topic tests for unit 4a: making business decisions · test uses the 2013 pre-release material on...

Topic Tests for Unit 4a: Making business decisions

For the 2013 examinations, based around the Superdry pre-release material

For Edexcel’s Business Studies A2 level, 6BS04

By Ned Browne, Carly Evans and Gerald Wood

Contents

These Topic Tests are designed to give teachers assessment tools, which they may use at the

end of teaching successive sections of Unit 4a. They may also be used by teachers to

familiarize themselves with the issues raised by the Case Study prior to teaching the course.

There are four tests outlined below:

Topic test title Specification

reference

Page

Section 1: Corporate objectives and strategy 4.3.1a 1

Section 2: Making strategic decisions 4.3.2a 13

Section 3: Assessing competitiveness 4.3.3a 25

Sections 4: Company growth 4.3.4a 37

Each Topic Test has four key features:

1. They are laid out in the general format of the Unit 4a examination, and so help students to

become familiar with the approach which they will face when they sit the Unit. Each Topic

Test uses the 2013 pre-release material on Superdry / SuperGroup.

2. They cover the core concepts in the relevant section of the syllabus.

3. Accompanying each test is a mark scheme, based around Edexcel’s own mark schemes.

These both assist the teacher in marking students’ work, and help students understand what

they need to do to improve their mark.

4. Also accompanying each test is a set of suggested answers. These are rather longer than

most students would have time to produce in an examination setting, and also contain more

analysis and detail than students would be expected to know. They will therefore be useful as

a source of further study.

Licence

The printed material is sold with a licence to photocopy for the benefit of staff and students

within the purchasing institution, but not further afield.

Disclaimer

While the authors are all experienced teachers of Edexcel’s A level specifications, the

endorsement of Edexcel has neither been sought nor given for this work.

August 2012

ii

More resources at www.anketelltraining.com (C) This work is sold with a non transferable licence to photocopy for the exclusive use of staff and students at the purchasing institution

1

More resources at www.anketelltraining.com (C) This work is sold with a non transferable licence to photocopy

for the exclusive use of staff and students at the purchasing institution

Instructions

Use black ink.

Fill in the boxes at the top of this page with your name, centre number and candidate

number.

Answer all questions in both Section A and Section B.

You may use a calculator.

Information

Total marks for this paper is 80.

Quality of written communication will be taken into account in Questions 7a and 7b

in Section B. This is indicated with an asterisk*. You should take particular care on

this question over spelling, punctuation, grammar and clarity of expression.

Advice

Read each question carefully.

Keep an eye on the time.

Try to answer every question.

Check your answers if you have time at the end.

Write your name here

Centre Number Candidate Number

Unit 4a Topic Test based on

2013 pre-release, Section 1

Surname Other name

Unit 4a: Making Business Decisions

Section 1: Corporate objectives and strategy

Date:

Time: 1 hour 30 minutes

Paper Reference

6BS04/01

You need the pre-issued Evidence A to I for this

examination paper

Total Marks

2



SECTION A

Evidence A to I was pre-issued before the date of the examination.

Using the Evidence and your own knowledge, answer all six questions (total 30

marks).

Time allowed (35 minutes).

Additional Evidence J

Superdry: from rebel outfit to the corporate mainstream?

SuperGroup began with the founding of Cult Clothing in 1985 by Julian Dunkerton

and a former business partner.

After three E’s at A level, Dunkerton hired an indoor market stall in Cheltenham and

called it Cult Clothing. The original Cult Clothing store led to the creation of others

across the country, many of them in university towns. Over 15 years, he grew it into

a nationwide chain with an annual turnover of £17 million. "At 19, I found I

understood this market. To be a good retailer you have to understand people and make

them happy.”

Superdry employs young trendy Brand Ambassadors to promote the brand. Its shops

play loud music and are staffed by good-looking employees draped in Superdry’s

clothes. It is considered a hip company to work for – no one wears a tie.

The company has come a long way. In March 2010 the business undertook a

successful flotation on the London Stock Exchange. By July 2012 the company was

valued at £1.2 billion.

However, concern has been raised that its customers will desert the brand if it

becomes too mainstream. Profit warnings early in 2012 have certainly raised alarm

bells.

The company recently hired John Lewis Partnership's director of fashion and beauty,

Susanne Given, as chief operating officer. Business analysts have suggested that this

is a sign of Superdry’s changing corporate culture.

Sources: media articles written in 2011-12

3



1. What is meant by ‘corporate culture’ (Evidence J, final paragraph)? (2)

2. What is meant by ‘Corporate Social Responsibility’ (Evidence G)? (2)

3. Explain how Superdry has sought to gain competitive advantage. (4)

4. Briefly comment on Superdry’s business (i.e. corporate) strategy (Evidence

B). (5)

5. Analyse the usefulness of the Boston Matrix for companies such as Superdry.

(8)

6. Assess the likely demands placed on Superdry’s resources (financial, physical,

human) given its rapid expansion. (9)

SECTION B

Decision-making report

Using ALL the Evidence and your own knowledge, answer both parts of the

question (total 50 marks).


7 *(a) With reference to Evidence J, evaluate the likely impact of Superdry’s

corporate culture on its past growth and future growth potential. (20)

7 *(b) Evaluate the potential for conflict between Superdry’s ethical ideals outlined

in Evidence G, and the conventional business objectives of increasing turnover and

profit. (30)

4



Unit 4a, Section 1– Corporate objectives and business strategy: mark

scheme Note: Any acceptable answer which shows the range of skills required may score full marks

Q. 1 What is meant by ‘corporate culture’ (Evidence J, final paragraph)? Mark

Knowledge up to 2

A definition of corporate culture i.e. the collective behaviour of employees

based on a shared set of assumptions

Note: 1 mark for partial explanation; a valid extension or example will

gain the second mark.

1-2

Total: 2

Q. 2 What is meant by ‘Corporate Social Responsibility’ (Evidence G)? Mark

Knowledge up to 2

A definition of CSR i.e. self-regulation by companies in pursuit of ethical

objectives

Note: 1 mark for partial explanation; a valid extension or example will

gain the second mark – e.g. reference to Boston Matrix.

1-2

Total: 2

Q. 3 Explain how Superdry has sought to gain competitive advantage. Marks

Knowledge up to 2

A definition of competitive advantage e.g. some aspect of the business that

improves its position relative to its rivals in the eyes of consumers

Application up to 2 Rapid growth of product mix (1), applied e.g. Evidence F (1)

Flagship store (1), applied e.g. top Regent St location Evidence I (1)

Focus on trendy market segments (1), applied e.g. students Evidence A (1)

Any other valid point (1); applied (1)

1-2

1-2

Total: 4

Q. 4 Briefly comment on Superdry’s business (i.e. corporate) strategy

(Evidence B).

Marks

Knowledge up to 2

Of corporate strategy e.g. the long-term planning needed to achieve the

mission, often expressed in terms of growth of profits or turnover

Application up to 2

Growth targets mentioned in Evidence B with clear market segmentation

strategy

Analysis - 1

Evidence of success – e.g. reference to Evidence C or D or H

1-2

1-2

1

Total: 5

Q. 5 Analyse the usefulness of the Boston Matrix for companies such as Superdry.

Level Marks Descriptor Possible content

1 1-2 Knowledge/understanding: of

Boston matrix

Reference to market growth &

market share

2 3-4 Application: of the matrix to

Superdry

Potential identification of stars,

cash cows etc from Evidence F

3 5-6 Analysis: how useful is this for

companies such as Superdry?

Help Superdry to focus on rising

stars e.g. …

4 7-8 Evaluation: some balanced wrap-up E.g. on the other hand, loyalty to

fashion items is weak; the overall

brand is probably much more

important than individual lines

5



Q. 6 Assess the likely demands placed on Superdry’s resources (financial, physical,

human) given its rapid expansion.


1 1-2 Knowledge/understanding: of

financial, physical & human

resources

Brief explanation of any two

2 3-4 Application: to Superdry E.g. Evidence H balance sheet for

financial & physical resources

3 5-7 Analysis: e.g. how rapid expansion

would place demands on these

resources

e.g. €7 million cash paid to owner

of CNC (Evidence D); decline in

acid test ratio in Evidence H

4 8-9 Evaluation: some balanced wrap-up On the other hand, most of the

CNC purchase paid for by offering

shares

*Q.7a With reference to Evidence J, evaluate the likely impact of Superdry’s corporate

culture on its past growth and future growth potential.


1 1-2 Knowledge and understanding

present - e.g. of corporate culture

and/or past growth & future

growth potential

QWC: struggling with business

terms, frequent errors in spg

Growth in terms of turnover or profit,

measured in % pa

2 3-6 Application: e.g. reference to

corporate culture in Evidence J

QWC: uses some business terms,

weak style, some spg errors

Youth & university culture initially,

perhaps turning into something more

‘mainstream’

3 7-13 Analysis

7-10: elementary discussion

attempted but lacks depth /

development

11-13: clear analysis with some

depth / development

QWC: comfortable use of

business terms, appropriate style,

reasonable-to-good spg

Initial appeal based entirely on youth

/ hip image; essential for its growth

But what about future growth? A

youth image may help it expand

internationally – as indeed it is doing

4 14-20 Evaluation:

14-17: some evaluative

summation

18-20: informed, realistic and

personal conclusion

QWC: effective use of business

terms, organised, coherent and

fluent response, good-to-excellent

spg

On the other hand, are there enough

young people with enough money for

sales to continue to grow?

Or will it have to move to the

‘mainstream’ (Evidence J)?

Trick is – can it move mainstream

without losing its existing core

customers?

6



*Q.7

b

Evaluate the potential for conflict between Superdry’s ethical ideals outlined in

Evidence G, and the conventional business objectives of increasing turnover and

profit.

Leve

l

Marks Descriptor Possible content

1 1-2 Knowledge and understanding present i.e.

of ethical ideals

QWC :struggling with business terms,

frequent errors in spg

e.g. treatment of all

stakeholders, not just

shareholders

2 3-6 Application: e.g. to Superdry

QWC: uses some business terms, weak

style, some spg errors

e.g. Evidence G refers to

honesty, SEDEX, monitoring

of suppliers

3 7-17 Analysis:

Low level 3: 7-10 marks – basic

commentary

Mid-level 3: 11-13 marks – makes a range

of analytical points

High level 3: 14-17 marks – makes a range

of analytical points in depth

QWC: comfortable use of business terms,

appropriate style, reasonable-to-good spg

Detailed look at supplier

supervision – which ones will

raise costs, which ones will

not?

