 10 = $158m

Correct answer (2 marks) Identifies all the data but flawed calculation (1 mark) (ii) Comment on the usefulness to UC of this cash flow forecast. [6]

Content: Planning Seeing how much finance is needed What if? Analysis Monitoring actual performance OFR ARA

Knowledge and Application Analysis

Level 2: Shows some understanding of cash flow in the context of the business. (3–4 marks)

Level 1: Simple statement(s). (1–2 marks)

Level 1: Analysis of usefulness. (1–2 marks)

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(c) Briefly analyse two benefits of training workers for the new Cleancoal treatment site. [6]

Content: Productivity Management of change Motivation New skills Etc. ARA One benefit max K + A = 3, An + Ev = 1.


Level 2: Shows understanding of training in the context of the business. (3–4 marks)

Level 1: Shows understanding of training. (1–2 marks)

Level 1: Analysis of training. (1–2 marks)

(d) Evaluate the impact of the Cleancoal development on any two of UC’s stakeholders. [10]

Content: Lots of contradictions in the data Shareholders: future profits, good publicity, higher profile Customers: (Elgen) helps them but extra cost? Possible bad publicity? The community: cleaner environment but noise, extra lorries The State: taxes? Carbon targets? Publicity? Suppliers: ? Employees: anxiety? Change of jobs? Opportunities/redundancies? Safety? ARA One stakeholder max K + A = 3, An + Ev = 4.


Level 2: Shows understanding of stakeholders in the context of the business. (3–4 marks)

Level 2: Evaluation of impact on stakeholders in context. (3–6 marks)

Level 1: Shows understanding of stakeholders. (1–2 marks)

Level 1: Limited analysis of impact on stakeholders. (1–2 marks)

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1 Turbo Tractors (TT) (a) Explain the following terms: (i) Economies of scale [3]

Content: Average costs decrease as scale of production increases. NOT average cost decreases as more units produced. Internal and External. Examples needed.

Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark) (ii) Revenue (sales turnover). [3]

Content: Monetary income from sales (cash or credit). Starting point of Income statement (P/L). Revenue = Quantity x Price. Use. Needs more than just a definition.

Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark) (b) (i) Using the information in Table 1, calculate the net profit margin for TT in 2011. [3]

Net Profit = 70 – 40 – 20 = 10 NPM = 10 ÷ 70 x 100 = 14.3% (allow sensible rounding) Lack of % = 2 marks

Correct answer (3 marks) Right method with mistakes (2 marks) Valid attempt e.g. formula (1 mark)

(ii) The net profit margin in 2009 was 40% and in 2010 it was 25%. Briefly comment on

the trend in the net profit margin. [3]

Content: Rapidly falling. However 14% not too bad. Costs and expenses rising proportionally faster than sales. OFR ARA


Level 2: Shows understanding of NPM in context. (2–3 marks)

Level 1: Simple statement(s). (1 mark)

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(c) Discuss whether Balzac’s proposed new payment system is likely to solve the problems of lost sales and increased customer complaints. [10]

Content: Problems are mainly quality and late deliveries. Focus on piece rate puts quantity before quality. As does bonus culture. As does long service policy. These will help overcome late deliveries. May make quality problem worse. Which is more important to TT’s customers? Management system may prevent finding out why there is falling quality. Other pay ideas do not encourage loyalty, commitment. ARA Evaluation likely to come from balancing arguments. For 4 marks K+A must address problems.

Knowledge and Application Analysis & Evaluation

Level 2: Shows understanding of payment systems/problems in context of the business. (3–4 marks)

Level 2: Evaluation of impact of payment systems in context of problems. (3–6 marks)

Level 1: Shows understanding of payment systems/problems. (1–2 marks)

Level 1: Analysis of impact of payment systems. (1–2 marks)

(d) Using Table 2 and other information, analyse the usefulness of just-in-time inventory

(stock) control to TT. [8]

Content: Could include: Features of JIT compared with other systems. Instruments seem to meet all the requirements for JIT. Is JIT being used for gearboxes? JIT would not work for gearboxes because of unpredictable supply and fact that they are imported. Shortage of engines. Would need to build up stock before JIT introduced. Long lead time (imported). Candidates are expected to use Table 2 for context. ARA

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Level 2: Shows understanding of JIT in context of the business. (3–4 marks)

Level 2: Analysis of JIT in context. (3–4 marks)

Level 1: Shows knowledge of JIT. (1–2 marks)

Level 1: Analysis of JIT. (1–2 marks)

2 McQuarry (MQ) (a) Explain the following terms:

(i) Secondary sector [3]

Content: That part of the business economy concerned with converting raw materials into finished products. Manufacturing. Examples.

Level 2: Good understanding (2–3 marks)

Level 1: Partial understanding (1 mark)

(ii) Add value. [3]

Content: Process of converting (low value) raw materials/products into higher value finished/ partially finished products. Measured by difference between cost of materials and components and price. Adding value through marketing is rewardable. Example helps.

Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark) (b) (i) With reference to Table 3, calculate the closing balance for 2016. [2]

Opening balance + income – costs (–40) + 150 – 10 = $100m Correct answer (2 marks) Identifies all the data but flawed calculation (1 mark)

(ii) Comment on the usefulness of this cash flow forecast to MQ. [6]

Content: Useful for planning, progress monitoring. Shows need for $70m finance. Good for ‘What if?’ OFR

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Level 2: Shows understanding of cash flow in the context of the business. (3–4 marks)


Level 1: Brief analysis. (1–2 marks)

(c) Briefly analyse the problems that MQ’s management might have if workers are made

redundant. [6] Content: Compensation/costs, claims for unfair dismissal

Motivation Attitude of workers etc. Public relations Managing change Impact on remaining workforce. Who’s to go? ARA


Level 2: Shows understanding of redundancy in the context of the business. (3–4 marks)

Level 1: Shows understanding of redundancy. (1–2 marks)

Level 1: Analysis of problems. (1–2 marks)

(d) Evaluate the impact of the Crushblock project on two of MQ’s stakeholders. [10]

Content: Owners (NB not shareholders): opportunity of investment returns. May not be keen on risk. Will they be concerned about adverse criticism? Government: tax revenues a long way in the future. Licences/planning etc? Adds to GDP. Exports? Community: jobs, disruption, some possible benefits Suppliers: services. Machinery. Buildings. May be some good contracts. Right sort of local suppliers? Workers: new jobs, skills, redundancies? Financiers. ARA One stakeholder max K + A = 3, An + Ev = 4.

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Evaluation through prioritisation of impacts or arguing which stakeholders are impacted the most.


Level 2: Shows understanding of stakeholders in the context of the business. (3–4 marks)

Level 2: Evaluation of impact in context. (3–6 marks)

Level 1: Shows understanding of stakeholders. (1–2 marks)

Level 1: Limited analysis of impact. (1–2 marks)

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1 Quality Coaches (QC) (a) Explain the following terms: (i) Internal economies of scale [3]

Content: Economies of scale = average/unit costs down as scale increases. Internal are those over which the business has direct control e.g. managerial. Example helps.

Level 2: Good explanation (2–3 marks) Level 1: Partial explanation/understanding (1 mark) (ii) Retained profit. [3]

Content: Profit after all costs, payments including tax, dividends are deducted. Retained in the business for use by the business (not the owners). Final entry in income statement (P&L), contributes to reserves in balance sheet.


(b) (i) The net profit margin for 2010 was 20%. Using this information and the data in

Table 1, calculate the revenue (sales turnover) in 2010. [3]

NPM = NP ÷ sales × 100 Sales = NP ÷ NPM × 100 = 50/20 × 100 = $250 million $m for 3rd mark Correct answer (3 marks) Right method with mistakes (2 marks) Attempt (1 mark)

(ii) Using your calculation in (i), comment on the trends shown in Table 1. [3]

Content: Sales down, costs not changing proportionally, overheads constant. OFR ARA


Level 2: Shows understanding of trends in context. (2–3 marks)

Level 1: Simple statement(s). (1 mark)

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(c) Discuss how the management of QC could solve the human resource problems. [10]

Content: QC seem to have fallen behind on both financial and non-financial motivators. Evidence: poor morale, quality issues, employees leaving. Perhaps emphasis has been too much on non-financial motivators. Key issue is pay. Need to look closely at wage structure. Should workers get a share of increased retained profits? ARA Evaluation likely to come from prioritising solutions.


Level 2: Shows understanding of HRM in context of the business. (3–4 marks)

Level 2: Evaluation of solutions in context. (3–6 marks)

Level 1: Shows understanding of HRM. (1–2 marks)

Level 1: Analysis of solutions to HRM problems. (1–2 marks)

(d) Using the information in Table 2, analyse ways in which QC could reduce inventory

(stock) costs. [8]

Content: Costs include storage costs and opportunity costs. Can reduce costs where storage costs are high (B and D) by reducing stock levels. Introducing JIT, stock control charts. Must use Table 2 for context.


Level 2: Shows understanding of inventory control in context of the business. (3–4 marks)

Level 2: Analysis of methods in context. (3–4 marks)

Level 1: Shows knowledge of inventory control. (1–2 marks)

Level 1: Limited analysis of methods of reducing inventory costs. (1–2 marks)

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2 Eldorado Gold (EG) (a) Explain the following terms: (i) Primary sector [3]

Content: That sector of the economy involving natural resources (farming, fishing, mining etc).

Level 2: Good understanding (2–3 marks) Level 1: Partial explanation/understanding (1 mark) (ii) Market. [3]

Content: Any situation that involves trading, buyers and sellers of a commodity, good or service. May be physical (e.g. cattle market), electronic (most stock markets).


(b) (i) Using the information in Table 3, calculate the value of X (the sales of gold for 2016). [2]

Closing balance = opening balance + sales – costs 295 = 5 + sales – 10 Sales = 295 – 5 + 10 = $300m Correct answer (2 marks) Identifies all the data but flawed calculation (1 mark)

(ii) Comment on the usefulness to EG of this cash flow forecast. [6]

Content: Shows needs for finance for new gold mine. Useful for planning, monitoring project progress. Useful for ‘What if?’. OFR


Level 2: Shows some understanding of cash flow in the context of the business. (3–4 marks)


Level 1: Analysis of usefulness. (1–2 marks)

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(c) Briefly analyse two factors that EG will need to consider when recruiting workers for the new gold mine. [6]

Content: Location Pay rates Skills needed Recruitment processes ARA


Level 2: Shows understanding of recruitment in the context of the business. (3–4 marks)

Level 1: Shows understanding of recruitment. (1–2 marks)

Level 1: Analysis of factors. (1–2 marks)

(d) Evaluate the impact of the new gold mine on two of EG’s stakeholders. [10]

Content: Employees: job opportunities, skills, standards of living. Shareholders: risk, profits, long-term investment, cash flows. Community: jobs, disruption, infrastructure, loss of land, new people coming in, more money spent. Government: taxes, foreign exchange, environmental controls. Suppliers: new contracts/opportunities. (More spent in shops by workers.) ARA Evaluation likely to be shown through arguing the biggest impacts or the stakeholders most likely to be affected. One stakeholder max K + A = 3, An + Ev = 4.


