Business 9609/32 May/June 2019: question paper and mark scheme

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1 Analyse how SWF might benefit from introducing a quality assurance 10 system. Level Knowledge Application Analysis 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Knowledge of QA Points applied to Good use of theory and/or and benefits SWF reasoned argument to explain benefits 1 1–2 marks 1 mark 1–3 marks Knowledge of QA Point applied to Some use of theory SWF and/or reasoned argument to explain benefits Note: Quality control is not a form of QA and should not be rewarded. Candidates must demonstrate some understanding about QA to access marks. Question is about benefits. No marks for drawbacks. Knowledge Definition of quality assurance: based on setting agreed quality standards at all stages of production in order to ensure customer satisfaction is achieved. Accept: • TQM as particular form of QA • Giving responsibility to workers for checking quality Benefits: • Makes everyone responsible for quality • Motivational impact of self-checking and efforts to increase quality leads to increased productivity • System can be used to trace back quality problems • Reduces the need for expensive final inspection – no need for quality inspectors 1 Application • Could avoid issues such as the poisoning caused by inadequate cleaning of production valve • A failure of SWF was in not identifying the problem of the production valve • Importance of quality in a food industry context • Maintaining SWF’s reputation for good quality products • Impact on sales to national supermarket group that SWF supplies • Link to mission statement which refers to meeting customers’ needs and expectations Benefit of QA can be explored in context of the possible consequences of SWF’s failure to assure quality of milk: • Possible loss of government contract to supply milk to schools • Impact on sales of non-milk products such as ice cream and butter • Payment of compensation to those affected by sub-standard products Analysis Building of chains of arguments linked to Knowledge and Application points raised above • Impact on long term reputation and therefore sales and profits • Avoid payment of compensation in poisoning outbreak will reduce profits • Loss of contract to government would reduce sales and profits • Motivation leading to higher productivity will lead to higher profits / enable SWF to offer more competitive prices. • Less rework of goods produced leading to a reduction in costs 1 1–2 marks 1–2 marks 1–2 marks 1–3 marks Some Some Limited Limited attempt to show judgement either understanding application use of within the answer shown to the case reasoned OR argument a weakly supported conclusion/ or use of recommendation with some focus on the theory to business in the case support points made

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2(a)(i) Refer to lines 37–48 and Table 2. Calculate, for the purchase of the 3 automated milking machinery, the: accounting rate of return (ARR) For full marks units (%) required ARR = Annual return/Capital cost x 100 (1 if no calculation) Return = $940 000 or 940 000(1) Annual return = $188 000 or 188 000 (2) ARR = 9.4% (3) 9.4 (2) Likely answers with errors: Requires working to be shown for award of marks. 1 error due to residual value being added or subtracted 148 000/2 000 000 × 100 = 7.4% or 7.4 (2) 228 000/2 000 000 = 11.4% or 11.4 (2) Alternative formula: ARR = Annual return/Average investment x 100 (1 if no calculation) Where: Average investment = (Initial capital cost + scrap value)/2 Return = $940 000 (1) Annual return = $188 000 (2) ARR = 188 000/(2.2/2) × 100 = 17.1% (3) 17.1 (2) OFR applies 2(a)(ii) net present value (NPV) at a discount rate of 10%. 3 For full marks units ($) are required Year Net cash flows Discounted cash Marks ($000s) flows ($000s) 1 200 182 1 for any accurate use 2 710 589.3 of discount factor(s) 3 780 585 4 650 442 5 600 372 Cumulative inflow 2170.3 2 Less Yr 0 (2000) (2000) NPV 170.3 3 NPV = $170 300 (3) 170 300 (2) $2 170 300 (2) Likely Answers with errors. Requires working to be shown for award of marks. Added on the residual value: $294 300 or 294 300 (2) Subtracted residual value: $46 300 or 46 300 (2) OFR 2(b) Recommend to SWF whether the new automated milking machinery 12 should be purchased. Justify 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 Factors well Good use of Good judgement relevant applied to theory and/or shown e.g. well points SWF reasoned supported argument to conclusion analyse factors 1 1 mark 1 mark 1–2 marks 1–2 marks Relevant Some Some use of Some judgement point application theory and/or shown e.g. one of factors to reasoned factor very SWF argument to important analyse factors Knowledge Understanding of factors influencing decision: • NPV • ARR • Payback • Importance of finance required/cost of investment • Benefits of automation – Increased productivity – Lower labour costs – Consistent quality • Disadvantages of automation – Labour redundancy – Training of workers – Initial cost • Use of strategic choice techniques such as force field analysis 2(b) Application Use of results to investment appraisal/case study information. OFR • NPV $170 300 so worth considering • ARR 9.4% – a good return on investment? • Calculation of payback; 3yrs 5.72 months (Allow 5.7 or 5.8 months) • Discounted payback; 4yrs 6.5 months • 100 employees may lose jobs. Contradicts the