Being ethical has both a

monitoring cost, and an

underlying cost if goods

become more expensive

4 18-30 Evaluation:

Threshold Level 4: 18-19 marks; some

evaluative summation

Low Level 4: 20-22 marks; a narrow range

of evaluation

Mid Level 4: 23-26 marks; wide range of

evaluation, if not at the highest level

High Level 4: 27-30 marks; informed,

realistic and personal summation based on

detailed consideration – at the highest level

QWC: effective use of business terms,

organised, coherent and fluent response,

good-to-excellent spg

Have to balance these

additional costs against

possible extra sales (whether

due to positive publicity or

avoidance of bad); increased

motivation for workforce and

effective PR.

Also depends on positioning

– difficult for a cost leader to

pay for being ethical. But

Superdry hardly one of those.

Can probably afford a little

ethical stardust.

7



Q Know-

ledge

Appli-

cation

Analy-

sis

Evalu-

ation

Total Specification coverage (all 4.3.1a)

1 2 2 Corporate culture

2 2 2 Corporate Social Responsibility

(CSR)

3 2 2 4 Competitive advantage

4 2 2 1 5 Corporate strategy

5 2 2 2 2 8 Boston matrix

6 2 2 3 2 9 Effects of strategic & tactical

decisions on human, physical &

financial resources

*7a 2 4 7 7 20 Corporate culture

*7b 2 4 11 13 30 Potential conflicts of ethical

behavior and profit-based

objectives

Total 16 16 24 24 80

8



Unit 4a, Section 1 – Corporate objectives and business strategy:

suggested answers

SECTION A: about 35 minutes, 6 questions, 30 marks

The total of 30 marks is split roughly 10 for Knowledge/Understanding, 10 for Application, 6

for Analysis and 4 for Evaluation:

Knowledge – show that you know and understand relevant business concepts

Application – show that you know how these concepts are relevant to the question

asked

Analysis – show that you can make thoughtful observations about the business

situation, using these concepts

Evaluation – come to a balanced and considered conclusion, showing depth of

understanding

1. What is meant by ‘corporate culture’ (Evidence J, final paragraph)? (2)

Answer: The corporate culture of a company describes the collective behaviour of its

employees, based around a shared set of assumptions. Examples might be a formal culture,

based on respect for the boss, or a relaxed, creative culture where employees are expected to

work out their own schedules. In Superdry’s case, the culture is young and trendy.

2. What is meant by ‘Corporate Social Responsibility’ (Evidence G)? (2)

Answer: Corporate Social Responsibility describes the self-regulation that many companies

impose on themselves with respect to their ethical behaviour. This might includes general

values such as honesty (as Superdry mentions at the start of Evidence G) and/or more specific

approaches outlining – for example – commitments to the environment or to their suppliers.

3. Explain how Superdry has sought to gain competitive advantage. (4)

Answer: A company gains competitive advantage if it manages to place itself in a favourable

position relative to its rivals. This could include lower costs, higher quality, or a stronger

brand profile. In the case of Superdry, one way it has sought competitive advantage is by

leasing a prime site in the world-famous Regent Street in London. Only the strongest brands

can afford a site in Regent Street, so setting up shop there sends a strong signal that your

brand has ‘arrived’.

Another way it seeks to gain competitive advantage is to react very quickly to changing

fashion. We see in Evidence F how it is widened its T-shirt graphics from just six designs to

over 400 in the space of eight years. Having chosen a fast-moving industry, Superdry must –

in its own words – ‘continually evolve’ its brand.

4. Briefly comment on Superdry’s business (i.e. corporate) strategy (Evidence B). (5)

Answer: A corporate strategy is the long-term direction that a business takes in order to

achieve its corporate objectives and so – ultimately – achieve its mission. It may be couched

in terms of targets for turnover, profits, geographical reach or market share.

In Superdry’s case, we are told in Evidence B that the emphasis is on growth ‘in the UK and

internationally’ with the focus being on its chosen market segment, namely youth fashion.

Given Britain’s strong reputation in creative industries, seeking to leverage the brand onto an

international scale is an obvious strategy. We see in Evidence D that they have already

embarked on this with the acquisition of CNC.

9



However, the fashion industry is notoriously fickle. Today’s hot brand can very quickly

become yesterday’s news, so Superdry should take care not to over-extend itself. Sensibly,

the purchase of CNC is being funded predominantly by the sale of equity, rather than

following the riskier path of taking out a loan.

5. Analyse the usefulness of the Boston matrix for companies such as Superdry. (8)

Answer: The Boston matrix is a way of categorising a company’s product mix on two

criteria, the market share of each product and the rate of market growth in that product area.

So products in low-growth, mature industries are called cash cows if they have a large market

share and dogs if they do not. In fast-growing industries, the equivalent products are called

rising stars and problem children.

In Evidence F we are given some indication of what Superdry’s product mix is, with the well-

established T-shirts, polos and hoodies presumably having a high market share. By contrast,

the ‘development’ categories like luggage and fragrance are areas where Superdry, as yet, has

a low market share.

However, none of these categories could be regarded as particularly high growth – at least not

in the UK where the entire clothing market is mature, and there is very little possibility of

technical developments leading to radically new products. The Boston matrix may, therefore,

work better in a traditional manufacturing context, where there is a greater possibility of

genuinely new products.

Nonetheless, one of the main points from the Boston matrix does hold good. Superdry will

have its cash cows, presumably its UK core range, and this can be used to fund development

of other markets. These might either be selling the same products in more countries, or

extending the product range in the UK. The basic message from the Boston matrix about the

need to fund tomorrow’s winners from today’s successes holds good in every industry.

6. Assess the likely demands placed on Superdry’s resources (financial, physical, human)

given its rapid expansion. (9)

Answer: Superdry is expanding both in terms of product range (see Evidence F), and in terms

of geographical spread (Evidence G). The combination of these two growth paths is evident

in the balance sheet (Evidence H) with its near doubling of both stock and short-term

creditors over the single year 2010-11.

However, it does not follow that it is financially stretched. We are told it specialises in

‘affordable, premium quality clothing’ which sounds like the products will have a healthy

gross margin. Certainly there appears to be no shortage of cash in the business, though it is

noticeable that cash reserves have not grown with the rest of the business over 2010-11.

Nor will physical resources prove much of a stumbling block. High Streets have been

decimated by a combination of the 2008-09 recession and the switch to Internet shopping, so

it will be relatively easy to lease space. Evidence C shows this to be the case, with a rapid

growth over 2007-11 in both stand-alone stores and concessions.

The main pinch point is likely to come in the area of human resources. Finding staff for its

stores and concessions will be no problem, as the same trends mentioned earlier that have left

High Street stores vacant will also have left plenty of shop assistants looking for work.

However, the same cannot be said for top management which is often the input in shortest

supply. Fashion retailing needs a particularly sure touch given the hyper-competitive, ever-

changing nature of the market. We read in Evidence J that Superdry has sought to address

this issue by hiring John Lewis’ director of fashion and beauty, Susanne Given. But John

10



Lewis, with its proud co-operative traditions stretching back many decades, is a very different

sort of store to Superdry.

In conclusion, we will have to wait and see whether Susanne Given – and indeed the new

team from CNC mentioned in Evidence D – can effectively manage the tensions created by

Superdry’s rapid expansion, as it transitions from upstart outsider to the fashion mainstream.

SECTION B: about 55 minutes, 2 questions, 50 marks

These questions involve extended writing, and the total of 50 marks is split roughly 6 for

Knowledge/Understanding, 6 for Application, 18 for Analysis and 20 for Evaluation. Note

the strong contrast with Section A, where two-thirds of the marks were for

Knowledge/Understanding and Application.



asked




understanding

*7a With reference to Evidence J, evaluate the likely impact of Superdry’s corporate culture

on its past growth and future growth potential. (20)

Answer: A company’s corporate culture describes the way its employees think and act,

based on their understanding of who they are, and what their company is about. In Evidence

J we have several indications that Superdry has (or at any rate had) a young, fashion-

conscious culture. Stores were set up in university towns, it is described as a hip company

where ‘no one wears a tie’ and it employs staff who are ‘young trendy … good-looking’.

Given that its target market, as described in Evidence B, is youth fashion it was absolutely

essential that it had this image. It would have been impossible to establish the brand if its

staff had worn suits and ties! Its corporate culture was, therefore, an absolutely essential part

of its early growth.

However, just because its corporate culture was an essential part of its early growth, we

should not imagine that that was all there was to it. For every Julian Dunkerton whose market

stall turns into a billion-pound business, there will be thousands of others who remain

stallholders all their lives. Incredibly hard work, all-round managerial skills and a healthy

dose of luck are all likely to have been essential ingredients of its early growth. Yes, the

corporate culture was necessary, but it was by no means sufficient on its own.

With regard to its future growth potential, the existing corporate culture is both a blessing and

a curse. It is a blessing in its international expansion plans, as there are tens of millions of 18-

25s worldwide, many of whom are getting a lot richer than the previous generation at a

similar age. Beyond Europe lie both North America and the growing BRIC economies,

which are ready to spend serious money on top UK brands, as we have seen in a different

market with the recent soaring overseas sales of Jaguar-Land Rover. If Superdry can ride on

its ‘Cool Britannia’ image, supported by David Beckham among others, then the £1.2 billion

valuation mentioned in Evidence J may only be the beginning.

On the other hand, as the years pass, its existing core customers are getting older. The

question then becomes, how does it hang onto its 20-year-old customers of 2010 when they

11



are 30 years old in 2020? Or does it accept that it will lose them, and be replaced by the next

generation of 20-year-olds? The problem, of course, is that the next Superdry is already

there, hiding among a thousand market stalls, ready to sell a fresh image to the next

generation of teenagers. In reality, it is very difficult to stay at the cutting edge of teenage

fashion: the market is simply too unpredictable.

It is therefore likely that Superdry will tone down its youth image and become more of a

young-adult mainstream fashion label as it follows its existing customers up through their

twenties, taking advantage of their rising salaries. We already have an indication of this at the

end of Evidence J, where reference is made to its ‘changing corporate culture’, and its hiring

of a John Lewis director. John Lewis is a traditional retailer whose reputation is excellent,

but who is not particularly associated with either fashion or young people.

In conclusion, corporate culture is not an unchanging given. Superdry will attempt to hang on

to its youth fashion image, but at the same time make it easy for older people to buy its

products too. It will be the skill with which it manages to bridge this gap, developing a

corporate culture that appeals to the young but also to the not-quite-so-young, that will

determine its future growth path. With skill and luck, it may succeed in appealing to both age

groups. The danger is that it ends up appealing to neither, as is suggested at the end of

Evidence J by the ‘profit warnings early in 2012’.

*7b Evaluate the potential for conflict between Superdry’s ethical ideals outlined in

Evidence G, and the conventional business objectives of increasing turnover and profit. (30)

Answer: Like many businesses, Superdry claims to have ethical ideals, that is, to act in a

moral and responsible fashion in all its business dealings. Evidence G comes from

Superdry’s own share offer prospectus, and provides some indication of what they think

acting responsibly means in practice.