Level 2: Shows understanding of stakeholders/impact in the context of the business. (3–4 marks)

Level 2: Evaluation of factors in context. (3–6 marks)

Level 1: Shows understanding of stakeholders/impact. (1–2 marks)

Level 1: Limited analysis of impact on stakeholders. (1–2 marks)

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GCE Advanced Level




9707/31 Paper 3 (Case Study), maximum raw mark 100




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GCE A LEVEL – May/June 2011 9707 31


1 Analyse the advantages and disadvantages for AC of greater use of electronic methods of communication. [10]

Knowledge 3 marks

Application 2 marks

Analysis 5 marks

Level 2 3 marks Two or more relevant points made or one point made plus knowledge of communication shown.

2 marks Points made are well applied to case.

3–5 marks Good use of theory to explain advantages and disadvantages.

Level 1 1–2 marks One relevant point made or knowledge of communication shown.

1 mark Some application to case.

1–2 marks Good use of theory to explain one side or limited use of theory to explain one or both sides.

Answers could include: Definition: the process of sending information from sender to receiver (plus feedback). Advantages:

• Accuracy of orders e.g. automatic ordering systems via computer links.

• Reduced stock levels – JIT based IT systems.

• Quicker e.g. than arranging meetings.

• Less time-consuming than face to face contact. Disadvantages:

• Capital cost – business is under pressure to cut costs.

• Staff training.

• Communication overload e.g. too many e-mails.

• Requires suppliers/customers to have compatible systems.

• Reliability issue.

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2 (a) Using data in Appendix A, calculate: (i) The Payback Period for both Option 1 and Option 2 Option 1 = 1 year + (5/5.5 x 12 months) = 1 year 10.9 months (2 marks) Option 2 = 2 years + (1/7 x12 months) = 2 years 1.7 months (2 marks) 2 marks for each correct answer OR 1 mark for each attempt. (ii) The Net Present Value after 3 years for Option 1 (at 12% discount). NPV @ 12% $m

Year Option 1 DCF

0 (8) (8)

1 3 2.67

2 5.5 4.35

3 4.5 3.2

NPV 2.22

Ready reckoner:

Result Explanation Mark

2.22 Correct 4

2.1 to 2.3 acceptable

Margin of error accepted due to candidate’s own calculation of discount factors

4

10.22 All correct DCFs but capital cost not subtracted Correct process but 1 omission

3

2 correct DCFs and no subtraction of capital cost

1 error and 1 omission 2

Two arithmetical errors 2

Some use of technique E.g. any multiplication of cash flows by discount factors

1

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(b) Comment briefly on the likely accuracy of the net cash flow data in Appendix A. [4] Allow own figure rule

Knowledge 1 mark

Application 1 mark

Analysis 1 mark

Evaluation 1 mark

Level 1 1 mark Shows some understanding of net cash flow forecasts.


1 mark Some use of theory to explain answer.

1 mark Judgement used to assess likely accuracy of forecasts.

Answers could include:

• Net cash flow forecasts are needed for investment appraisal – the initial cost of the options may be quite accurate.

• Cash inflows likely to be gained from internal company data for previous internal expansion or from FF’s accounts for external growth option.

• But future forecasts depend on market research data etc.

Evaluation:

• How reliable are the forecasts? Likely to be much less reliable as the cost of and returns from a takeover with culture clashes and potential lack of synergy are unreliable.

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(c) Discuss, using your results from (a) and other information, whether AC should expand organically (Option 1) or take over Fancy Fashions (Option 2). [14]

Knowledge 2 marks

Application 3 marks

Analysis 4 marks

Evaluation 5 marks

Level 2 2 marks Two or more relevant points made.

3 marks Points made are well applied to case and country.

3–4 marks Good use of theory to explain advantages and disadvantages of both options.

3–5 marks Judgement shown in considering both advantages and disadvantages and making a final recommendation.

Level 1 1 mark One relevant point made.

1–2 marks Some application to case and country.

1–2 marks Good use of theory to explain one or both options on one side only.

1–2 marks Judgement shown but on one side only.


• ORGANIC: analysis of results. Less risky as growth is more gradual and easier to manage. Same staff and production methods? Less costly – business is under pressure to reduce costs. Allows AC to offer complete range of clothing to retail stores. Quicker payback and the benefits of this could be analysed.

• TAKEOVER: analysis of results. More expensive. Is Abu paying too much to a friend? Damage to AC’s CSR – long-term damage to image? Will it be possible to change the culture of this business to meet AC’s standards? Higher NPV – but is the difference significant? What future interest rates (and thus discount rates) are forecast?

• Evaluation: the decision may depend on:

• The potential for sales growth in both markets – much more information like this would have been useful.

• Whether the leather factory will be operated under the original name – less chance of damage to reputation?

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3 (a) Refer to Appendix B. Calculate all the variances between the budgeted and actual data. Indicate whether each one is adverse or favourable. [6]

Variance (award 1 mark for each correct variance including Favourable/Adverse – ½ marks for each correct result with no A/F or incorrect A/F. Round up half marks).

Sales revenue 1 F

Cost of material 2 A

Direct labour costs 0.5 A

Management expenses 0.5 A

Marketing expenses 1 A

Other expenses 0 (No marks)

Profit 3 A

(b) Evaluate any two ways in which the business might reduce its costs. [8]

Knowledge 2 marks

Application 2 marks

Analysis 2 marks

Evaluation 2 marks

Level 2 2 marks Two ways identified.

