Business 9609/32 February/March 2021: question paper and mark scheme

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0 No creditable content

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1 Analyse the benefits to BFB of continuing with a centralised structure 10 as the business develops. Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Knowledge of Two or more Good use of theory centralisation points applied to and/or reasoned and two relevant BFB argument to explain points linked to benefits benefits 1 1–2 marks 1 mark 1–3 marks Knowledge of One point Some use of theory centralisation applied to BFB and/or reasoned and one benefit argument to explain OR one/two benefits benefits Note: Question is about benefits. No marks for drawbacks. Do not credit reproduction of phrases or data in the case study without use and/or comment. Knowledge Definition of centralisation: keeping all the important decision-making powers within head office or at the centre of the organisation. • Minimum delegation to managers in other areas, departments or divisions of the business Possible advantages include: • Rapid decision making. • Consistent policies throughout the organisation. • Decisions taken in the interest of the whole business rather than just one division of it. • Experience of senior managers resulting in better decisions. • Central buying allows for greater economies of scale. Application • BFB is the market leader in country C – success of BFB achieved with centralised structure. • Experience of Aela and John as founders and directors of BFB since 2014. Entrepreneur of the year in 2018. • Linking centralisation to future growth plans of the business including cycling accessories or mountain bikes and developing bikes for consumers aged over 60. • Quick decision making needed to deal with the dynamic external environment faced by BFB. • BFB is a premium brand. • BFB exports to more than 10% of output. 1 Analysis Building chains of arguments linked to Knowledge and Application points raised above. • Decisions made in interests of the business as a whole will ensure consistency in tactics to support BFB’s strategic goals. As a premium brand it is important that there is consistency. Avoid dilution of the brand when introducing new products such as the bicycles aimed at over 60s. • Keeping brand image consistent in the different markets will ensure that customers will know what to expect from a BFB product thus increasing sales. • New products may be developed more quickly as there is clear direction from head office. Thus BFB can take advantage of market opportunities such as the over 60s market more effectively and this will increase sales and growth. • Avoids inexperienced managers making costly errors in their decision making. ARA 1 1–2 marks 1–2 marks 1–2 marks 1–3 marks Some Some Limited use Limited attempt to show judgement understanding application to of reasoned either within the answer shown the case argument or OR use of theory a weakly supported conclusion/ to support recommendation with some focus on points made the business in the case

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2(a) Refer to Appendix 1. Calculate the: 2(a)(i) gearing ratio 4 Rationale Content Marks Correct answer with or without units. 59.41% 4 Working not required. Allow accurate 146.34% rounding. Statement of correct calculation of gearing 6 / 10.1 × 100 3 6 / 4.1 × 100 OR OFR based on error in calculating 6 / 7 = 85.7% capital employed. Working not required. 6 / 9.1 = 65.93% 6 / 10.1 = 0.5941 Calculation of capital employed 4.1 + 6 = $10.1m 2 Calculation of shareholder equity 1 + 3.1 = $4.1m 1 OR Correct formula No creditable content 0 Relevant formulae: Non-current liabilities / (shareholder equity + NCL) × 100 (1 mark if no relevant calculation) Long term liabilities / capital employed × 100 (1 mark if no relevant calculation) OFR 2(a)(ii) profit margin 4 Rationale Content Marks Correct answer with or without 6.06% 4 units. Working not required. Allow accurate rounding. Statement of correct calculation of 0.8 / 13.2 × 100 3 profit margin. OR OFR based on error in 3.2 / 13.2 × 100 = 24.24% calculating profit. Working not required. 10.8 / 13.2 × 100 = 81.82% Calculation of profit 13.2 – 10 – 2.4 = 0.8 2 Incorrect calculation of profit with or $3.2m OR $10.8m 1 without units OR Correct formula No creditable content 0 Relevant formula: Profit margin = (profit for the year / sales revenue) × 100 (1 if no relevant calculation) OFR 2(a)(iii) acid test ratio 2 AT = liquid assets / current liabilities OR AT = (current assets – inventory) / current liabilities (1 if no relevant calculation) AT = 0.6 / 1.3 (1) AT = 0.46 OR 0.46:1 OR 1:2.17 (2) 6:13 (1) OR 0.6:1.3 (1) 2(b) Recommend whether Aela and John should accept TT’s offer. Justify 12 your recommendation. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 4 marks 4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two Two or Good use of Good judgement relevant more points theory and/or shown e.g. well points applied reasoned supported argument to conclusion analyse factors 1 1 mark 1 mark 1–2 marks 1–2 marks One One point Some use of Some relevant applied theory and/or judgement point reasoned shown e.g. one argument to factor very analyse important factors Knowledge This is a takeover. Understanding of factors influencing decision: • Objectives of current owners of the business. • Control of business decision making. • Need for finance in period of business growth. • Benefit of support offered by a larger organisation. Application Use of results to 2(a) / case study information. OFR • Gearing is high at 59.41%. Most of finance is from bank loans. • Acid test of 0.46 may indicate potential liquidity issues. • Current ratio is low at 1.08. • Working capital only $100 000. • Profit margin is 6.06%. Is that sufficient for financing growth? • BFB has borrowed substantial funds to finance growth. • Accepting the offer would mean that Aela and John no longer control the business. • Aela and John haven’t taken a dividend yet. • TT will support BFB’s plans for growth. • $7m for 55% values the business at $12.73m. This is much greater than the value of net assets at $4.1m or capital employed of $10.1m. 2(b) Analysis • Profits insufficient to finance growth. Therefore, borrowing is increasing and this is increasing risk in the business. • Injection of finance into BFB would give greater stability to the business in time of economic uncertainty. • Support of TT – a much larger business could help BFB develop its product range and increase its market share. Economies of scale may result. • Move into cycling accessories or mountain cycles is risky and therefore need to sure up the finances of the business. • Support given to growth would generate profits and enable Aela and John to take a dividend from the business. Evaluation • Supported recommendation. • Importance of control to Aela and John relative to pursuit of growth of the business. • Elements that the evaluation/judgement might depend on: – Is $7m an appropriate valuation of a 55% stake? – Future capital needs of BFB – Possibility of selling less than 50% of shares so that Aela and John retain control. – How TT is financing the takeover? Debt financing could leave BFB even more indebted. – What is TT’s underlying motive? • Significance of other factors that may also influence decision – Long-term role of Aela and John may be threatened. – Are other companies interested in investing in BFB – Possible culture class ARA 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good Good use of Some judgement shown in the main understanding application to reasoned body of the answer and an attempt to shown the case argument or support conclusion/ recommendation, use of theory focused on the business in the case to explain OR points made effective and well supported conclusion/ recommendation, focused on the business in the case