This includes a general statement about acting ‘with integrity and honesty’ (paragraph 1).

There is no conflict between this aim and their aims of increasing turnover and profit.

Superdry relies on repeat business from its customers and this will not be possible to achieve

without a great deal of trust. If Superdry were to be constantly in the newspapers for claims

about unfair dismissal of staff, exploitation of suppliers or a miserly attitude towards

customers wishing to return goods, then that level of trust would soon evaporate. Of course,

if Superdry were cost leaders selling itself on the basis of the lowest price, then its customers

might be prepared to tolerate a poor reputation. Some low-cost airlines, for example,

positively revel in their less-than-perfect reputations. However, for a brand which describes

itself as selling ‘affordable, premium-quality clothing’ (Evidence B), customers will want the

brand to have a feel-good factor about it. There is no surer way of losing a feel-good factor

about a brand than to have a constant drip of negative publicity. The best way to avoid this is

to have nothing to hide in the first place –in other words, to act with integrity and honesty.

Superdry’s commitment to ethical ideals is further spelled out in some detail in the rest of

Evidence G. In particular, the way suppliers operate is discussed in some detail. Recent

adverse publicity about Western garment manufacturers profiting from ‘sweatshops’ in poor

countries have brought this matter very much to the forefront of public discussion. It would,

therefore, be virtually impossible for a new brand like Superdry not to have a policy on this

issue.

The question is: will this damage profits? The whole point of making garments in poor

countries is to benefit from the low wages that local workers are paid. Garment manufacture

is still a labour-intensive industry, which is why it gravitates to low-wage countries. These

are the places that have a comparative advantage in these sectors of the economy, and – as the

theory indicates – they actually stand to gain from such specialisation along with everyone

12



else. If Superdry’s commitment to acting in a socially responsible manner means that their

suppliers in Bangladesh, China and Vietnam have to pay the same wage rates as those paid in

rich countries, then Superdry would have to pay a lot more for its clothes than everyone else,

and their profits will indeed be damaged.

However, a careful reading of Evidence G shows that Superdry’s stated policy with regard to

its suppliers is actually going to cost it very little. First of all, the organisation which

Superdry has joined (called SEDEX) will not be calling Superdry to account. The name ‘data

exchange’ suggests it is an information-sharing forum, rather than an organisation empowered

to conduct surprise inspections on Superdry’s suppliers. Superdry remains firmly in the

driving seat, simply using SEDEX’ ‘system and tools’.

Then the final paragraph simply states that Superdry ‘expects’ its suppliers to adopt ‘fair and

ethical labour practices’. There is no suggestion as to what action – if any – Superdry might

take if these expectations were not fulfilled. Superdry has said it expects its suppliers to use

‘no forced labour’ and ‘no physical maltreatment’. Refusing to profit from slavery, and from

beating up workers, is hardly at the cutting edge of good practice!

As far as costs go, the key issues are the wage levels paid and the working hours expected in

the Superdry supplier factories. Here, no assurances are given at all. Instead, we are told that

wages will be ‘fair’ and working hours ‘reasonable’ (final paragraph, Evidence G). These

phrases are capable of almost any interpretation. They are so vague as to be meaningless.

In conclusion, on the basis of the evidence presented to us, there is no reason to think that

Superdry has committed itself beyond the bare minimum expected of an upmarket clothing

brand. Its rivals will all have similar statements, some of which may indeed be worded rather

more strongly than the modest offering we have here. Its ethical ideals, such as they are,

seem unlikely to cause any serious conflict with the conventional business objectives of

increasing turnover and profit.

Of course, if Superdry had taken a stronger ethical stance, then this might well have increased

its costs. In such a case, it is still possible that profits would be unaffected. It might well be

possible to pass on these increased costs in return for the extra brand value that a strong

ethical stance would create. This is the path taken by Fair Trade products where, in return for

outside endorsement from the Fair Trade organisation, workers really are paid more than they

otherwise would be paid – and this extra is passed on to consumers in the form of higher

prices.

13



Instructions

Use black ink.


number.



Information





Advice







Unit 4a Topic Tests based on


Surname Other name


Section 2: Making strategic decisions

Date:


Paper Reference

6BS04/01


examination paper

Total Marks

14



SECTION A



marks).



SuperGroup slows in 2012

In April 2012, SuperGroup, owner of the Superdry clothing brand, announced

disappointing financial results.

It was acknowledged that the current economic environment had contributed to the

company’s difficulties. However the Chairman, Peter Bamford, admitted that the

“problems have largely been self-inflicted”.

In the past three years, Superdry has grown at a rapid pace. There has been a

particular focus on overseas expansion as the following figures indicate:

Opened 37 new stores in the UK (up from 42 to 79)

Opened 72 new stores in other countries (up from 29 to 101)

Suffered from stock shortages

Not increased the management and operational capacity sufficiently to keep

up with the increasing size of the business, leading to a declining Average

Rate of Return on new stores

Some business analysts have suggested that Superdry should have undertaken a more

thorough investment appraisal before embarking on such a rapid expansion.

Sources: adapted from media reports, mid-2012

15



1. What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? (2)

2. What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? (2)

3. Explain how Net Present Value calculations are useful when making

investment decisions, such as acquiring a franchise partner (Evidence D). (4)

4. Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s

strategic direction. (5)

5. Assess the usefulness of Critical Path Analysis for Superdry when opening a

new store, such as the Regent Street branch (Evidence I). (8)

6. Assess the role of contingency planning for Superdry, when launching new

product categories. (9)

SECTION B


Read the following evidence carefully.

Using ALL the evidence and your own knowledge, answer both parts of the



7. Superdry is considering the development of their product range (Evidence F).

Some of the options being considered are to:

a. Develop the core range

b. Introduce womenswear

c. Develop and introduce a range of luggage

Option Probability of market reaction and

projected profit

Good Moderate Poor

a. 50% £60m 30% £30m 20% £10m

b. 30% £100m 30% £30m 40% - £20m

c. 30% £30m 50% £nil 20% -£10m

The estimated probability factors are based on the reactions of a focus group

of Superdry’s target market.

*(a) Construct a decision tree based on the information above, and advise Superdry

how to proceed. (20)

*(b) Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J).

(30)

16



Unit 4a, Section 2 – Making strategic decisions: mark scheme

Note: Any acceptable answer which shows the range of skills required may score full marks

Q. 1 What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? Mark

Knowledge up to 2

Simple definition e.g. the average annual profit of an investment over its

lifetime, expressed as a percentage of the initial investment outlay (1); any

extension such as fuller explanation, or example (1)

Does not have to be related to Evidence J, though this is one way to gain

marks - provided information is not simply repeated

1-2

Total: 2

Q. 2 What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? Mark

Knowledge up to 2

Simple definition e.g. the assessment of a proposal to put money into a

project with the hope of a future return (1); any extension such as fuller

explanation, or example (1)

Does not have to be related to Evidence J, though this is one way to gain

marks - provided information is not simply repeated

1-2

Total: 2

Q. 3 Explain how Net Present Value calculations are useful when making

investment decisions, such as acquiring a franchise partner (Evidence D).

Marks

Knowledge up to 2

Simple explanation e.g. to work out how much a proposed investment is

currently worth, bearing in mind that money received in the future has a

lower value than money in the present (1); some extension e.g. the basis

on which future money is discounted to arrive at a present value, or the

significance of ‘net’ (1)

Application up to 2

Any example – including acquiring a franchise partner; producing notional

figures one way to achieve marks, but not necessary

1-2

1-2

Total: 4

17



Q. 4 Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s

strategic direction.

Marks

Knowledge up to 2

Some understanding of the matrix, e.g. four expansion options based on

whether a) new markets, and b) new products are developed – or not (1-2)

Application up to 2

Examples of product development and/or market development and/or

penetration and/or diversification

Analysis: 1

Some comment e.g. which expansion option (or options) seem most

important to Superdry

1-2

1-2

1

Total: 5

Q. 5 Assess the usefulness of Critical Path Analysis for Superdry when opening a new

store, such as the Regent Street branch (Evidence I).


1 1-2 Knowledge/understanding:

Of CPA e.g. general definition, and some

extension

2 3-4 Application:

e.g. working out the length of CPA, what the

absolute requirements are to achieve it

3 5-6 Analysis:

Comment e.g. value of knowing ‘float’ for

various activities; need to factor in slippage

4 7-8 Evaluation: some balanced

wrap-up

e.g. value as a means of reducing

management costs if opening a series of

stores; basic CPA only has to be done once.

Limitation – needs to be efficiently executed

Q. 6 Assess the role of contingency planning for Superdry, when launching new product

categories.



Definition with some extension e.g. likely

contingencies

2 3-4 Application:

e.g. explanation of relevant contingencies,

possibly including failure of product

category

3 5-7 Analysis:

Need to ‘protect the downside’ commented

upon.


wrap-up

e.g. protecting the downside not in itself a

strategy for success; just one building block

in a much wider set of business skills

required

18



*Q.7a Construct a decision tree based on the information above, and advise Superdry how

to proceed.



present.



Basic understanding of decision

trees

2 3-6 Application: to figures in preamble



Decision square with three

options (1); three circles each

with three outcomes (1);

numerical value of each decision

identified (1-2)

3 7-13 Analysis

7-10: elementary discussion attempted

but lacks depth / development

11-14: clear analysis with some depth

/ development

QWC: comfortable use of business

terms, appropriate style, reasonable-

to-good spg

Why core range development

offers the greatest potential

returns for the lowest risk;

possibility of choosing 2 or 3

options – all have net positive

values;

particular value of womenswear

4 14-20 Evaluation:

15-17: some evaluative summation

18-20: informed, realistic and personal

conclusion


organised, coherent and fluent

response, good-to-excellent spg

Constraint of management time

and expertise (see end of

additional Evidence J); also,

possibly, of cash;

luggage is most different and has

limited upside – most obvious

one to sacrifice;

limitations of decision trees

19



*Q.7b Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J).