2 marks Both points applied to case.

2 marks Use of theory to explain how each way would help.

2 marks Judgement shown in assessing both ways.

Level 1 1 mark One way identified.

1 mark Application of one point to case.

1 mark Use of theory to explain how one way would help.

1 mark Judgement shown in assessing one way.


• Reducing material costs by cutting down on wastage or reducing unit cost of cloth – more detail would have been useful here about the actual cause of the unfavourable variance.

• Labour costs – is this due to lower productivity or higher wage rates than budgeted for? Cut wage rates – conflict with CSR? Cheaper materials – this might be possible if they go for fast fashion as consumers may be less concerned about quality.

• Expenses – are trade exhibitions really necessary if AC has large customers already? Might need to attract more customers for fear of losing some of the existing ones. Management salaries: are they paying themselves ‘too much’? Could they be accused of being unethical? Reduce these salaries? Will good managers leave?

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4 Evaluate the impact that the trends in the macro-economic data could have on AC’s future profitability. [16]

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 6 marks

Level 2 3 marks Good knowledge shown.

3 marks Good application to case.

3–4 marks Good use of theory to explain answer.

4–6 marks Good judgement shown.

Level 1 1–2 marks Some knowledge shown.

1–2 marks Some application to case.

1–2 marks Some use of theory to explain answer.

1–3 marks Some judgment shown.


• GDP growth – slowing but little impact directly on AC’s sales as most output is exported – may affect unemployment levels though and with continued economic growth, workers may be harder to recruit.

• Inflation rate falling – may help to reduce upward pressure on AC’s costs e.g. through lower wage settlements. Depends on inflation rate in other countries.

• Higher interest rates – could be a problem for AC if they need to borrow money for either of the two growth options – may depend on what percentage of finance is obtained internally.

• Tax rates – reduce retained profit so could be very significant – will this be enough to convince AC to start building factories in other countries? What are the rates of profits tax in other countries, though?

• Income tax – may lead to higher wage/salary demands.

• Exchange rate – appreciation will make imports of cloth cheaper (but what percentage of total costs are accounted for by cloth?) but make AC’s prices of its exports less competitive. Again, do they need to locate abroad.

Final evaluation:

• How reliable are the forecasts?

• What is the evidence of other countries’ economies, especially those countries that AC exports to?

• How dependent is the business on loan capital?

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5 Assess the importance of AC’s corporate social responsibility (CSR) policy to the company’s future success. [14]

Knowledge 2 marks

Application 2 marks

Analysis 4 marks

Evaluation 6 marks





Level 1 1 mark Some knowledge shown.





• Definition: the policy of the business towards meeting stakeholder objectives other than shareholders’ objectives.

• A good and well-publicised CSR policy (as in this case) can be a useful marketing tool and lead to increased sales.

• BUT: are the shops AC deals with interested in this? Are the consumers of the shops interested in the sources of the clothes they buy? How concerned are consumers during global downturns about ethical issues? Is the demand for ethically sourced clothes rising or falling? Is low cost or ethical sourcing more important to retail customers?

• Labour relations should improve with good CSR policy e.g. employment contracts. Make it easier to recruit and retain good staff – especially if unemployment is falling. BUT does the policy add too much to costs and reduce labour flexibility? Is the balance between ethical standards and short-run costs inappropriate in this case at this time?

• Final evaluation: other factors will affect future success too – e.g. fast fashion and price level of AC’s clothes.

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Questions 6 and 7

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 10 marks

Level 3 7–10 marks Good judgement shown in text and conclusions.

Level 2 3 marks Good understanding shown e.g. 2 factors identified plus at least 1 explained.


3–4 marks Good use of theory to explain points made.

4–6 marks Some judgement shown in text and/or conclusions.

Level 1 1–2 marks Some understanding shown e.g. 1 factor identified/ developed.


1–2 marks Limited use made of theory.

1–3 marks Limited judgement shown.

6 Evaluate the usefulness of methods of strategic analysis to the directors of AC before

making major decisions about the future growth of the company. [20] Answers could include:

• Definition of strategic analysis.

• SWOT – explanation of the benefits of using this – the threats and opportunities need to be carefully identified and analysed when a significant change in strategic direction is being considered.

• PEST – explanation of the benefits of using this – economic and technological influences important in this case but social too, with changing fashion trends and consumer expectations.

• Making strategies blend in with mission/value statements – does the company have these?

• Boston Matrix – the two options are slightly different in terms of this.

• Porter’s 5 Forces analysis – the benefits of using this.

• Core competences.

• Accept Ansoff discussion.

• Two methods sufficient for max marks.

Evaluation:

• Prioritisation of methods – discussion of their relative importance in this case.

• Is the family, and Abu in particular, skilled and experienced enough to be able to take effective strategic decisions without time-consuming and possibly expensive analysis?

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7 Discuss the importance of contingency planning to AC. [20] Answers could include:

• Definition: planning for unforeseen events – business continuity planning.

• Benefits: reassures customers and staff that their interests are being considered.

• Cuts down potential damage from disasters both in terms of costs (e.g. compensation) and bad PR and loss of customer loyalty.

• Reduces risks of disaster occurring as recognising major risks sometimes allows them to be reduced.

• Particularly important to firms like AC where there is a potential risk to consumers and they project themselves as a ‘caring’ organisation.

• Limitations: disasters still occur – refer to case.

• Too expensive especially for small businesses or those in a very cost competitive industry – refer to case.

