Business 9609/32 May/June 2022: question paper and mark scheme

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1 Analyse two possible benefits to WTZ of introducing Kaizen. 10 Knowledge Application Analysis Level 3 marks 2 marks 5 marks 2 3 marks 2 marks 4–5 marks Good knowledge Two points Good use of theory of Kaizen and applied to WTZ and/or reasoned one or two argument to explain benefits benefit(s) 1 1–2 marks 1 mark 1–3 marks Knowledge of One point applied Some use of theory Kaizen and / OR to WTZ and/or reasoned knowledge of argument to explain kaizen and one benefit(s) benefit Notes: Repeating text from the case study is not application. Question is about benefits to WTZ. No marks for drawbacks. Level 1 all skills if good knowledge of Kaizen not demonstrated Knowledge Definition of Kaizen: continuous improvement based on worker group discussion. [reward even though clearly signposted in case] Good knowledge Kaizen includes teamworking through kaizen groups (or quality circles) with each group given the power to take decisions. Kaizen is based on making incremental (small) changes to improve quality or efficiency. Benefits Reduction in absenteeism. Increased employee motivation. Increase in productivity. Reduction in proportion of output rejected. Improvement in quality Application Amandi’s focus is on minimising costs. Kaizen could help meet this objective. Increasing absenteeism will increase costs. 5% of output is rejected increasing costs. Collection of recycled materials is inefficient. High inventory levels increase costs. Training will increase employee skills. 1 Analysis Building chains of arguments linked to Knowledge and Application points raised above. Knowledge of workforce can be linked to find solutions to the problems faced at the Hydrocamel factory. This could result in an increase in productivity which would reduce unit costs of production. Employees may be motivated by the increased responsibility (Herzberg) associated with Kaizen resulting in a reduction in labour turnover and a reduction in recruitment costs. Therefore, profits would increase. A reduction in faulty products would cut costs and ensure customers are satisfied leading to higher sales. Increased responsibility at work will enhance employee satisfaction and may result in lower rates of absenteeism. Therefore, there will be an increase in output and less disruption to production and less pressure on other employees due to absences. Kaizen empowers workers and results in the quick introduction of new ideas and motivates employees to come up with more ideas. ARA 1 1–2 marks 1–2 marks 1–2 marks 1–3 marks Some Some application Limited use of Limited attempt to show understanding to the case reasoned judgement within the shown argument or use answer. of theory to OR support points a weakly supported made conclusion/ recommendation with some focus on the business in the case

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2(a) Refer to lines 71–74. Calculate the: 2(a)(i) cross elasticity of demand of the Hydrocamel following the price 2 reduction of the Hippo Barrel XED = % change in quantity of good A / % change in price of good B (1 mark if no relevant calculation) XED = -8 / –20 (1) allow 8 / 20 (1) XED = 0.4 (2) Other answers –0.4 (1) 2(a)(ii) annual revenue of the Hydrocamel if its price is reduced by 10%. 5 Rationale Content Marks Correct answer with or without units. Working not $5 644 800 5 required. Correct working for calculating revenue. Correct 44 800 × 4 Qd × correct price. 126 New quantity demanded following price change 44 800 2 Percentage change in demand following price 12(%) 1 change Price after 10% reduction OR relevant formula(e) ($)126 1 Relevant formulae if no relevant calculation PED OR 1 max Revenue No creditable content 0 Content Revenue = price × quantity (1 mark if no relevant calculation) PED = % change quantity / % change price Or % change in quantity = PED × % change in price (1 mark if no relevant calculation) New price is: 140 – 10% = ($)126 (1) % change in quantity given that PED = –1.2 is: –1.2 × –10 = 12% (1) new quantity = 40 000 × 1.12 = 44 800 (2) revenue = 44 800 × 126 (4) = $5 644 800 OR 5 644 800 (5) 126 × 40 000 = ($)5 040 000 (3) 126 × 50 000 = ($)6 300 000 (3) Answer based on 126 × by any quantity = (3) [on basis that calculating quantity correctly was awarded 2 marks] OFR 2(b) You may refer to your answer to 2(a) and other information. Evaluate 12 the usefulness to WTZ of elasticity data when planning its marketing strategy. 