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3 Refer to Table 2 and any other information. Evaluate the likely impact 16 on BFB’s future decisions of changes in external influences. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Two Two or Good use of theory Good relevant more and/or reasoned judgement points points argument to explain shown applied impact of external environment 1 1 mark 1 mark 1–3 marks 1–3 marks One One point Some use of theory Some relevant applied and/or reasoned judgement point argument to explain shown impact of external environment Knowledge • The external environment includes consideration of the economic, social, technological, demographic and legal factors that influence BFB. – Changes in real GDP measure economic growth. – Inflation is a sustained increase in the average price level. – The unemployment rate measures the percentage of the labour market without work. – The exchange rate index measures the value of a currency against a basket of other currencies. – Understanding of government fiscal and monetary policies. Application • Consumer price inflation is increasing and may impact costs and pricing decisions. • Increasing costs may mean that BFB needs to identify methods of increasing efficiency. • Rate of economic growth is forecast to slow to below 3% by 2023. • Country C’s currency has depreciated since 2019 making imports more expensive. • Unemployment is falling making recruitment more difficult and will impact wages. • Government may reduce spending to control national debt. • Government may increase interest rates to control inflation. Link to BFB expansion plans. • Increase in number of BFB’s direct competitors and impact on marketing 3 Analysis • Potential increase interest rates will increase borrowing costs for BFFC making plans for growth less profitable thus impacting decision about growth and methods of financing. • Depreciation will impact cost of the many components from around the world. As costs increase this will affect pricing decisions of BFB. • Inflation will affect the discretionary income of households and potentially reduce spending in the economy affecting demand for cycles. • New factory may face increased wage pressure costs due to fall in unemployment. • Continued increase in real GDP will support decisions of BFB regarding growth. • New competitors may increase pressure on BFB to reduce prices and thus impact revenues and profit. Evaluation • Identification of most important external factor and justification • Diversification of BFB will reduce risk. • The external environment is dynamic and may change in the future and affect profitability differently. What if government changes policy? • Contingency planning may be significant. • Elements that the evaluation/judgement might depend on: – Impact of cost increases on profitability depend on price elasticity of demand. – Data in Table 2 is forecast. Actual changes may be very different. – Managers ability to plan for forecast changes. – Competitor actions in response to changes will be important. • Significance of other factors influencing decisions – Internal strengths and weaknesses will influence decision making in response to external influences – Proposed takeover may influence response of BFB ARA 3 7–10 marks Good judgement shown throughout with well supported conclusion/ recommendation, focused on the business in the case