• CP may be of little benefit if other measures are not in place, e.g. effective quality assurance over supplies – refer to case.

Final evaluation:

• Cost of CP needs to be balanced against the potential costs of not doing it.

• How much time is spent on preparing and testing contingency plans?

• In this case it seems to have been effective but it might be more important to focus on quality issues themselves, rather than trying to respond to a problem once it has arisen.

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GCE Advanced Level








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1 Analyse the advantages to FitsU of increasing the use of technology in marketing and operations management. [10]

Knowledge 3 marks

Application 2 marks

Analysis 5 marks

Level 2 3 marks Two or more relevant points showing understanding.

2 marks Points made are applied to case and both departments.

3–5 marks Good use of theory to explain advantages in both departments.

Level 1 1–2 marks One or two relevant points made.

1 mark Some application to case for one department.

1–2 marks Some use of theory to explain advantage(s) in one department.

Answers could include: Technology: the use of IT and other technical developments to increase efficiency. For example:

• ERP: using single computer system to track the operations of the business – supplies, customers’ orders, inventories etc.

• Advantages: keeps track of all goods supplied, work in progress, inventory levels – gives complete computerised overview and allows accurate monitoring of the operations of the business.

• May be particularly useful in this case if the factory is opened as there will be raw material inventories and work in progress.

Internet selling – using websites to promote products and take orders.

• Advantages: worldwide market coverage – FitsU might be selling in a mature market with limited opportunities for growth.

• Direct selling of own shoes (if factory is opened) – no mark-up given to other intermediaries and business gains useful direct communications with customers.

• May be able to close retail outlets and reduce fixed costs. Other applications of IT and technology may be possible and should be suitably rewarded.

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2 (a) Using data in Appendix A, calculate for the factory project: (i) The Average Rate of Return (ARR) [4] ARR % = Annual profit/initial capital cost × 100 = 7/4 = 1.75m/15 × 100 = 11.67% Ready reckoner:

Result Explanation Marks

11.67% 4

7/15 × 100 = 46.67% 36.67%

Does not calculate annual profit Does not deduct capital costs

3

2 errors 2

Formula only 1

(ii) The Discounted Payback Period ($m) [4]

Year Option A DCF

0 (15) (15)

1 4.5 4.1

2 4.5 3.74

3 6.5 4.88

4 6.5 4.42

Discounted payback: 3 years and 2.28/4.42 × 12 = 6.2 months 3 years 6.2 months (Allow 3 years 6 months) 4 marks – correct answer 3 marks – one error 2 marks – 2 errors 1 mark – some idea e.g. some use of discount factors or discounted cash flow total of

$17.14m

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(b) Comment briefly on the likely accuracy of the net cash flow data in Appendix A. [4] Allow own figure rule

Knowledge 1 mark

Application 1 mark

Analysis 1 mark

Evaluation 1 mark

Level 1 1 mark Shows some understanding.



1 mark Judgement used to assess accuracy of cash flows.


• Net cash flows are forecast annual cash inflows from the project less forecast cash outflows. Year 0 is the expected capital cost.

• Inflows may be based on market research data or internal data about cost price of shoes. Outflows may be based on industry data on operating costs of show factories.

• Cash flows could be affected by competitors’ actions e.g. their decision to open factories etc.

Evaluation:

• How reliable are the forecasts? Likely to be much less reliable than, for example, estimating cash flows from a new shop as the business has not operated a factory before.

• Have management influenced the data in any way to achieve a particular decision?

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(c) Discuss, using your results to (a) and other information, whether FitsU should open the shoe-making factory. [12]

Knowledge 2 marks

Application 2 marks

Analysis 4 marks

Evaluation 4 marks

Level 2 2 marks Good knowledge/ understanding shown.


3–4 marks Good use of theory to explain results and other information.

3–4 marks Judgement shown in considering this decision plus clear recommendation.

Level 1 1 mark Some knowledge/ understanding shown.


1–2 marks Some use of theory to explain results OR other information.

1–2 marks Some judgement shown e.g. on accuracy of results.


• Analysis of results (accept OFR analysis).

• ARR of 11.67% may not be considered high for a relatively risky project – but depends on cost of capital.

• Discounted Payback (may define or explain this for knowledge marks) is long in terms of the 4-year initial period of the lease.

• Quantitative data are not strongly in support of decision to open factory – but what other uses of capital are there? Do they offer higher returns/quicker payback?

Other factors:

• Consumer preference for branded shoes.

• May take longer to reach capacity than expected – raising unit costs above forecast.

• No experience in this sector – manager has manufacturing experience but not in shoe production.

• Gives cost/quality control of shoes to FitsU.

• Takes finance and focus away from retail shop business. Evaluation:

• Most important factor?

• Need to give the project a longer life span before deciding on permanent production?

• Final, justified, conclusion is needed for level E2.

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3 (a) Using data in Appendix B, calculate the acid test ratio and the gearing ratio of FitsU for the year ending 31st May 2011. [6]

Formulae:

Acid test = sliabilitie Current

assets Liquid = 33/88

Gearing ratio % = employed Capital

sliabilitie term Long × 100 = 100/215 × 100

2011

Acid test 0.375 (0.38)

Gearing ratio 46.5% (47% or 0.465/0.47)

Ready reckoner:

Result for each ratio Explanation Mark

Correct 3

Correct data identified but incorrect result 2

Correct ratio formula 1

(b) Assume the decision to build a new factory is taken. Discuss whether the business should raise the finance required for the new factory from additional long-term loans. [8]

Knowledge 2 marks

Application 2 marks

Analysis 2 marks

Evaluation 2 marks

Level 2 2 marks Good understanding shown.