stated core values of SWF regarding employees • Other firms too small to take advantage of machinery – SWF gains competitive advantage • Calculation of cost per farm = $100 000 • Reference to industry being competitive. Price important. • Application of strategic choice techniques Analysis • Cost savings would make SWF more competitive in market enabling price to be reduced leading to higher sales. • Impact of redundancies on motivation and therefore productivity of firm • Impact of redundancies on reputation and sales of SWF • Reaction of unions/ employees could lead to industrial action and disruption to production during transition. This could impact reputation and future sales Evaluation • Identification and justification of most important factor. • How many employees will leave due to natural wastage? • Would consumers care about redundancies or do they just want cheaper milk – Some evidence of ethical considerations as sales of organic produce is increasing • This is a competitive industry, feed costs are increasing and sales decreasing – SWF must change to remain competitive. • This is a significant investment that has to be financed. Does SWF have sufficient funds? Will a loan be required? What is the rate of interest for borrowing? 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good Good use Some judgement shown in the main body of understanding application of the answer and an attempt to support shown to the case reasoned conclusion/recommendation, focused on the argument business in the case or use of OR theory to effective and well supported conclusion/ explain recommendation, focused on the business points in the case made

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3 Assess the likely impact on SWF’s profitability of the changing external 16 environment. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Good Good Good use of theory Good knowledge application and/or reasoned judgement shown to SWF argument to explain shown impact of external environment 1 1 mark 1 mark 1–3 marks 1–3 marks Some Some Some use of theory Some knowledge application and/or reasoned judgement shown to SWF 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 SWF. • Profitability; rate of return measured by profit margins Application • Use of data in Table 1 • Technological changes e.g. automation of milking offer solutions to problems • Demographic changes resulting in decreasing sales of milk. This is SWF’s core product accounting for 70% of sales. • Consumer price inflation is lower than feed cost inflation • Increasing costs may mean that SWF needs to identify methods of increasing efficiency • Changes to minimum wage are likely to impact SWF as employees may be paid near MINIMUM WAGE • Changes to government policy important as SWF has contract for supplying milk to schools. • Exporting products will be subject to the regulatory regimes of other countries as with country P 3 Analysis • Decreasing sales of milk due to demographics means SWF may need to identify alternative markets for using milk such as frozen desserts. Entering these new markets may require substantial investment. • Consumer price inflation is lower than feed cost inflation – this could put pressure on SWF’s profit margins. • As MINIMUM WAGE increases SWF production costs may increase and this may reduce profits. This may affect all other farming businesses equally • Technological changes offer solutions to problems to cost pressures but require substantial investment and therefore carry risk • Increasing costs will mean that SWF needs to identify methods of increasing efficiency. Evaluation • Identification of most important external factor and justification • SWF less affected by MINIMUM WAGE changes as they can automate milking • Diversification of SWF will have reduced risk • Impact of cost increases on profitability depend on price elasticity of demand • The external environment is dynamic and may change in the future and affect profitability differently. What if government changes policy? Will government increase subsidies to farms? • Data in Table 1 is forecast. Actual changes may be very different • Impact of changing environment will depend on the management of SWF and its flexibility in responding to change. Contingency planning may be significant. 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)(i) Refer to the table in Appendix 1. Calculate: 3 the centred quarterly moving average for quarter 3, 2018 4 period MA = 8 period moving total/8 (1 mark if no calculation) = (23 + 36 + 50 + 36 + 36 + 50 + 36 + 25)/8 (1) = 292/8 (2) = 36 500 litres or 36.5 thousand litres (3) Allow full marks for 36.5 thousand or 36 500 OFR 4(a)(ii) the seasonal variation for quarter 3, 2015. 