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4(a) Refer to Appendix 1. Calculate the inventory turnover ratio. 4 Rationale Content Marks Correct answer with or without units. 12.5 times 4 Working not required. Allow accurate 29.2 days rounding. Statement of correct calculation of 10 / 0.8 OR 3 inventory turnover. 0.8 / 10 × 365 Correct calculation of inventory $0.8m 2 OR OFR based on error in calculating e.g. 10 / 0.6 = 16.67 inventory and statement of correct formula Correct calculation of inventories Inventory = 1.4 – 0.6 1 OR Correct formula for inventory turnover No creditable content 0 Relevant formulae: Inventory turnover = cost of sales / value of inventories (1 if no relevant calculation) Inventory turnover (days) = value of inventories / (cost of sales / 365) OR average value of inventory / cost of sales × 365 OFR 4(b) You may refer to your results from 4(a) and any other information. 12 Assess the likely impact on BFB of adopting lean production techniques. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 4 marks 4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Two Two or more Good use of Good judgement relevant points theory and/or shown e.g. well points applied reasoned supported argument conclusion 1 1 mark 1 mark 1–2 marks 1–2 marks One One point Some use of Some judgement relevant applied theory and/or shown point reasoned argument Knowledge • Definition of lean production: reducing all forms of waste. • Lean production techniques – TQM – Quality circles – Cell production – JIT • Knowledge of relevant ratios such as inventory turnover Application • Inventory turnover of 12.5. Inventory currently held for approximately 1 month (29.2 days). • High levels of stocks of finished products to ensure demand is met. • Problems of forecasting demand that BFB has faced. • Many components from around the world – complex supply chain. • Limited experience of operations manager. • Shift of production to new factory. Analysis • By reducing all forms of waste BFB will be more efficient and this will reduce unit cost of production making BFB more competitive. • Giving workers responsibility for quality may increase motivation, improve quality and productivity making BFB more competitive. • Training costs will be required thus increasing costs of BFB. • Complex supply chain with components from around the world will make JIT production difficult to implement. Lead times may be long. 4(b) Evaluation • Elements that the evaluation/judgement might depend on: – Effectiveness will depend on supplier relationships and reliability of receiving supplies when needed. Given significant transport distances this may be difficult due to long lead times. – BFB hasn’t been able to predict demand accurately. Thus, JIT risks lost customers if demand is underestimated. – Is inventory turnover high or low compared to competitors? • Significance of other factors that may also impact success of LP: – New factory, new workers so no ingrained culture to overcome. • Supported overall judgement about introduction of LP. ARA

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5 Evaluate the importance of marketing planning to the success of 16 BFB’s new products. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Two relevant Two or more Good use of theory Good points points and/or reasoned judgement applied argument shown 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point applied theory and/or judgement reasoned shown argument Knowledge Definition of marketing planning: • Marketing objectives, budgets and marketing mix. Market research and situational analysis may also be explained. • Success in terms of profit, sales, market share, customer satisfaction and meeting objectives set. Application • Older adults is a distinct market from children with differing needs • Product differences necessary to attract older adults e.g. lower gears, changes to frame, easy change tyres. • Use of social media to attract parents for existing products. Less likely to be appropriate for older generation. • Premium pricing to reflect quality of product. • Link to cycling accessories and mountain cycle options. • Mature market for mountain bikes Analysis • Benefits of tailoring marketing according to differences in target markets to ensure that new products gain market sales. – Over 60s promotion might focus on more traditional above the line techniques using print media rather than social media – Skimming pricing for over 60s as there is limited competition in the market. – Mountain bikes may need more competitive pricing due to competition. – Mountain bikes more intense promotion to gain awareness and attract customers. – Cycling accessories may be targeted at people who already have bikes • Need to cover costs to make a profit. • More effective targeting of marketing budget when planned. 5 Evaluation • Marketing planning gives a clear direction to the business making success more likely. However, does not guarantee success. • Particularly important for new markets such as mountain cycles or older adult market. • Other factors also important to success such as operations – Need to deliver bikes on time so implementation of JIT may affect success of marketing plan. • Elements that the evaluation/judgement might depend on: – Competitors’ marketing strategies will be significant to success of marketing plan. – Level of detail in the marketing plan and its flexibility – being responsive to the changing environment. – Planning depends on effective market research to identify needs of customers and determine how best to appeal to them. ARA Questions 6 and 7 use this marking grid: Level Knowledge Application Analysis Evaluation 3 marks 3 marks 4 marks 10 marks