2 marks Good use of theory to explain impact of using long-term loans.

2 marks Good judgement shown in assessing sources of finance.

Level 1 1 mark Some understanding shown.


1 mark Some use of theory to explain how long-term loans would impact on business.

1 mark Some judgement shown.


• Relatively high gearing already – this would raise it to 115/230 = 50%.

• Risky – interest costs. Interest rates could increase/profits could fall, both of which would make servicing the loans more difficult.

• Should perhaps not raise all of the finance from loans – suggest and support other sources, e.g. share capital is possible as it is a plc. But to what extent would this dilute control/ownership?

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4 Discuss how the company should respond to the data in Appendix C, using Boston Matrix analysis to support your judgements. [16]

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 6 marks










• Definition/diagram/explanation of Boston Matrix.

• Calculation of market share: W 60%; S 10%; C 20%; M 50%

• Allocation of products to each category: W = Star; S = Dog; M = Cash Cow; C = Problem child.

• Options: divest the dog.

• Support the problem child – cash from cash cow?

• Maintain the star – how? Cost of this?

• Other strategic options possible e.g. replace dog with products in other market segments.

• Marks to be awarded for calculations of market share: K1P1 for one correct calculation. K2P2 for two or more correct calculations.

• Marks to be awarded for correct classification of products to Boston Matrix: K1P1 for one correct classification. K2P2 for two or more correct classifications. Evaluation:

• Need more data before major strategic decisions can be taken? How useful is Boston Matrix in actually making strategic decisions about products?

• For example, sales of individual product ranges/styles.

• External data would be useful too e.g. social and demographic trends.

• Competitor analysis would be useful before major decisions are taken.

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5 Evaluate the most appropriate Human Resource strategies that FitsU could adopt to increase staff motivation without increasing the unit costs of sales. [16]

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 6 marks



3–4 marks Good use of theory to explain answer and impact on unit costs.






Examiners’ note: Max L1 for Analysis/Evaluation if no specific reference to unit costs. Answers could include:

• Details of present pay system and the problems this is causing.

• Seems to be a Taylorite approach – yet senior managers and directors know how to motivate themselves.

• ‘Them and us’ approach could be very damaging to long-term motivation and morale.

• Bonus system may encourage sales – but does it lead to effective customer service and relations in the long term?

• Profit-sharing scheme for all staff? Would this increase motivation without increasing unit costs?

• Share ownership scheme to promote sense of ownership and belonging?

• Non-financial motivators need to be reviewed – no attempt to adopt job enrichment etc.

• Analysis of likely impact of suggestions made on unit costs. Evaluation:

• Suggestions must be applied to case and assessed in terms of ‘not increasing unit costs’.

• Best methods are… plus justification.

• How likely is the existing management to adopt a less Taylorite approach to both financial and non-financial motivators? This could be a major obstacle.

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Questions 6 and 7

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 10 marks


Level 2 3 marks Good knowledge/ understanding shown.

3 marks Good application to case

3–4 marks Good use of theory to explain points made

4–6 marks Some judgement shown in text and/or conclusions

Level 1 1–2 marks Some knowledge/ understanding shown

1–2 marks Some application to case


1–3 marks Limited judgement shown

Examiners’ note: good answers considering just two techniques can gain max. marks. 6 Evaluate the usefulness of strategic choice techniques that FitsU directors might use in

making the decision to manufacture shoes. [20] Answers could include:

• Definition of strategic choice – choosing between strategic options including not going ahead with a major decision.

• This is a major change from existing growth strategy.

• Vertical integration has cost/control benefits – should increase profit margins.

• Break-even analysis might be useful to aid this decision.

• Use of decision trees and/or force field analysis? Assess the usefulness of these techniques, in this case including their benefits and limitations.

• Can probabilities be assessed?

• Can ‘restraining’ and ‘driving’ forces be measured quantitatively?

• Ansoff’s matrix – is this a form of diversification i.e. into production even though in the same industry? Risks associated with this.

• How reliable would the data be for basing a scientific decision on? Are qualitative factors more important than quantitative ones?

• Investment appraisal is an appropriate technique but how reliable are the cash flows and results of investment appraisal?

Evaluation:

• Lack of management expertise could be major problem in applying these techniques.

• Is Ansoff appropriate as this is a move towards manufacturing not a marketing growth strategy?

• Prioritisation of techniques – which is likely to be of most use in this case?

• Discussion of their relative importance in this case. Should the decision be taken scientifically or with ‘instinct’?

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7 Discuss the importance of effective management of change to the future success of FitsU. [20] Examiners’ note: Level 1 max for Application/Analysis/Evaluation if not specifically applied to

change management. Answers could include:

• Definition of change management – the process of managing and leading strategic change to achieve desired objectives.

• Knowledge marks can be gained for understanding of management/management functions.

• FitsU current management have not done this effectively so far it seems – recent changes have caused resistance.

• Lack of staff involvement, lack of communication of the need for change, lack of ownership of the change process is a major weakness.

• This could lead to serious HR problems and a lack of competitiveness in the future e.g. in terms of customer service.

• Will the vertical integration of the business be handled well?

• Will future takeovers be handled better than that of FeetHut?

• Pace and scale of change is likely to accelerate e.g. Internet selling and globalisation. FitsU might not be prepared for effective management and leadership of these changes.

• Steps to be taken in effective change management include: vision for the business; ‘selling’ change to staff; communication of reasons for change and consequences; involvement in change process.