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 or Two points Good use of Good judgement more applied theory and/or shown e.g. well relevant WTZ reasoned supported points argument to conclusion answer question 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 made WTZ reasoned shown e.g. one argument to factor very answer question important Note: If there is no knowledge of elasticity then limit marks to K and APP only. (Maximum of 4 marks) Knowledge Definition of elasticity Elasticity measures the responsiveness of Qd or Qs to a change in one of its determinants. – PED measures responsiveness of Qd to change in price. – XED measures responsiveness of Qd to change in price of another product. – PrED measure responsiveness of Qd to change in promotional spending. Definition of marketing strategy: coordinated marketing mix to achieve marketing objectives. Includes 4Ps and marketing budget. Application Competition from Hippo Barrel which is $20 cheaper than the Hydrocamel. Demand estimated to be price elastic –1.2 i.e. sensitive to change in price Cross price elasticity is inelastic 0.4 (i.e. goods are substitutes) Use of answer to Q2(a) (OFR) – Revenue without price reduction would be $5.6m. – Increase in revenue of $44 800. – New price of $126. Promotional elasticity estimated to be elastic/responsive 1.3. Promotional elasticity linked to changing current promotional budget of $10 000. Comment on current promotion through specialist magazines and direct selling. 2(b) Analysis Reducing price will result in an increase in quantity demanded if estimate of PED is correct and therefore revenue will increase. PED suggests that, other things being equal, a decrease in price will result in a marginal increase in revenue. This can be used to help make pricing decisions as it will help to demonstrate whether profit will also increase. XED indicates that demand for Hydrocamel is not sensitive to change in price of competitor product, so WTZ has some control over pricing. PrED is elastic, therefore an increase in promotional expenditure will lead to a more than proportionate increase in revenue, suggesting that greater advertising is worthwhile. 20.83% reduction in price is required to achieve sales of 50 000 units, assuming that PED is –1.2 19.2% increase in promotion could raise sales to 50 000 units assuming PrED is 1.3. This would only be an extra $1923 of promotional spending. Evaluation Only award EVAL if the candidate has also demonstrated APP. Judgement of the usefulness of elasticity to marketing planning. Elements that the evaluation/judgement might depend on: – Decisions of competitors will affect the impact of any price change made by WTZ. – Accuracy of the elasticity estimates. Significance of other factors that may also influence the marketing strategy such as operations and human resource. Marketing strategy depends on effective market research to identify needs of customers and determine how best to appeal to them. 2 3 marks 3 marks 3–4 marks 4–6 marks Good Good application Good use of Some judgement shown in understanding to the case reasoned the main body of the shown argument or use answer and an attempt to of theory to support conclusion/ explain points recommendation, focused made on the business in the case. OR effective and well supported conclusion/ recommendation, focused on the business in the case

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3 Evaluate the likely impact on WTZ’s future profitability of increased 16 focus on corporate social responsibility (CSR). 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 or more Two points Good use of Good relevant applied to theory and/or judgement points WTZ reasoned shown argument to answer question 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of Some point made applied to theory and/or judgement WTZ reasoned shown argument to answer question Knowledge Definition of corporate social responsibility (CSR): where a firm considers the impact of its decisions on society and the environment. Treatment of employees Environmental responsibility e.g. pollution Ethical supply chains Accounting practices Role of triple bottom line Role of social audits Understanding of profitability – relationship between profit and sales or capital employed. It is a measure of efficiency. Possible impact of increased focus on CSR on WTZ: Brand loyalty develops Increased sales Employee retention and recruitment improved Costs of adopting CSR goals e.g. higher wages, Application Making use of case information: Minimum wage paid to employees Increasing absenteeism in Hydrocamel