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6 Evaluate the importance to BFB of strategic analysis when making 20 strategic decisions. Question is not about the choice between Option 1 and Option 2. Focus should be on how SA will help guide the direction of BFB. Knowledge Definition: the process of conducting research into the business environment within which an organisation operates, and into the organisation itself, to help form future strategies. • Explanation of strategic analysis and its techniques – SWOT, PEST, Boston Matrix, Porter’s 5 Forces, core competencies. • Place of strategic analysis techniques in strategic management i.e. come before strategic choice. • Need to understand the external environment – requiring a detailed PEST analysis. Application • SWOT applied to BFB: – Strengths e.g. design and quality of cycles evidenced by award winning designs. – Weaknesses e.g. lack of contingency planning, inadequate QA systems, high gearing. – Opportunities e.g. mountain cycles. Accessories with high profit margins. – Threats e.g. government fiscal / monetary policy. • PEST applied to BFB: – Economic e.g. change to exchange rate/trade relations, government policies. • Relevant application of other techniques e.g. Boston Matrix. • Link between SA and introduction of lean production. • Core competencies – cycle design. Analysis • Analysis of how strategic analysis might guide strategic decisions: – Identification of weaknesses that need to be addressed when making decisions or alternative sought e.g. financing. – Anticipating changes to the external environment will enable BFB to take decisions to reduce risk and take advantage of opportunities. • SA will help reduce the risk of decisions taken by BFB as it will help BFB build on their core competencies and strengths and highlight weaknesses that need to be resolved. • SA takes time to do in terms of management focus, reducing time available for other tasks. • Boston Matrix as part of product portfolio analysis could help identify cash cows and dogs. This information can be useful in ensuring that BFB maintains a balanced product portfolio and identify products for divestment. • Porter’s Five Forces: Power of buyers, suppliers, threat of substitutes, barriers to entry and competitive rivalry helps BFB make decisions about markets to enter and reduces risk by considering factors that affect success. 6 Evaluation Clear judgements as to the importance of strategic analysis and/or techniques including: • Importance of understanding where the business is now in order to generate ideas and/or support for expansion. • Judgement/evaluation about usefulness of strategic analysis techniques supported by argument. • Elements that the evaluation/judgement might depend on such as: – BFB operate in a dynamic environment so analysis may quickly become outdated. – Subjective nature of SWOT analysis. – An assessment of the importance of timing and a timescale in carrying out analysis. – Subjective interpretation of the models – one manager’s opinion of SWOT may be very different to another’s. – Critical comments on the techniques. • Evaluation of other factors that influence options such as: – Comments that strategic analysis on its own is not enough to fully support a decision. – Attitude of directors – Attitude to risk • Justification of most useful technique(s) with supporting argument. – Ranking the usefulness of the techniques in relation to expansion plans. – Weighing up importance of other stages in strategic management especially objectives and choice techniques in relation to strategic analysis. ARA

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7 Evaluate the usefulness to BFB of focusing only on Force Field 20 Analysis when choosing between strategic options. Knowledge • Meaning of strategic choice as part of strategic management. • Definition and understanding of force field analysis as a technique of strategic choice. • Reference to other strategic choice techniques such as Ansoff Matrix, decision trees and investment appraisal. • Reference to strategic analysis techniques when preparing for choice such as SWOT, PEST, Boston matrix, Porter’s 5 Forces, Core competencies and others. Application • Use of the techniques/factors for two options – appendix 2. • Ansoff’s matrix – Option 1 – diversification. • Option 2 – product development. • Option 2 has higher probability of success. Less risk. • Option 1 has higher ARR – link to shareholder returns. • Option 1 capital cost is $1m greater – link to gearing. • Force field analysis – what is the balance between driving and restraining forces? – Use of these forces in answer such as BFB’s lack of experience in accessories market. Analysis • How techniques may be used and the advantages and disadvantages. – Force field analysis encourages managers to consider different aspects of a decision. – By identifying restraining forces action can be taken to mitigate negative effects and reduce risk. – Visual summary of factors in a decision. Helps focus attention on the most important forces affecting the decision. Facilitates discussion of these points to enhance decision making. – Forces can be weighted thus improving decision making. – Subjective forces are objectified by giving them a weighting focusing attention on important issues and making it easier to compare force for and against change. • Role of other techniques in decision making that consider the quantitative aspects of the choices. – Use of probabilities in decision trees therefore reducing risk for BFB of option choice. – ARR enables BFB to choose option with highest return which may be important to shareholders. • The use of techniques to analyse aspects of the options. 7 Evaluation • Weighting of the driving and restraining forces is subjective. Has Aela manipulated the data to support her preferred option? TT may view choices differently (assuming there is a takeover). Bias and hidden agenda in formulating the analysis. Disagreements about relative importance. • Forces may be missed from the analysis. • Justification of most useful choice technique technique with supporting argument. • Elements that the evaluation/judgement might depend on: – Effective integration of analysis and choice techniques will be important. – Ability of the individual(s) completing the FFA. • Significance of other factors that may also be important: – FFA unlikely to be sufficient to make decision. Needs to be used alongside other choice techniques taking into account both quantitative and qualitative factors. – Impact of management objectives and attitudes. – Availability of finance (these may be included in the FFA). – Other information that could be useful? ARA