1 1-2 Knowledge and understanding present.



e.g. of expansion,

acquisition

2 3-6 Application: to Superdry’s overseas

expansion



Purchase of its leading

franchisee, CNC (Evidence

D); opening of new stores

overseas (Evidence J)

3 7-17 Analysis:

Low level 3: 7-10 marks – basic analysis

Mid-level 3: 11-13 marks – looks at a

range

High level 3: 14-17 marks – looks at a

wide range



Concepts that could be used

include brand leverage,

economies of scale,

Ansoff’s matrix, global

youth culture, competitive

advantage, market

saturation

4 18-30 Evaluation:



Low Level 4: 20-22 marks; a narrow range

of evaluation

Mid Level 4: 23-26 marks; wide range of

evaluation, if not at the highest level



detailed consideration of a variety of points

– at the highest level




On the other hand: limited

management capacity &

product diversification also

taking place, cultural

differences of doing

business, competitive

responses, loss of focus on

core UK markets

Question Know-

ledge

Appli-

cation

Analy-

sis

Evalu-

ation

Total Specification coverage (all

4.3.2a)

1 2 2 Average Rate of Return

2 2 2 Investment appraisal

3 2 2 4 Net Present Value

4 2 2 1 5 Ansoff matrix

5 2 2 2 2 8 Critical Path Analysis

6 2 2 3 2 9 Contingency planning

*7a 2 4 7 7 20 Decision trees

*7b 2 4 11 13 30 Overseas growth

Total 16 16 24 24 80

20



Unit 4a, Section 2 – Making strategic decisions: suggested answers






asked




understanding

1. What is meant by ‘Average Rate of Return’ (Evidence J, bullet points)? (2)

Answer: The Average Rate of Return is the average annual profit of an investment over its

lifetime, expressed as a percentage of the initial investment outlay. The average profit is

calculated after deducting the cost of the equipment, so a true rate of return may be calculated

which may be compared with what the investment outlay could have earned if left in the bank

to gain interest.

2. What is meant by ‘investment appraisal’ (Evidence J, last paragraph)? (2)

Answer: Investment appraisal is the process of assessing the likely returns on spending

money now on a project which, it is hoped, will generate returns in the future. Investment

appraisal may involve using formal mathematical techniques, but may equally well be

conducted informally by reflecting on the proposed project in the light of past experience.

3. Explain how Net Present Value calculations are useful when making investment decisions,

such as acquiring a franchise partner (Evidence D). (4)

Answer: The Net Present Value (NPV) of an investment is a way of working out how much

the expected future profit earned (minus the initial cost) is worth in today’s money. Future

earnings are discounted by the rate of interest in order to find out how much money you

would need today (if then invested in a savings account) to get the amount of money

generated by the project in the future. The equivalent in today’s money is known as the

‘present value’ of the future profit. So in the case of Superdry’s acquisition of CNC (see

Evidence D), expected future profits could be discounted to arrive at their present value.

Only if they were substantially more than the €40 million asking price should the purchase

have gone ahead.

4. Briefly explain how Ansoff’s matrix could be used to illustrate Superdry’s strategic

direction. (5)

Answer: Ansoff’s matrix presents four expansion options, based on whether increased sales

are to come from new or existing markets, and from new or existing products. At least three

of these options are evident from the Evidence on Superdry’s expansion. Selling the existing

product range to more UK customers through the opening of new stores and concessions is an

example of market penetration, as shown in Evidence C. Selling a wider range of products to

existing customers is called product development, and we see this in Evidence F where the

number of T-shirt graphics has expanded from 6 to over 400. At the same time, the

21



expansion into new overseas markets recorded in Evidence D and F is an example of market

development.

So in the case of Superdry, Ansoff’s matrix shows that the company is expanding in almost

every direction. Only Ansoff’s fourth expansion option of selling totally new products into

totally new markets (known as diversification) is not explicitly mentioned in the Evidence.

5. Assess the usefulness of Critical Path Analysis for Superdry when opening a new store,

such as the Regent Street branch (Evidence I). (8)

Answer: Critical Path Analysis (CPA) is a means of working out in detail which small tasks

need to be done when in order to get a project completed in the shortest possible time. In

order to work out a CPA, you need to define all the tasks that need doing, the time each task

will take, and which tasks cannot be started until other defined tasks have been completed.

For example, a new store cannot be painted in Superdry colours until after the electrics have

been installed and the plaster work repaired.

CPA will be an absolutely essential tool for Superdry. Every new store opening will need

very much the same set of procedures to follow, so it will be a great time saver to get CPA

worked out for one new store, and then re-use it (with minor modifications) for all the others.

Unit costs of opening should fall, and – crucially – the new stores should get under way and

earning money as soon as possible.

However, drawing up a schedule – which is what CPA amounts to – does not in itself get any

work done. As well as the plan, dedicated implementation is also required, with managers

thinking flexibly when unexpected obstacles crop up. So if, for example, a burst water main

flooded the shop during refurbishment, staff and managers might have to work evenings and

weekends to make up the lost time and stick to the published launch date. In conclusion,

good technical analysis such as that provided by CPA has to be matched with a motivating

management team and a can-do attitude to get the job done.

6. Assess the role of contingency planning for Superdry, when launching new product

categories. (9)

Answer: Contingency planning describes the process of working out what to do if something

bad (i.e. the ‘contingency’) happens. Some contingency planning will be relatively

straightforward, such as taking out buildings insurance in the event of flood or fire, and ‘key

man’ insurance in case the company’s most important person falls ill and is unable to work.

In the case of launching a new product category, the most likely contingency to guard against

would be if the new category flops. In Evidence F, we see that Superdry is planning to move

into luggage and fragrance – quite a stretch from T-shirts and hoodies, and therefore quite a

risk.

The role of contingency planning will revolve around protecting the downside i.e. making

sure that the company loses as little money as possible if the new product launch doesn’t

work. One way of doing this would be to order a relatively small amount of stock prior to

launch, so that if it fails to sell the company will not be left with too much unsold stock.

Similarly, rather than employing extra staff right away, it might make better sense to offer

overtime to existing staff before going to the expense of recruiting and training extra people

who might then not be needed.

However, contingency planning will be only one very small part of the overall planning

needed for a new product launch. While protecting the downside, Superdry will also want to

do everything in its power to make the new product category a success. Product development

and market research will be required, and possibly test marketing too. Then the launch itself

will need point-of-sale materials and probably the assistance of an advertising agency and a

PR company too. It is the task of management to juggle these many tasks and make sure that,

in the event of failure, there is a plan for that too.

22










asked




understanding

7. Superdry is considering the development of their product range (Evidence F). Some of the

options being considered are to:

a. Develop the core range

b. Introduce womenswear

c. Develop and introduce a range of luggage

Option Probability of market reaction and

projected profit

Good Moderate Poor

a 50% £60m 30% £30m 20% £10m

b 30% £100m 30% £30m 40% - £20m

c 30% £30m 50% £nil 20% -£10m

The estimated probability factors are based on the reactions of a focus group of Superdry’s

target market.

*7a Construct a decision tree based on the information above, and advise Superdry how to

proceed. (20)

Answer: A decision tree is a tool which helps a business person decide between different

courses of action, where the probabilities of various outcomes (and their financial

consequences) are known with some degree of certainty.

So in this case, developing the core range generates between £60 million and £10 million,

with an average outcome of £41 million once we have taken into account the relative

probabilities of each result. The figure is the sum of (50% x £60m) and (30% x 330m) and

(20% x £10m). Similar calculations value the introduction of womenswear at £31 million,

and the development and introduction of luggage at just £7 million.

These options are outlined in the decision tree below. The square represents a decision to be

made – in other words should the company choose option A and/or B and/or C? The circles

represent unknown outcomes with probabilities and financial outcomes attached.

With these figures, developing the core range (option A) generates the most financial return

on average and is also the safest option as no money is lost on the worst-case outcome.

However, all three options generate a positive financial return, so a case could be made for

doing all three together.

23



However, one piece of information we have not been told is what the initial investment

expenditures are on the various options. We might guess that option A is the lowest-cost

option as it is the least radical. We might expect greater marketing expenditure to be

associated with penetrating new markets such as womenswear and luggage compared to

sticking with the same broad product category.

As well as the implications of following all three options together on cash flow, we also have

to consider whether Superdry has the management capacity to develop all three at the same

time. In other words, the probabilities of success with each investment may not be

independent of each other, with the ‘good’ outcomes significantly less likely to be achieved if

all three are attempted at once. Indeed, this is the criticism leveled at Superdry in Evidence J,

where business analysts suggested that ‘more thorough investment appraisal’ was needed

before such ‘rapid expansion’ took place.

Finally, as with any decision tree, the outcomes are only as good as the figures that are put

into the system in the first place, and we have very little evidence to guide us as to what the

probabilities are based on other than the single sentence that they come from ‘reactions from

a focus group’. Critical information which has not been included is any indication as to what

competitors’ responses might be. This would be particularly relevant to Options B and C,

where Superdry will need to take market share from others if it is to enter these new markets

successfully.

However, even on the limited information which we have, it is possible to recommend Option

A because of the relatively low risks and high returns expected. Options B and C could not

be recommended in addition without first acquiring significantly more information along the

lines suggested.

*7b Evaluate Superdry’s decision to focus on overseas expansion (Evidence D and J). (30)

Answer: In Evidence D we see that Superdry has spent €40 million acquiring CNC, its

‘leading global franchisee’. As a result of this move, sales of Superdry products will not

increase immediately because CNC are already selling them. Rather, the profit margin on

their sales should increase because CNC will no longer need to be paid for selling them. This

is the point made in the final paragraph of Evidence D where the Superdry founder says the

move will allow Superdry to “capture additional gross profit”.

Evidence J paints a broader picture showing how, over the course of three years, the number

of Superdry’s overseas stores has risen from 29 to 101 – over a threefold increase. This is a

much faster rate of expansion than UK stores, which have less than doubled in number (42 to

79) over the same time period. Superdry’s overseas expansion is, therefore, aimed at

24



increasing both sales volume and profit margin. To the extent to which these objectives are

achieved, profits will rise.

We might ask, have we any reason to believe that they will be successful in these ambitions?

Part of the reasoning behind their overseas expansion is that Britain has strong creative

industries and is seen as a world leader in youth culture, particularly in areas such as music

and fashion. This comparative advantage can be exploited by individual companies who also

have a competitive advantage of their own. In Superdry’s case, the latest ‘from Britain’ youth

brand should have strong global appeal. Put another way, the main reason for rapid overseas

expansion is the opportunity it provides successfully to leverage the brand that is Superdry.

In any case, the risks are minimized insofar as CNC is already selling Superdry products in

Europe as a franchisee. So it is not as though Superdry is taking a complete leap in the dark.

Rather, it is leveraging its existing brand asset to scale up in overseas markets, some of which

at least it has already successfully penetrated.

On the other hand, Evidence J points to Superdry’s “disappointing financial results” in April

2012, and goes on to suggest that too-rapid expansion may be to blame. There is a warning

sign of impending trouble in Evidence C, where revenue between 2010 and 2011 is virtually

unchanged, even though UK outlets increased by nearly 50% at the same time. In other

words, sales per square foot were sharply down.

One set of disadvantages of rapid expansion are known as ‘management diseconomies of

scale’, i.e. the fact that large companies are harder to manage effectively than small ones.

These will be particularly significant when companies are expanding rapidly: there may

simply be too much for the existing management team to do. Particularly for a fashion brand

such as Superdry, it will be essential that each new product that is rolled out every few days

or weeks is fully up-to-date and successfully anticipates emerging trends. This is an

extremely difficult task for anyone to achieve, and if the senior management are engaged in

trying to understand overseas markets and negotiate acquisitions with people who will know

their own national markets far better than Superdry’s management ever will then you can

appreciate the scale of the task that Superdry has set itself.