factory Core activities benefit the environment already Contracts with charities Increasing social awareness shown in PEST analysis 3 Analysis Benefits of using environmental credentials in marketing of the business to build positive publicity and gain sales. This could result in higher revenues and profit. Using recycled plastics to make Hydrocamel could be a USP to promote sales to charities enabling WTZ to deal with challenge of Hippo Barrel. Changing working conditions and treatment of employees may be expensive e.g. paying above minimum wage. This could result in higher prices and customers looking elsewhere for materials and products. Improved treatment of workers could result in higher productivity and a reduction in absenteeism and labour turnover so costs might be reduced resulting in higher profitability. Evaluation Only award EVAL if the candidate has also demonstrated APP. Change in culture toward employees might be required to avoid accusations of selective use of CSR. Does CSR matter to customers of the recycled materials? Cost may be more important. Developments in technology offer opportunity for WTZ to act more responsibly without an overall increase in costs. Has to be genuine CSR not ‘greenwash’. Potential backlash if WTZ operations do not match claims. Significance of competitors’ strategy towards CSR – if competitors are not embracing CSR this could put WTZ at a price disadvantage. Need to communicate CSR through social/environmental audits so that customers are aware of the increased focus. Profitability is a relative concept whereas profit is an absolute concept. An increased focus on CSR could increase profit without increasing profitability. WTZ might have more important problems to focus on in the short term such as quality standards or how to respond to competition. 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 Table 1 and Table 2. Calculate for 2022 the: 4(a)(i) gearing ratio 3 Non-current liabilities / (Shareholder Equity + NCL) × 100 OR Debt / (Debt + equity) × 100 OR Long term liabilities / capital employed × 100 (1 mark if no relevant calculation) Capital employed = Shareholder equity + NCL = 4 + 4 +14 = ($)22(m) (1) Gearing = 14 / 22 × 100 (2) Gearing = 63.6% OR 63.6 OR 64 (allow 63) (3) If wrong year: 2021 = 56.2% OR 56.2 OR 56 (2) OR Long term liabilities / equity × 100 (1 mark if no relevant calculation) (Accept equivalent variations of this equation) Gearing = 14 / 8 × 100 (2) Gearing = 175% OR 175 (3) If wrong year: 2021 = 128% OR 128 (2) Other likely answers 14 / 18 × 100 = 77.7 OR 77.8 OR 78 (%) (2) Answer based on 14 / any number × 100 e.g.14 / 28 × 100 = 50 (2) As long as gearing equation is correctly stated. OFR 4(a)(ii) dividend yield 2 dividend yield = dividend per share / market share price × 100 (1 mark if no relevant calculation) Dividend per share = 4.8 / 8 = ($)0.60 per share (1) OR DY = 0.6 / 3 × 100 (1) DY = 20% OR 20 (2) 2021: Award 1 mark for DY = 4.4 / 8 / 3 × 100 = 0.55 / 3 × 100 18.3% OR 18.3 (although share price not known for 2021) 4(a)(iii) profit margin 2 profit margin = profit / revenue × 100 (1 mark if no relevant calculation) PM = 5.6 / 60 × 100 (1) PM = 9.3% OR 9.3 (2) If answer given for 2021: 12.8% OR 12.8 (1) 4(b) You may refer to your answer to 4(a) and other information. Evaluate 12 the usefulness to WTZ’s Board of Directors of ratio analysis when choosing a suitable source of finance for further growth. 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 or more Two points Good use of Good relevant applied to theory and/or judgement points made WTZ reasoned shown e.g. well argument to supported answer question conclusion 1 1 mark 1 mark 1–2 marks 1–2 marks One One point Some use of Some relevant applied to theory and/or judgement point made WTZ reasoned shown argument to answer question Note: If there is no knowledge of ratio analysis then limit marks to K and APP only. (Maximum of 4 marks) Knowledge Ratios help identify the financial health of the business Understanding of ratios – Gearing – proportion of capital financed by debt – Dividend yield – how much a company pays out in dividends relative to its share price – Profit margin – measures a company’s earnings relative to revenue – Current/acid test – measure of liquidity Understanding of sources of finance – From working capital – Loans – debt finance with interest – Share capital – selling shares to shareholders – Retained profit – internal source of finance from profit not paid in tax or distributed to shareholders Application Using case information or