2 Sales – 4 period moving average trend (1) = 40 – 30 (1) = 10 000 litres (2) Allow full marks for 10 or 10 000 Note: -10 or -10 000 is no marks (wrong equation) 4(b) Refer to the table and graph in Appendix 1. Calculate SWF’s forecast 3 sales for Quarter 3 in 2019. Predicted trend from inspection of graph: 40.8 (1) Allow ±0.2 i.e. 40.6 – 41 Add average seasonal variation Q3 = 11.97(1) Forecast = 52.77 thousand litres or 527 700 litres (3) Allow 52.57 – 52.97 thousand litres (3) Correct units must be indicated for full marks 52.57 – 52.97 or 527 570 – 527 970 (2) OFR 4(c) Refer to your result from 4(b). Discuss the usefulness of sales forecasts 12 to SWF when making marketing and operational decisions. Level Knowledge Application Analysis Evaluation 2 marks 2 marks 4 marks 4 marks 2 2 marks 2 marks 3–4 marks 3–4 marks Good knowledge Points well Good use of Good shown of sales applied to theory and/or judgement forecasts & SWF reasoned shown e.g. well decisions argument supported conclusion 1 1 mark 1 mark 1–2 marks 1–2 marks Knowledge Some Some use of Some shown of application theory and/or judgement forecasts or to SWF reasoned shown decisions argument Note: Limit to L1 AN & EVAL if only marketing or operational decisions considered. Limit to L1 AN & EVAL if no reference to trend shown from 4(b)/Appendix 1 OFR for answer to 4(b) Knowledge • Methods of forecasting sales: TSA, Delphi etc – TSA based on extrapolating from past sales data – Delphi technique based estimates of a panel of experts • Sales forecasting using Time Series Analysis takes account of seasonal variations and gives a realistic prediction. • Marketing decisions relate to marketing strategy / marketing mix • Operational decisions relate to production e.g. stock control, capacity utilisation. May include reference to numbers of workers / types of contract 4(c) Application • Trend clearly shows that sales of ice cream are increasing • Reference to usefulness of data in Table 1 e.g. change in milk sales by volume etc • Forecasting enables planning, this method fits ice cream sales pattern well i.e. SWF faces clear seasonal variation and consistent past trends so it is reasonable to assume that the future will be similar, making forecasting valuable for planning. E.g. Volume of milk required to meet production requirements • Combined forecasting sales of milk and milk products will inform decisions regarding purchase of animal feed, herd size required – this requires relatively long term planning as herd size may take time to alter. • Case indicates possible changes to the market; demographic change and change in tastes will impact accuracy of forecasts based on past data • Not all products sold by SWF will demonstrate seasonal patterns of demand e.g. milk thus using 4 period moving average not necessary. Analysis • Helps ensure efficient use of labour and machinery helping to control costs of production and therefore ensure profitability • Marketing decisions regarding pricing will be influenced by many other factors such as PED and costs of production • Advertising likely to be influenced by overall sales so foresting important but will also be influenced by competitor actions • Objectives will influence decisions – e.g. if SWF wishes to increase profits may need to cut costs of operations • How forecasts contribute to market planning and production planning Evaluation • More reliable than simple forecasting or just projecting a trend • Relies on future events behaving as in past so may not be reliable • Extent to which it is or isn’t useful • Other evidence needs to be taken into account e.g. prediction of competitors’ behaviour, likely future government actions, and/or economic changes • May be advisable to introduce an element of probability to the forecasts – what if analysis?

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5 The Board of Directors is to consider changes to the organisational 16 structure of SWF needed during a period of business growth. Recommend changes to the organisational structure of SWF. Justify the changes you recommend Level Knowledge Application Analysis Evaluation 2 marks 2 marks 6 marks 6 marks 2 2 marks 2 marks 4–6 marks 4–6 marks Good knowledge Good Good use of Good shown of application theory and/or judgement organisational to SWF reasoned shown structure argument 1 1 mark 1 mark 1–3 marks 1–3 marks Relevant point Some Some use of Some organisational application theory and/or judgement structure to SWF reasoned shown argument Knowledge • Organisational structure shows the lines of authority/chain of command in an organisation – also spans of control/levels of hierarchy/formal communication channels • Knowledge of different organisational structures e.g. matrix, geographic • Delayering – e.g. from tall to flat • Centralisation/Decentralisation Application • Current structure appears to be traditional hierarchy based on functional departments. This hasn’t evolved with the growth of the business and could lead to potential inefficiencies linked to: – SWF has farms throughout country Q and regional differences. – SWF produces a range of products – milk, ice cream, cheese – that may require different ways of managing e.g. marketing. Could this be better achieved through a product based structure – SWF sells internationally – may require different approach to selling goods. – Expansion plans include further extending the product portfolio Other options include: • Geographical structure e.g. farms throughout country Q, sales in country P • Business unit structure e.g. ice cream, milk and option 2 • Matrix structure for new projects such as option 1 or 2 • Remain hierarchical but adopt a flatter structure 5 Analysis • Analysis of why the current structure is not suited to SWF • Analysis of why the structure is not suited to growth of the business or increasing competition which might need more flexible/adaptable structure • Geographical structure allows for regional/country differences and quicker local decision making – less control from SWF head office though? – SWF has farms throughout country Q. Regional differences may require managers to respond to local conditions. A