Furthermore, with any acquisition, the price is an extremely important part of the whole deal.

We might wonder whether Superdry’s in-a-hurry management are going to be any match for

Luc Clément when it comes to settling on a price for Luc’s company, CNC (see Evidence D).

Superdry’s existing shareholders have had to dilute their own shareholding to give Luc an

equity stake in order to persuade him to sell so it is important that Superdry has got good

value from the deal.

In conclusion, a better strategy would have been to focus on building market share in the UK

where Superdry’s management expertise already lies. The very fast UK expansion shown in

Evidence C would have been enough to keep Superdry’s management team busy. This is not

to say that overseas markets should be ignored completely. Rather, they can be skimmed for

easy sales and high profit margins by the much less expensive option of building national

websites. These will not achieve the same degree of market penetration as a bricks-and-

mortar operation, but will demand much less in the way of capital outlay and – crucially – the

management time of Superdry’s team. Indeed, we see at the end of Evidence C that this

expansion path has been successfully introduced.

Superdry would have done better to leave it there – for now – while focusing on their

heartland UK operations. The key objective for a young brand has to be to establish its value,

its reputation, in its most important market. In the case of Superdry, it made a good start, but

the comment at the end of Evidence A that it still “flies under the radar” shows that it is not

yet well-established in the UK. Only when the brand is on a secure footing can the

management team afford the time to seek to go global.

25



Instructions

Use black ink.


number.



Information





Advice









Surname Other name


Section 3: Assessing competitiveness

Date:


Paper Reference

6BS04/01


examination paper

Total Marks

26



SECTION A



marks).



Financial information from SuperGroup plc

£m 2011 2010

Share capital (i.e. equity) 150.8 100.5

Long term liabilities 38.9 16.6

Total capital employed 189.7 117.1

Revenue 237.9 139.4

Pre-tax profit 50.2 26.5

The above figures can be used to work out the Return on Capital, the profit margin

and the gearing ratio.

Source: SuperGroup annual report, 2011

Staff retention

As the economy began to improve in 2010, experts were warning companies,

particularly in the retail and service industries, to think carefully about their staff

retention planning. A survey conducted by PricewaterhouseCoopers (PwC) found that

an average of 10.4% of staff resigned from their job in 2009. They estimated that this

cost the UK £42bn in one year.

Experts urge companies to weigh up the short term cost of increasing salaries, against

the long term costs of additional recruitment and training. In 2010, SuperGroup Plc

employed an average of 798 people. In 2011, this had increased to 1,277.

Source: adapted from media reports in 2010 and 2011

27



1. What is meant by ‘profit margin’ (Evidence J)? (2)

2. What is meant by ‘creditors’ (Evidence H)? (2)

3. Explain how SuperGroup would calculate their labour productivity. (4)

4. Calculate and comment on the significance of the change in SuperGroup’s

Return on Capital between 2010 and 2011 (Evidence J). (6)

5. (a) Using Evidence H, calculate the SuperGroup’s current ratio for 2010 and

2011. (4)

(b) Comment on the results of your calculations. (4)

6. Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing

ratio from 2010 to 2011. (8)

SECTION B


Read the following evidence carefully.




7. The retail industry tends to have higher labour turnover than other industries.

*(a) Assess the usefulness of labour turnover and labour productivity

calculations in monitoring a company’s organisational effectiveness. (20)

*(b) To what extent do financial data enable us to judge the performance of a

company such as SuperGroup? (30)

28



Unit 4a, Section 3 – Assessing competitiveness: mark scheme

Note: Any acceptable answer which shows the range of skills required may score full marks

Q. 1 What is meant by ‘profit margin’ (Evidence J)? Mark

Knowledge up to 2

1 mark for basic idea, e.g. profit as a percentage or proportion of turnover

Second mark for any extension or example e.g. from Evidence J figures

1-2

Total: 2

Q. 2 What is meant by ‘creditors’ (Evidence H)? Mark

Knowledge up to 2

1 mark for basic idea e.g. money owed in short-term

Second mark for any extension or example e.g. in Evidence H creditors

are likely to be money owed to factories supplying clothes

1-2

Total: 2

Q. 3 Explain how SuperGroup would calculate their labour productivity. Marks

Knowledge up to 2

For formulae – output / number of workers (1); some extension e.g.

output measured in financial or physical terms (1)

Application up to 2

For example, working out labour productivity from Evidence H (1); some

development e.g. Comparison of 2010 and 2011 figure

1-2

1-2

Total: 4

Q. 4 Calculate and comment on the significance of the change in SuperGroup’s

Return on Capital between 2010 and 2011 (Evidence J).

Marks

Knowledge up to 2

1 mark for basic definition – profit / capital employed

Second mark for any extension e.g. profit is annual figure, capital

employed includes both equity and loan capital

Application up to 2

Figure for 2010 (26.5/117.1 =) 22.6% [accept 22 or 23%] (1); and for

2011(50.2/189.7 =) 26.5% [accept 26 or 27%] (1)

Analysis up to 2

e.g. relatively small change – not very significant (1)

e.g. larger ROCE represents more efficient use of capital (1)

e.g. any extension on above point (1)

1-2

1-2

1-2

Total: 6

29



Q. 5a Using Evidence H, calculate the SuperGroup’s current ratio for 2010

and 2011.

Marks

Knowledge up to 2

2 marks for clear formula: current assets / current liabilities

Application up to 2

For 2010: £67m / £24m = 2.8

For 2011: £120.2m / £42.7m = 2.8

1-2

1-2

Total: 4

Q. 5b Comment on the results of your calculations. Marks

Analysis up to 2

e.g. no change, even though both figures have almost doubled – since

they have increased at the same rate, the ratio is unaltered

Evaluation up to 2

e.g. secure ratios – 1.5 or 2.0 normally considered high enough;

SuperGroup should (on these figures) have no difficulty meeting

immediate debts

1-2

1-2

Total: 4

Q. 6 Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing ratio

from 2010 to 2011.



Formula plus brief explanation

2 3-4 Application:

Apply formula: 14.2% in 2010, 20.5% in

2011

3 5-6 Analysis:

Gearing ratio has increased i.e. become more

risky – outstanding loans have increased

faster than equity


wrap-up

However, gearing ratio still very low: almost

80% of funding remains equity, so plenty of

room for further borrowing without undue

risk

30



*Q.7a The retail industry tends to have higher labour turnover than other industries.

Assess the usefulness of labour turnover and labour productivity calculations in

monitoring a company’s organisational effectiveness.


1 1-2 Knowledge and understanding present



Brief explanation of labour

turnover and labour productivity

(1 mark each)

2 3-6 Application: e.g. to Evidence J for

labour turnover



Explanation of why high labour

productivity and low labour

turnover are desirable

3 7-13 Analysis

7-10: elementary discussion attempted

but lacks depth / development

11-14: clear analysis with some depth

/ development


terms, appropriate style, reasonable-

to-good spg

Labour productivity: higher than

industry average might indicate

efficiency – or a more capital-

intensive approach;

labour turnover a higher-than-

industry-average might indicate

ineffectiveness – or simply

position as a cost leader

4 14-20 Evaluation:

15-17: some evaluative summation

18-20: informed, realistic and personal

conclusion




Organisational effectiveness best

measured by some more over-

arching variable, such as ROCE;

however, sharp changes year-on-

year in either labour turnover or

labour productivity would be

worth investigating as a possible

source of changing effectiveness

31



*Q.7b To what extent do financial data enable us to judge the performance of a company

such as SuperGroup?





Shows understanding of 1 or 2

technical terms e.g. profit,

turnover, ROCE

2 3-6 Application: e.g. to SuperGroup



Turnover gives indication of

size; profit of potential return;

ROCE on efficiency of capital

3 7-17 Analysis:

Low level 3: 7-10 marks – basic

analysis


range of factors


range of factors in depth


terms, appropriate style, reasonable-to-

good spg

Most commercial companies

are driven by financial data,

often looking at sales on a daily

basis;

key management tool;

value of time series – this year

compared to last;

value of comparisons with

rivals;

issue of how much financial

data is published, and how

much kept secret

4 18-30 Evaluation:



Low Level 4: 20-22 marks; a narrow

range of evaluation

Mid Level 4: 23-26 marks; wide range

of evaluation, if not at the highest level


realistic and personal summation based

on detailed consideration of a variety of

points – at the highest level




On the other hand:

financial data may fail to pick

up on longer-term

considerations e.g. company

culture, whether staff like

working there & whether

suppliers like the relationship;

financial data needs to be

complemented with ‘softer’

data e.g. labour turnover, staff

satisfaction surveys;

also financial data poor at

picking up long-term

preparedness e.g. how many

new products are in the

pipeline

Ques-

tion

Know-

ledge

Appli-

cation

Analy-

sis

Evalu-

ation

Total Specification coverage (all 4.3.3a)

1 2 2 Profit margin

2 2 2 Balance sheet

3 2 2 4 Labour productivity

4 2 2 2 6 Return on capital

5a 2 2 4 Current ratio

5b 2 2 4 Current ratio

6 2 2 2 2 8 Gearing

*7a 2 4 7 7 20 Labour turnover & productivity

*7b 2 4 11 13 30 Interpretation of financial statements

Total 16 16 24 24 80

32



Unit 4a, Section 3 – Assessing competitiveness: suggested answers






asked




understanding

1. What is meant by ‘profit margin’ (Evidence J)? (2)

Answer: The profit margin of a company is its profit expressed as a proportion or a

percentage of its turnover. So, for example, in 2011 the profit margin of SuperGroup was

£50.2m/£189.7m = 26.5%. In other words, for every £100 of sales, just over £26 was profit.

2. What is meant by ‘creditors’ (Evidence H)? (2)

Answer: Creditors are people to whom you owe money. Where, as in Evidence H, these are

recorded under current liabilities, they refer to short-term debts. For a fashion company like

SuperGroup, these are likely to include the factories which manufacture their clothing.

3. Explain how SuperGroup would calculate their labour productivity. (4)

Answer: Labour productivity measures the output of a company per employee. The output

might be measured in physical terms (e.g. 15 cars manufactured per worker per year) or in

financial terms (e.g. £400,000 of turnover per employee).

Since SuperGroup is a retail brand selling dozens of different lines, a financial measure would

make most sense. Looking at the figures in Evidence J, their labour productivity in 2011 was

£237.9m / 1,277 = £186,296 per employee per year. However this figure will need to be

interpreted with caution, as lots of SuperGroup apparel is sold through franchisees whose

employees are not SuperGroup’s.