Evaluation:

• How important is strategic change in this context and the management of such change? Will effective change management make any difference to the future success of FitsU?

• Can management culture towards change management and the role of staff be adapted to meet future challenges?

• If unemployment is rising perhaps autocratic management of change might be ‘acceptable’ but will it lead to longer term problems e.g. when unemployment is falling?

• Examination of factors other than effective management of change that could affect the future success of this business.

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GCE Advanced Level








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1 Analyse the advantages and disadvantages for FPC of operating sawmills at nearly full capacity. [10]

Knowledge 3 marks

Application 2 marks

Analysis 5 marks

Level 2 3 marks Good knowledge of relevant points and capacity utilisation.



Level 1 1–2 marks One/two relevant point(s) made or knowledge of capacity utilisation shown.


1–2 marks Use of theory to explain advantages or disadvantages.

Answers could include: Definition of full capacity (or capacity utilisation): output equal to capacity (proportion of total capacity accounted for by current output). Advantages:

• Lowers fixed costs per unit and therefore total costs.

• Increases competitiveness as a result – this is a competitive market.

• Gives staff job security.

• Cuts down on wasted time/resources. Disadvantages:

• Little time for maintenance/repairs – see case. This may lead to breakdown of machinery.

• Worsens health and safety record – see case.

• Puts pressure on staff/managers.

• Not able to meet increased orders e.g. from established customers. Calculation of capacity utilisation would provide evidence of application. 2008 42/45 93.3% 2009 44.5/46 96.7% 2010 47/48 97.9%

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2 (a) Draw up a forecasted Income Statement (Profit & Loss Account) for FPC for the 12 months ending 31 May 2012 based on the actual Income Statement shown in Appendix C.

Assume that:

• the impact on sales and profit margins is based on the information and estimates made on lines 33–35

• there are no other changes. [8]

Income Statement

Year ending 31/5/11

($m)

Income Statement

Year ending 31/5/12

($m)

Marks

Income statement if 15% mistakenly added

to total revenue ($m)

Sales revenue 50 56* 3 57.5 2 marks

Cost of sales 15 15.68 1 OFR 16.1 1 mark

Gross profit 35 40.32 1 OFR 41.4 1 mark

Overhead expenses

28 29.4 2 29.4 2 marks

Net profit (profit before tax)

7 10.92 1 OFR 12 1 mark

Notes: (1) Net profit of $10.92m should not be automatically rewarded with 8 marks. Each

element of the income statement must be shown. (2) *Sales revenue to 31/5/12 = 50 + 15% of (80% × 50) = 50 + 15% of 40 = 56 Calculations: Revenue 80% of 50 = 40 (1 mark) 15% of 40 = 6 (2 marks) Overheads 5% of 28 = 1.4 (1 mark)

(b) Comment briefly on the usefulness of a forecasted Income Statement to the directors of FPC. [4]

Knowledge 1 mark

Application 1 mark

Analysis 1 mark

Evaluation 1 mark


1 mark Applied to case.

1 mark An explanation of usefulness.

1 mark Judgement given.


• Forecast of future profits/losses.

• Allows comparison with budgets and past performance to be made.

• Useful for decision-making – as in this case. ‘What if’ scenarios can be compared.

• Based on forecasts such as market research, cost estimates etc – so considerable scope for inaccuracy.

• CEO in this case might be trying to justify the decision so could have used optimistic data.

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(c) Discuss, using your result from (a) and other information, whether FPC should respond to pressure group threats and stop extracting wood from the Lotus forest. [14]

Knowledge 2 marks

Application 2 marks

Analysis 5 marks

Evaluation 5 marks

Level 2 2 marks Two or more relevant points made.



3–5 marks Judgement shown in considering both advantages and disadvantages with well supported recommendation.

Level 1 1 mark One relevant point made.


1–2 marks Good use of theory to explain one side or limited use of theory to explain one or both sides.

1–2 marks Judgement shown but on one side only or poorly supported recommendation.

Answers could include: NO they should continue extracting timber:

• It is clearly profitable – see (a). – Net profit margin (NPM) will increase from 14% to 19.5%. – NPM will increase by 5.5 percentage points. – There will be a 56% increase in net profit.

• FPC is a plc and has shareholders to satisfy. – They will not be impressed by closing a forest so soon after purchasing it. – They are demanding higher dividends.

• Operations will end in a few years anyway – environmental and other pressure groups will be pleased about that.

YES they should stop now:

• Against mission statement – not living up to their stated mission.

• Pressure group activity may reduce FPC’s reputation and sales and have a long-term impact on profitability.

• Only a small part of their operations and may be able to sell to another timber business anyway.

Evaluation may include:

• How powerful are the pressure groups?

• Can the forest be sold to another business?

• Will shareholders take action against directors who seem to have paid too much for a forest that they are now thinking of ceasing operations in?

• Business customers may not be driven by ethical considerations.

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3 (a) Refer to Appendix A.

(i) Identify the earliest start time (EST) and latest finish time (LFT) at node 5. [2]

EST = 5; LFT = 7

(ii) State the length of the critical path. [1]

16 weeks or accept CFIK

(iii) Calculate the total float on Activity J. [3]

LFT – Duration – EST (1 mark) 10 – 2 – 6 = 2

or LST – EST (1 mark) 8 – 6 = 2

(Award 2 marks for correct data identified but incorrect result.)

(b) To what extent will the use of critical path analysis ensure a successful completion of the new sawmill? [8]

Knowledge 2 marks

Application 2 marks

Analysis 2 marks

Evaluation 2 marks

Level 2 2 marks Good understanding of CPA.