centralised, tall structure may prevent SWF responding appropriately. A more decentralised structure might be more appropriate. • Business unit structure allows specialist managers to focus on different needs of different divisions – might lead to rivalry though? • Matrix structure improves communication between departments allowing better decisions to be made. This could be linked to change required by strategic options. • Analysis of benefits of a centralised structure currently used – Consistency of management • Analysis of benefits of change to decentralised structure. Evaluation • Judgement as to which structure is best suited to SWF with justification • Recognition of possible limitations on change e.g. impact of delayering on motivation, role of unions etc. • Judgement as to which is most important factor guiding the change e.g. need for more effective coordination. 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 usefulness of strategic analysis techniques when making 20 decisions about the future direction of SWF. If only consider strategic choice techniques i.e. decision tree, force field, investment appraisal, Ansoff then no marks. Question is not about the choice between Option 1 and Option 2. Focus should be on how SA will help guide the direction of SWF Knowledge • Explanation of strategic analysis and its techniques – SWOT, PEST, Boston Matrix, Porters 5 Forces, core competencies. • Place of strategic techniques in strategic management • Critical comments on the techniques • Need to understand the external environment – requiring a detailed PEST analysis Application • SWOT applied to SWF – Strengths e.g. reputation for quality, scale of production – Weaknesses e.g. lack of contingency planning, inadequate QA systems, high gearing – Threats e.g. changing demographics and tastes in society – Opportunities e.g. organic market growth • PEST applied to SWF – Technological e.g. automation and impact on costs – Economic e.g. changes to minimum wage, change to exchange rate/trade relations – Social e.g. demographic changes – Political/legal e.g. regulations regarding milk processing • Relevant application of other techniques e.g. Boston Matrix etc Analysis • Analysis of how changes identified might guide strategic decisions – Focus on strengths will reduce risk to the business – 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 SWF to take decisions to reduce risk take advantage of opportunities 6 Evaluation Clear conclusion as to the importance of strategic analysis and/or techniques including: • Critical comments on the techniques • Importance of understanding where the business is now in order to generate ideas and/or support for expansion • Comments that strategic analysis on its own is not enough to fully support a decision • Subjective interpretation of the models – one manager’s opinion of SWOT may be very different to another’s • SWF operate in a dynamic environment so analysis may quickly become outdated • Weighing up importance of other stages in strategic management especially objectives and choice techniques in relation to strategic analysis • Ranking the usefulness of the techniques in relation to expansion plans • An assessment of the importance of timing and a timescale in carrying out analysis.

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7 Discuss the importance of contingency planning to the future success 20 of SWF. Knowledge Definition of contingency planning: preparing an organisation‘s resources for unlikely events. This may also be referred to as crisis management, scenario planning and business continuity planning. Allow reference to business use of having a ‘Plan B’ Benefits: • Reassures customers and staff that their interests are being considered. • Reduces potential impact on customers in the event of a major disaster • Recognising major risks may actually reduce the risk of the disaster happening Limitations: • Disasters still occur • Can’t have contingency plans for all eventualities Application • Recognising major risks, such as • milk contamination • impacts of weather on production • disease of livestock • failure of equipment – could impact storage of ice cream etc • fire in factories producing ice cream etc • Commentary on SWF’s response to milk contamination • Confused statements from SWF • Delay in appointing PR consultant • Delay in public announcement from CEO Analysis • Can be expensive and time consuming especially for small businesses. There is the planning process and also the need to train staff for each possible eventuality • With fore-planning the public relations response is much more likely to be quick and appropriate so that senior managers can manage the media attention and communicate effectively what the company intends to do, by when and how from disasters both in terms of costs and bad PR and loss of customer loyalty • Avoiding disasters is better than planning what to do if they happen. • Plans need to be updated frequently as the business develops increasing costs • Ineffective response to milk contamination threatens SWF’s future sales and profitability Evaluation • Judgement of extent to which CP is important to success • Recognition that other factors will have significant impact on success of SWF • Cost of CP needs to be balanced against the potential costs of not doing it. Which potential disasters should be planned for? • How much time is spent on preparing and testing contingency plans?