4. Calculate and comment on the significance of the change in SuperGroup’s Return on

Capital between 2010 and 2011 (Evidence J). (6)

Answer: The Return on Capital of a company measures its annual profit as a proportion of

the money invested in the business both by shareholders and by lenders such as banks. The

formula is Return on Capital = annual operating profit / capital employed.

So in 2010, SuperGroup’s ROC was (from Evidence J) [£26.5m / £117.1m =] 22.6%. In

2011, ROC rose to [£50.2m / £189.7m =] 26.5%.

Given that Britain and much of the world was still recovering from the recession of 2008-09,

these are very good figures and represent a much higher return on capital than a savings

account would give you of perhaps 4 or 5%. However, they are not spectacular compared

with the long-term norm of about 17% for UK business. Furthermore, the fashion business is

notoriously fickle, with today’s hot brand being tomorrow’s has-been. While ROC has

improved marginally, a one-year increase tells us very little about the long-term prospects of

the company. More significant than the ROC figure is the almost-doubling in profit. This,

33



together with a comparable increase in turnover, tells us that SuperGroup grew very fast

indeed.

5. (a) Using Evidence H, calculate the SuperGroup’s current ratio for 2010 and 2011. (4)

Answer: The current ratio is the number of times that current liabilities are covered by

current assets, and is expressed by the formula, current ratio = current assets / current

liabilities. Current assets are cash, and the assets easily converted into cash – stock and

debtors. Current liabilities are short-term loans which have to be paid off within a year.

So from Evidence H, the 2010 current ratio is £67m / £24m = 2.8.

And the equivalent figure for 2011 is £120.2m / £42.7m = 2.8.

(b) Comment on the results of your calculations. (4)

Answer: In both years, for every £100 of current liabilities, SuperGroup has £280 of current

assets. Both current assets and current liabilities have almost doubled over the year, but

because they have increased at the same rate the ratio between them has stayed the same.

A ratio of 1.5 to 2.0 is normally considered secure enough. A current ratio of 2.8 indicates

that SuperGroup will have no difficulty in meeting its immediate debts. For example, if we

look at the position on 1st May 2011, £42.7 million is owed over the coming year, but there is

£32.2 million in cash and a further £35.7 million owed to SuperGroup. This alone is enough

to meet SuperGroup’s immediate debts, even without selling its £52.3 million of stock.

6. Using Evidence J, evaluate the impact of the change in SuperGroup’s gearing ratio from

2010 to 2011. (8)

Answer: The gearing ratio of a company measures its long-term loans as a proportion of the

total money invested in the company. It is a measure of the degree of risk which the company

faces. If all its money is borrowed (i.e. gearing is 100%) then the overhead cost of the

interest payments will be very high and the position of the company correspondingly risky.

The reverse would be the case if no money had been borrowed and the company had instead

been funded entirely by share capital.

In the case of SuperGroup, it had borrowed £16.6 million as of 2010 against a total capital of

£117.1 million, so its gearing was 16.7/117.1 = 14.2%. This is a very low gearing, indicating

that the company was being financed almost entirely with shareholders’ money rather than

bank loans. By 2011, borrowings had more than doubled to £38.9 million while

shareholders’ investment in the company had risen less sharply, so the new gearing was

38.9/189.7 = 20.5%.

This indicates that the company has taken a slightly more risky position in 2011, with a larger

percentage increase in borrowing than in shareholders’ funds. However, the gearing ratio is

still very low, with only £1 in every £5 of company funds being borrowed. We may therefore

assume that the company still represents a very safe investment. Indeed, looking at the

financial side of the company, there is plenty of scope to borrow more money for expansion

and let the gearing ratio rise to 30% or so. However, just because banks are willing to lend

money it does not follow that companies should take up the offer. They also need the

opportunities to use the money profitably.

34










asked




understanding

7. The retail industry tends to have higher labour turnover than other industries.

*7a Assess the usefulness of labour turnover and labour productivity calculations in

monitoring a company’s organisational effectiveness.

(20)

Answer: Labour turnover measures the proportion of a company’s labour force which leaves

each year. Sometimes a distinction is made between ‘voluntary’ labour turnover where the

member of staff makes their own choice, and ‘involuntary’ labour turnover caused by

redundancy, dismissal or retirement. We read in Evidence J that voluntary labour turnover in

the UK was 10.4%, that is, roughly 10% of the entire UK workforce chose to leave their jobs.

Part of being an effective organisation is having managers whom employees wish to work for.

It has often been said that employees do not leave organisations, they leave managers. The

general rule, therefore, is that effective organisations will have a lower-than-average labour

turnover because their staff will like working there.

However, staff turnover will be a measure of many, interlocking features of working life, and

not just organisational effectiveness. For example, voluntary labour turnover normally falls

during a recession because people have fewer alternative employment opportunities. So a fall

in labour turnover might not be due to an increase in organisational effectiveness at all. It

could just be that employees’ options have narrowed.

Equally, caution must be taken in comparing one company’s employee turnover with another

in the same industry. A lot will depend on the market structure of the industry in question.

So in competitive industries like retailing mentioned here, we might expect a relatively high

turnover among the sales force as they switch from one company to another. On the other

hand, the specialists maintaining and repairing railway tracks have no-one to work for in the

UK except Network Rail, which owns the entire system. Their labour turnover will be much

less.

Even within an industry, labour turnover will generally be higher in the highly-populated

South-East where there are likely to be more alternative employment opportunities and slower

in the less-densely populated areas like Scotland and Northern Ireland.

However, working for an effective organisation where management is fair and friendly is a

great reason to stay with the company you work for. The opposite is also true: a poorly

managed outfit with an arbitrary and incompetent boss is a good reason to leave. So when a

new manger is appointed, he or she should in part be judged on whether the people working

for him (or her) want to stay or start applying elsewhere. On the other hand, sometimes an

organisation needs to be shaken up. A really good boss may demand a lot from employees,

and ones least able to rise to the challenge may decide to quit to everyone’s benefit.

35



Turning to labour productivity, this measures the output per employee, and is worked out by

dividing total output (whether measured in physical units or in financial terms) by the number

of employees. This may be an excellent measure of organisational effectiveness. If

SuperGroup’s employees average £200,000 of sales whereas Gap manages £350,000 then the

obvious question to ask is why Gap does so much better.

Once again, while the difference may boil down to organisational effectiveness, there may be

many other reasons too. For example, Internet-based businesses often have very few

employees and correspondingly high levels of labour productivity. This may reflect a more

effective business model – but equally the gains from having fewer employees might be

balanced out by having lower net profit margins on the goods that are sold.

Then again, capital-intensive businesses tend to have higher labour productivity because

fewer people are needed to get the job done. But it doesn’t follow that unit costs will be

lower. The capital equipment may fail to live up to its promise and often be out of order and

awaiting repair. In such circumstances, the company with the lower labour productivity may

actually be the most effective.

In conclusion, labour turnover and labour productivity are both very useful figures for

comparing the effectiveness of one company with a rival, or the progress of a company over

time. But they need to be used in conjunction with a whole range of other variables too. No

one set of figures is going to tell you anything like the whole truth about a company’s

performance.

*7b To what extent do financial data enable us to judge the performance of a company such

as SuperGroup? (30)

Answer: Financial data is the lifeblood of any commercial enterprise. Annual or six-

monthly profit-and-loss accounts and balance sheets, such as those recorded in Evidence H

and Evidence J are just two examples of financial data. An enterprise such as SuperGroup is

likely to record turnover on a daily basis, broken down by each product line, and by each

store and concession. Modern computer systems have made this easier to do than ever

before. Each time an item is scanned at the till at the point of purchase, SuperGroup will

know a) what has been bought, and b) where it has been bought. If, in addition, it operates a

loyalty card scheme then it may well know who has bought it as well. This will be true for all

Internet sales where the credit or debit card details will reveal the identity of each buyer.

SuperGroup managers will produce daily, weekly and monthly reports, with very fast

feedback. Is a new design not selling well? Or in danger of running out? Is a new store

manager getting up to speed? Or falling behind? How have sales been affected by a new

special offer? Or a new store layout?

Financial data will give precise answers to all these questions and dozens more like them –

every day. For operations management, financial data is, therefore, indispensable. It would

be impossible to run a fashion company like SuperGroup without it.

However, such detailed management accounts will not be available to the public, who are

likely to see only the annual report. The breakdown of sales by country may well be kept

secret, and no commercial enterprise would ever release detailed store-by-store information

because of the help this would be to competitors. Financial data will, therefore, be much less

help to members of the public in judging company performance than it will to SuperGroup’s

management.

Indeed, there is a case for saying that published financial information will, by its very nature,

be out of date when it is available. If you were wondering whether to buy or sell SuperGroup

shares, you would ideally know about sales prior to published results. One way to do this is

just to visit stores and see how busy they are. Such informal, qualitative research may give

you the answer you need before everyone else finds out. A lot depends, therefore, on who

you are and why you want to know about SuperGroup’s performance. For financial

journalists, the annual publication of its financial data will enable them to judge past

36



performance. But for investors who are seeking to find out before everyone else, financial

data far from being the only line of enquiry.

Performance is not just about daily sales, however. Most investors are looking for a company

that will do well in the coming years, and for this past financial results are not necessarily the

best guide. This is certainly the case with SuperGroup which, after a stunning rate of

expansion in 2010 and 2011 has done much less well in 2012 with suggestions that the

management overstretched itself.

Instead, more sophisticated analysis will be needed. One of the key criteria to future

company profits will be the extent to which its innovations may be copied by rivals. A

company with a great new idea might make enormous profits for a year or two only to see

them dwindle away when rivals get in on the act. On the other hand, if the new idea can be

successfully patented then government-approved monopoly profits may be possible for years

to come. In the case of SuperGroup, nothing can be patented as it is not a high-technology

company. Its products will always be vulnerable to imitation, and stunning financial data for

a year or two does not necessarily say much about its long-term prospects.

Instead, an assessment needs to be made about its brand strength. Plenty of market research

companies are engaged in finding out month-by-month which brands are up and which are

down in terms of public perception. Both the proportion of a population who has heard of a

brand, and what they think about it, will be significant figures. This data is not financial data,

but nonetheless is valuable for making estimates as to what future financial data might look

like.

As well as brand strength, the future performance of Julian Dunkerton, major shareholder and

Managing Director, will also be key. At the end of the day, the performance of the chief

executive is the single most important determinant of success for any enterprise – just like the

performance of the football coach or the head teacher determines the success of the team or

the school. There is no escaping the responsibility which goes with being in charge. And in

the case of rapidly growing companies, past success is no guarantee of the future. At the time

of writing in the summer of 2012, after Face Book’s share slide following its flotation, it is

being openly asked whether Mark Zuckerberg, the brilliant founder and first CEO of the

company, is really the right person to run a mature, multi-billion dollar enterprise.