2 marks Good application to case e.g. use of CP/durations etc.

2 marks Good analysis shown.

2 marks Clear judgement shown.

Level 1 1 mark Shows some understanding of CPA.



1 mark Judgement used to assess usefulness of CPA.


• Definition/explanation of CPA.

• Should help because: – Puts tasks in order; helps with identifying simultaneous activities.

– Float times can be used to allocate resources more efficiently. – Delays can lead to managers using network to identify which activities need to be

speeded up; 16 weeks is length of CP so it should be possible to get yard ready within time limit set.

Limitations:

• Only a planning tool – needs good management to see the project through to successful completion. Does FPC have good enough middle managers to see project through on time?

• Outside events could result in unforeseen delays e.g. planning permission problems.

• How reliable are the duration estimates?

Evaluation:

• Has this tool been used by FPC managers before and, if so, with what success?

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4 Refer to Appendix B and lines 36–41. Evaluate the most important changes that you consider should be made to improve the organisational structure of FPC’s Operations Department. [14]

Knowledge 2 marks

Application 2 marks

Analysis 5 marks

Evaluation 5 marks










• Criticisms of existing structure: too tall with narrow spans of control; no separate divisions for different countries or products.

• New structure may be drawn – allow up to 6 marks (2,2,2) for revised version with significant differences that appear logical, e.g. separate divisions for products or countries or wider spans of control (matrix structure possible too).

• Analysis of the claimed benefits of student’s own version, e.g. better vertical communication, more delegation, clearer lines of authority.

• Will other departmental organisations need to be changed? Can just one department have a different structure?

Evaluation may include:

• Will delayering be handled sensitively?

• Most important features of the new structure are…with justification.

• Will delegation and wider spans of control need a new management/corporate culture of trust and will this occur?

• How long will the changes take? Will they be imposed from the ‘top’?

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5 Assess the potential impact of increasing globalisation on the marketing strategy for FPC furniture. [16]

Knowledge 2 marks

Application 3 marks

Analysis 5 marks

Evaluation 6 marks

Level 2 2 marks Good knowledge demonstrated.

3 marks Good application of points to case.

3–5 marks Good use of theory to answer question.


Level 1 1 mark Some knowledge of globalisation or marketing strategy.

1–2 marks One or two points applied to case.

1–2 marks Some use of theory to answer question.

1–3 marks Some judgement shown.


• Definition or explanation of globalisation and/or marketing strategy.

• Existing marketing strategy: traditional Asian designs; low prices (discount stores); sold through other retailers – no company-owned shops; no or little marketing budget.

• Current position: increased competition from cheaper imports due to free trade.

• How should marketing strategy be revised?

• Market research – are imports only in the lower price segments of the market?

• New market segment?

• Selling abroad – pan-global marketing or global localisation? For example, will new furniture styles and promotions be needed in European and American markets?

• Selling directly over the Internet? How feasible is this with furniture? Evaluation:

• More information needed e.g. market research.

• May depend on which strategic option FPC adopts.

• Is the process of globalisation and free trade likely to continue for the markets FPC operates in?

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Questions 6 and 7

Knowledge 3 marks

Application 3 marks

Analysis 4 marks

Evaluation 10 marks


Level 2 3 marks Good understanding shown.


3–4 marks Good use of theory to explain points made.

3–5 marks Some judgement shown in text and/or conclusions.

Level 1 1–2 marks Some understanding shown.



1–2 marks Limited judgement shown.

6 Evaluate the importance of both SWOT and PEST analysis to FPC’s directors as they

analyse the two strategic options. [20] Answers could include:

• Definition/explanation of PEST and SWOT as techniques of strategic analysis.

• Benefits of SWOT – considers both internal (SW) and external factors (OT) in analysing the situation in which the business is currently. This is important before major strategic decisions are taken.

• Helps to identify areas for action to reduce weaknesses and the strengths that will allow opportunities to be taken advantage of e.g., in this case, strength in primary products, profits being made to finance expansion, new CEO with plans to reorganise the organisation.

• PEST focuses on external factors: – Legal changes e.g. protection of natural parks. – Environmental pressure groups – will it be easier to avoid pressure if FPC expands into

secondary sector? – Social issues such as relocation of villagers.

Evaluation:

• PEST and SWOT need frequent updating.

• Major decisions such as this require other forms of analysis too, e.g. investment appraisal and Porter’s 5 Forces.

• Can be subjective.

• Market research essential.

• Financial analysis of accounts needed for Option 1.

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7 FPC’s directors aim to increase profits. Recommend to FPC’s directors which one of the two strategic options they should choose for the company, assessing the potential risks and rewards of both options. [20]

Reward appropriate use of Ansoff.

Expansion into furniture making

Rewards: Risks:

• Moves away from primary products with low value added and pressure group activity.

• Rising global incomes will allow expansion into an income elastic market.

• Less risky than diversification?

• Potential problems with further takeovers/mergers e.g. paying too much (as with case example) and culture clashes.

• Lack of previous success in furniture making – will expansion overcome this?

Diversification into other primary products

Rewards: Risks:

• FPC understands primary product markets.

• Existing land can be used – may be cheaper than other option.

• Social/environmental objections.

• Lack of detailed knowledge about extraction methods etc.

• More risky?

Evaluation:

• Overall judgement required e.g. recommendation given but may be conditional on other information being provided, such as investment appraisal, PEST analysis for both options etc.

• Quantitative analysis is essential to achieve the profit objective.

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