Finally, it should be noted that financial data is not always accurate, and may even be

fraudulent. Although auditors have to sign off company accounts, it is possible for them to be

misled. Sometimes the chief executives of major companies like Bernard Madoff Securities,

Enron and the Mirror Group have successfully concealed the true state of their companies

through the publication of false accounts, and have faced long jail terms when their theft

and/or dishonesty have been discovered.

In conclusion, financial data should – if it is accurate – be a good guide to the past

performance of a company. It is a less good guide to future performance. This will depend

on the character and the skills of management, and the nature of the business in which they

are engaged. Those vulnerable to technological change or with low entry barriers may see

their profits vanish almost overnight. By contrast, well-run family businesses in specialist

niche markets like cricket bats or large companies with unassailable brand equity like Coca

Cola appear to have the capacity to churn out profits for decades regardless of the political,

economic, social and technological changes that wipe out their more exciting growth-

orientated contemporaries on the business scene.

37



Instructions

Use black ink.


number.



Information





Advice









Surname Other name


Section 4: Company growth

Date:


Paper Reference

6BS04/01


examination paper

Total Marks

38



SECTION A


Using the evidence and your own knowledge, answer all six questions (total 30

marks).



How are the mighty fallen: share price collapse at Superdry

In the year to April 2012, Supergroup, owner of the fashion label Superdry, saw

profits fall to £43 million. This profits warning, delivered in advance of the

publication of the figures, saw shares lose one-third of their value. They now stand at

just 25% of their value a year ago.

In a research note, Numis Securities said “We think today’s statement brings into

question the long-term sustainability of profit growth if the brand is, as we believe, in

decline”.

Earlier in the year, chief executive Julian Dunkerton had commented on deep

discounting by rivals, as well as the one-off costs associated with building up the

management team. He was, however, hopeful that margins would rise in 2012-13

following an expected decline in the price of cotton.

Superdry’s turnaround in fortunes has been swift. In 2010-11, profits more than

doubled from the previous year to £47 million, driven by huge organic and external

growth.

Sources: media reports in 2012

39



1. What is meant by ‘franchise’ (Evidence D, paragraph 1)? (2)

2. What is meant by ‘external growth’ (Evidence J, final paragraph)? (2)

3. Explain the likely impact of competition law on Superdry. (4)

4. Briefly comment on the growth of Superdry’s internet business (Evidence C).

(5)

5. To what extent is Superdry’s success due to its ‘expanding retail estate’

(Evidence C)? (8)

6. Analyse the likely benefits to Superdry of growing externally, for example by

acquiring CNC (Evidence D). (9)

SECTION B





7*(a) Evaluate the extent to which Superdry’s ‘continually evolving brand’ (Evidence

F) might be the reason for its rapid growth over 2003-11. (20)

7*(b) Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence

J). (30)

40



Unit 4a, Section 4 – Company growth: mark scheme Note: Any acceptable answer which shows the range of skills required may score full marks

Q. 1 What is meant by ‘franchise’ (Evidence D, paragraph 1)? Mark

Knowledge up to 2

1 mark for basic idea – sale to franchisees of right to sell franchisor’s

products

1 mark for any extension/example e.g. with reference to Superdry’s plans

via CNC

1-2

Total: 2

Q. 2 What is meant by ‘external growth’ (Evidence J, final paragraph)? Mark

Knowledge up to 2

1 mark for basic idea – expanding through mergers and acquisitions

1 mark for any extension/example e.g. reference to acquisition of CNC

1-2

Total: 2

Q. 3 Explain the likely impact of competition law on Superdry. Marks

Knowledge up to 2

1 mark for basic idea of competition law; prohibition of collusion, and of

anti-competitive acquisitions

1 mark for any extension/example e.g. reference to OFT or CC

Application up to 2

1 mark for basic point: Superdry operates in a competitive market

1 mark for any extension/example e.g. why CNC acquisition will be of no

interest to the competition authorities

1-2

1-2

Total: 4

Q. 4 Briefly comment on the growth of Superdry’s internet business (Evidence

C).

Marks

Knowledge up to 2

Some understanding of growth e.g. annual percentage growth rate; growth

of one segment of the overall business

Application up to 2

e.g. internet growth here measured as a percentage of total Superdry sales;

while growing, target for 2011 still under 10%

Analysis up to 1

Despite planned internet growth, success of business firmly tied to its

‘bricks and mortar’ performance – not its internet sales

1-2

1-2

1

Total: 5

41



Q. 5 To what extent is Superdry’s success due to its ‘expanding retail estate’ (Evidence

C)?


1 1-2 Knowledge

/understanding:

Traditional retail growth requires a greater ‘footprint’

Sales can only rise if either you have more square

footage or if you achieve more sales per square foot

2 3-4 Application:

Roughly 50% pa increase in footprint every year

between 2007 and 2011

3 5-6 Analysis:

An essential part of Superdry’s expansion, given that it

is not primarily an internet business

4 7-8 Evaluation:

some balanced

wrap-up

But retail expansion no good without rising brand

awareness leading to these new stores having shoppers

Q. 6 Analyse the likely benefits to Superdry of growing externally, for example by

acquiring CNC (Evidence D).


1 1-2 Knowledge

/understanding:

Benefits of external growth, e.g. speed of growth,

ability to crack new markets

2 3-4 Application:

CNC currently Superdry’s major franchisee, so

acquisition marks a move to bring these stores under

Superdry’s direct control

3 5-7 Analysis:

External growth the fastest method of growing, and

culture shock less of an issue as CNC already runs

lots of Superdry’s franchises

4 8-9 Evaluation: some

balanced wrap-up

On the other hand, not actually winning new

customers as CNC already sells Superdry clothing

through their franchises;

have to ask whether the price paid (€40 million)

works for Superdry – or have they paid too much?

42



*Q.7a Evaluate the extent to which Superdry’s ’continually evolving brand’ (Evidence F)

might be the reason for its rapid growth over 2003-11.



present

QWC :struggling with

business terms, frequent

errors in spg

Benefits of wider product mix; reference

to Ansoff – product development

2 3-6 Application: e.g. use of

Evidence or own knowledge

to make relevant links to

Superdry

QWC: uses some business

terms, weak style, some spg

errors

Benefits of expanding portfolio,

leveraging the brand image of Superdry

3 7-13 Analysis

7-10: elementary discussion

attempted but lacks depth /

development

11-14: clear analysis with

some depth / development

QWC: comfortable use of

business terms, appropriate

style, reasonable-to-good spg

Greatest asset is the brand: the goods

themselves will be very similar to those

of their rivals;

consumers like choice: with their own

stores, need to have a wide and varied

product selection;

without a wide product mix, will end up

selling through supermarkets at greatly

reduced margins

4 14-20 Evaluation:

15-17: some evaluative

summation

18-20: informed, realistic and

personal conclusion

QWC: effective use of

business terms, organised,

coherent and fluent response,


On the other hand, product development

has to be matched by market

development;

Superdry would not have got anywhere

without rapid expansion of own stores

and concessions – both in the UK

(Evidence C), and overseas (Evidence D)

43



*Q.7b Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence J).

Level Mar

ks

Descriptor Possible content




Profit = profit margins x sales

Profit = revenue minus costs

2 3-6 Application: e.g. reference to Evidence H



Doubling in 2010-11 followed

by slight reverse in 2011-12;

but share price collapse shows

concern about future

3 7-17 Analysis:

Low level 3: 7-10 marks – basic analysis


range


wide range



Margins under attack from

‘deep discounting’ by rivals

sales always at risk in high

fashion businesses

caught between ‘young

fashion’ and ‘mainstream

fashion’

4 18-

30

Evaluation:



Low Level 4: 20-22 marks; a narrow

range of evaluation

Mid Level 4: 23-26 marks; a wide range

of evaluation, if not at the highest level



detailed consideration of a variety of

points – at the highest level




Dangers of external growth,

leading to expansion into

businesses they do not fully

understand; diseconomies of

scale;

matched with volatile nature of

brand loyalty in fashion

anyway;

competitive response of rivals;

relatively weak internet

presence;

looking for one or two key

points that are of most

significance

Question Know-

ledge

Appli-

cation

Analy-

sis

Evalu-

ation

Total Specification coverage (all

4.3.4a)

1 2 2 Organic growth

2 2 2 External growth

3 2 2 4 Competition law

4 2 2 1 5 Organic growth

5 2 2 2 2 8 Organic growth

6 2 2 3 2 9 External growth

*7a 2 4 7 7 20 Different types of growth

*7b 2 4 11 13 30 Problems of growth

Total 16 16 24 24 80

44



Unit 4a, Section 4 – Company growth: suggested answers






asked




understanding

1. What is meant by ‘franchise’ (Evidence D, paragraph 1)? (2)

Answer: A franchise is a right to sell a set of branded products in your own business. The

owner of the branded products is the franchisor, and the businesses that acquire this right are

called the franchisees. Many franchisees own just one shop, but in the case of CNC it

manages multiple franchises of Superdry, and possibly other brands too.

2. What is meant by ‘external growth’ (Evidence J, final paragraph)? (2)

Answer: External growth is that form of expansion that is achieved by buying up (or

merging with) other companies. Also known as ‘inorganic growth’ or ‘mergers and

acquisitions’, it is the fastest way to expand a business although it often leads to difficulties in

the integration of the two companies.

3. Explain the likely impact of competition law on Superdry. (4)

Answer: Competition law is designed to ‘make markets work well for consumers’ in the

words of the Office of Fair Trading (OFT), whose job it is to oversee competition law.

Action that lessens competition, such as rivals secretly agreeing to charge the same high

prices is illegal. Mergers or acquisitions between market leaders is often prevented too on the

grounds that competition would be reduced.

However, Superdry is unlikely to be affected. The fashion industry is intensely competitive,

and it is highly unlikely that any of its acquisitions (such as of CNC) will be prohibited.

Additionally, there are so many fashion retailers that any attempt on their part to form a cartel

would probably never get off the ground.

4. Briefly comment on the growth of Superdry’s internet business (Evidence C). (5)

Answer: Evidence C shows that Superdry’s internet sales rose from 4% to 8% of the total

between 2010 and 2011. Given that the company as a whole was enjoying record growth at

the time, this probably represents a threefold or fourfold increase in actual internet sales.

While this is impressive, it is still a relatively minor channel of distribution for Superdry

which has, since its foundation in 2003, followed a traditional ‘bricks and mortar’ expansion

path.

The future success of Superdry is likely to be bound up with traditional retailing for some

time to come. If the brand succeeds, so will the internet business; but if the brand goes into

45



decline then it will be unlikely that the internet can save it. This may change in the future, but

at the moment shopping for clothes is still dominated by physical stores and Superdry has

gone along with this traditional business model.

5. To what extent is Superdry’s success due to its ‘expanding retail estate’ (Evidence C)? (8)

Answer: Evidence C shows that Superdry’s square footage expanded by roughly 50% every

year from its foundation in 2003 up until 2011. For a traditional bricks and mortar retailer

like Superdry, the total space you have to sell your products in is absolutely vital. Without a

rapidly growing number of places in which to sell their goods there is no way in which they

could have enjoyed the rapid growth in sales and profits which they have. England, where

most of their UK stores are located according to the maps we are given, enjoys a relatively

homogenous culture. What sells well in London is likely to sell well in Birmingham and

other big cities too. By contrast, the internet has played a relatively minor part in Superdry’s

expansion with internet sales just 4% or less of total sales up until 2011, when they jumped to

8%.

However, while an expanding retail estate was necessary for Superdry to grow, it would not

have been sufficient by itself. A chain of shops creates the supply of goods, but the demand

has to be there too. From its student beginnings, it then attracted celebrity endorsement, as

we read in Evidence A. Above all, it is probably the wearing of its clothes by the likes of

David Beckham and Justin Bieber that enabled it to expand beyond its student origins. The

expanding retail estate was necessary – but it would have counted for nothing without the

brand strength to pull shoppers in.

6. Analyse the likely benefits to Superdry of growing externally, for example by acquiring

CNC (Evidence D). (9)

Answer: External growth is by far the fastest way to grow, because the company acquires

everything in the one purchase: staff, customers, and premises – the lot. In this respect,

external growth is quite like franchising, an expansion method that has also been used

extensively by Superdry.

Fast growth is necessary because, once a brand has taken hold of the popular imagination,

there is no way that this brand recognition can be monetised unless there are plenty of

opportunities to buy. While Superdry has opened its own stores and concessions in the UK

with impressive speed, when it comes to overseas sales it almost certainly lacks the expertise

to grow a retail operation very quickly in strange surroundings. External growth should – so

the theory goes – provide that ‘one-stop-shop’ for the emerging brand looking to conquer new

territories.

However, external growth brings with it its own problems. If overseas companies are bought

up, then those companies are likely to have a shrewder idea of what they are really worth than

Superdry. There is therefore a considerable danger of paying too much for these hurried

acquisitions. As with anything, eager buyers tend to get overcharged.

Then again, the new acquisitions have to be integrated into Superdry’s management structure

and this is easier said than done. In the hyper-competitive world of fashion, organisations

need to react very quickly. This is only possible if they are very well managed, and it is open

to question whether this level of management can be sustained during an acquisition spree.

Stagnating profits in 2012, mentioned in Evidence J, suggest that Superdry may have

expanded too fast, particularly in the area of external growth.

Perhaps a better approach would have been to consider a joint venture with an overseas

partner. This alternative method of external growth leaves the new partner with an equity

stake, and this may prove to be a more secure method of retaining the loyalty and expertise of

the staff in question.

46










asked




understanding

*7a Evaluate the extent to which Superdry’s ‘continually evolving brand’ (Evidence F) might

be the reason for its rapid growth over 2003-11. (20)

Answer: In Evidence F, we are given an insight into brand evolution at Superdry, with the

number of T-shirt graphics rising from six to over 400 during the eight years 2003-2011.

Superdry’s growth story is also charted over the second half of this time period (2007-2011)

in Evidence C, during which their retail outlets (both stand-alone stores and concessions) rise

tenfold from just 13 to 135. Assuming they started off with just one store in 2003, we have a

pattern of a roughly tenfold increase from 2003-07, followed by another tenfold increase over

2007-11.

At the heart of this growth is the brand, the key asset of any clothing retailer. We have little

information about how this brand gained an audience, beyond the reference in Evidence A to

its beginnings in student cities – a pattern also followed, incidentally, by Facebook.

Universities are, in many respects, the cultural heart of a nation, so perhaps it is not surprising

that so many new ideas – including business ideas – have their origin there. Perhaps a student

following drove Superdry from one store to 13. Then the critical exposure to a wider

audience seems to have come through celebrity adoption (again mentioned in Evidence A),

perhaps propelling it from 13 to 135 outlets.

Our question asks us what the role was of Superdry’s continually evolving brand in all this,

and specifically the wider product mix mentioned in Evidence F. This took the form not only

of a burgeoning number of T-shirt graphics, but also expansion from the core range of T-

shirts and hoodies into womenswear and denim, and then on into luggage and fragrance. Any

fashion business has to convey a sense of movement, and this is best achieved by having an

ever-expanding product range. There has to be a reason for existing loyal customers to come

back to you. New collections in spring, summer, autumn and winter form the basis of this

movement; as do surprise moves into new product categories. Repeat business from existing

customers then creates the narrative that prospective customers need to hear, namely that this

is a store that people go back to – time and time again.

It is, therefore, the case that Superdry’s rapid growth over 2003-11 would have been

impossible without a ‘continually evolving brand’. Like riding a bicycle, there is no standing

still in the fashion business. Either the brand goes forward in ‘constant and continued brand

evolution’ or it will fade away to nothing very quickly.

47



Having said that, in the competitive world of fashion a lot of things have to be got right

simultaneously if the brand is to have any chance of long-term success. First of all, there has

to be a platform to build on. Without the initial enthusiasm from the student population,

Superdry would have folded within a matter of months. A continually evolving brand is only

possible if the brand itself has proved to be a winner.

Second, the widening product mix has to be matched by a widening geographical spread. In

terms of Ansoff’s matrix, markets have to be developed as well as products. New product

development is an expensive business, and the ability to generate hundreds of T-shirt designs

and diversify into luggage, fragrances and so on is dependent upon a rising volume of sales.

Economies of scale are such that it might be possible to sell a dozen different designs of T-

shirt from a couple of stores, but it wouldn’t make sense to diversify into the full range of

clothing and accessories without several dozen stores to ‘spread the overheads’ of these

development costs.

In conclusion, a ‘continually evolving brand’ is just one part of the formula behind

Superdry’s growth. Product development has to go hand-in-hand with market development.

And both activities rely upon razor-sharp management who need to possess an acute sense of

how fashions are developing on a week-by-week basis, and combine this with the supply-

chain, human resources, PR and financial skills to deliver on time, every time, in a widening

set of locations.

*7b Evaluate the possible causes of Superdry’s fall in profits in 2011-12 (Evidence J). (30)

Answer: In 2011-12, Superdry’s profits fell from £47 million to £43 million (Evidence J).

While this is a modest decline, the pattern is in stark contrast to the doubling of profits the

year before. The profits decline led to a huge 75% reduction in the share price, because

previously the share price had factored in continuing growth. Now, as we read in paragraph

3, “today’s statement brings into question the long-term sustainability of profit growth”. In

other words, the share price had reflected a belief that Superdry was going to be the “Next

Big Thing”. Suddenly, it has started to look like just another also-ran, which will never fulfill

its potential.

One possible cause for the fall in profits could be lack of focus on the core brand attributes.

The breakneck expansion recorded in Evidence C and D would have consumed enormous

amounts of management time and energy. Julian Dunkerton refers in Evidence J to the “one-

off costs associated with building up the management team”. He is presumably thinking of

employing expensive new managers, and spending heavily on consultants. There is, however,

another cost which may have been equally significant, and that is the opportunity cost of

Julian’s time. Perhaps he switched his focus away from the brand itself, and towards strategic

management issues.

Young people’s fashion is a very fast-moving market, and unless the senior decision-maker

has their finger on the pulse, possessing an up-to-the-minute appreciation of how trends are

developing, then someone else will come along with a product range that chimes more closely

with what young people are thinking and feeling. Superdry is not yet established as a

mainstream brand appealing across the age-range. If university students move on to some

newer, more appealing brand then Superdry’s profits will decline.

A second reason for the fall in profits could be the difficulty of making the transition to a

slightly older age-range, as Superdry’s early customer base progress up through their

twenties. That Superdry is trying to make this transition is shown in Evidence I where they

are described as “desperate” to take a large store on Regent Street. By taking over the retail

space previously occupied by Austin Reed, a much more traditional store catering for an older

age-range, Superdry is clearly seeking to sell youth fashion to the not-quite-so-young as well

as to students.

48



The problem, of course, is that well-established competitors are not going to sit back and let

Superdry take their market – especially in a time of recession such as the UK is currently

experiencing. Rather than lose customers, established names might be prepared to cut prices

heavily, sacrificing profit margins in the short-term in return for maintaining sales volume

and their customer base. This appears to be what has happened, with Julian commenting in

Evidence J on “deep discounting” by rivals. Superdry cannot ignore this, as its strategy is

based on providing “affordable” premium quality clothing (Evidence B). If Superdry has

responded to this competitive threat by reducing prices in turn, then this might explain why

profits have declined.

The more general point is that competitors will respond to threats to their position. A

management strategy that does not take into account likely competitive responses is a flawed

strategy.

Finally, profits may have declined because of the acquisition of CNC in Europe. External

growth is the fastest way to expand, yet also brings management difficulties in its wake. In

this particular case, keeping tabs on youth fashion in just one country is a hard enough task:

doing the same across the Continent creates a whole new set of problems. Now it is true that

this responsibility will be shared with CNC’s own management team with their “significant

retail, wholesale and franchise expertise” (Evidence D), but we are not told how much this

expertise is costing Superdry in terms of salaries and daily running costs. It may well be that

the management team at CNC picked up on Superdry’s desperation to expand, and drove a

hard bargain. They might, for example, have insisted on loyalty bonuses for staying on at the

company under new ownership. Since Superdry is buying their management expertise as

much as their business, Superdry may have felt compelled to pay such bonuses. There is

always the fear when you buy a company that the top management will leave to set up a rival

business, taking their customers with them.

In conclusion, the decline in profits may reflect the fact that Superdry has tried to do too

much, too quickly. While an exciting new brand needs to seize the moment and expand while

it can, there will always be a limit to what management is able to do at the level of excellence

necessary to avoid damaging the brand. Superdry has both expanded its product range and

opened lots of new UK outlets and tried to widen its customer base to older age groups and

expanded overseas – all at the same time.

The strategic error is most likely to have been premature overseas expansion. Even well-

established major British retailers find it difficult to establish an effective overseas presence.

Superdry is nowhere near this level of development, as shown by the statement at the end of

Evidence A that it still “flies under the radar”. Furthermore the balance sheet extracts in

Evidence H, with current assets in 2011 of £120 million, show that Superdry is not yet a large

company. So while the decline in profits in 2011-12 is almost certainly due to a range of

factors, it is probable that this is the factor which has not only played the primary role in

reducing profits but has also put the long-term development of the company in jeopardy.

It may well be that this error is fatal, and that the share price never recovers. It is the case that

“nothing succeeds like success”, and equally nothing fails like failure. Once Superdry has

faltered then its reputation as a winner may be lost beyond recall. As Numis Securities opines

in Evidence J, the brand is “in decline”.

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