calculations: Current gearing is high - above 50%. Link to expansion plans Further borrowing for expansion and predicted decrease in interest rates There are 12m unissued shares, current share price is $3. Could raise around $36m 4(b) Profit margin has decreased from 12.8% to 9.3% Link to Dividend per share is $0.60 Use of DY is 20% Use of Current ratio = 2021 = 5.1 / 3.6 = 1.42: 1, 2022 = 5.8/4.2 = 1.38: 1 Use of Acid test ratio = 2021 = 1.9 /3.6 = 0.53: 1, 2022 = 1.8/4.2 = 0.43: 1 Linking to options for growth – Purchase Lacpac – Expansion into country S by building a factory and contracts Reference to Amandi currently having a controlling stake in the business Analysis Gearing high so expansion funded by borrowing would potentially be difficult as banks may consider the business too risky. High gearing means that successful expansion financed by further debt can produce significant increase in returns to shareholders. Issuing shares would impact control of the business and reduce Amandi’s influence. High dividend yield would be attractive to potential shareholders making a share issue successful. Profit margin has fallen making the business less attractive to invest in. Growth of business over time may make investment attractive to either shareholders or financial institutions. Evaluation Only award EVAL if the candidate has also demonstrated APP. A judgement of the usefulness of ratio analysis to the choice of finance. Evaluation of other factors that influence choice of finance such as: – The business’s attitude toward risk – Desire of Amandi to retain control may be crucial – Interest rate on debt finance – Cost of issuing shares Elements that the judgement of usefulness might depend on such as: – The reliability of the figures – Historical figures – Trend analysis of ratio results.

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5 Recommend appropriate changes to WTZ’s organisational structure to 16 ‘support growth and drive innovation’ (line 89). Justify your recommendation. 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 or more Two points Good use of theory Good relevant applied to and/or reasoned judgement points made WTZ argument to shown answer question 1 1 mark 1 mark 1–3 marks 1–3 marks One relevant One point Some use of theory Some point made applied to and/or reasoned judgement WTZ argument to shown answer question Note: Answers which just discuss leadership style should not be rewarded Knowledge Definition of organisational structure: the internal, formal framework of a business that shows the way in which management is linked together, and how authority is passed through the organisation. Span of control – number of subordinates reporting to each more senior manager, levels of hierarchy Impacts communication – more hierarchical structure may suggest that communication is one-way and top-down. Formal and informal Delegation – passing authority down the organisational hierarchy Centralised – keeping all important decision making powers with head office Decentralised - decision making powers passed down the hierarchy to empower subordinates and area or product managers Knowledge of different structures: Functional - departments have clearly defined roles in a specialist area such as marketing Hierarchical – consisting of multiple levels in which all members of the organisation, apart from one, are subordinate to someone else. Matrix – structure that creates project teams that cut across traditional functional departments Divisional – structure that organises activities around geographical areas or product groups 5 Application Diversified nature of WTZ and possible link to product-based structure or geographic-based structure WTZ has a hierarchical structure and therefore probably a tall structure Difficulty of exerting control for directors as the business grows Current structure as a weakness Current hierarchical structure with functional areas of operations, human resources, marketing and finance Innovations such as Hydrocamel and bricks made from waste plastic and rubber at WTZ and link to structure Expansion abroad and link to structure Possible takeover of Lacpac and previous takeover of MR Analysis Matrix structure bringing different functions together for individual projects could be beneficial for innovation as with the Hydrocamel and recycled bricks. Structure by product could enable more targeted marketing to occur increasing sales ensuring strategy is developed by those with strong product knowledge. Hierarchical/tall structure keeps control at the top, meeting objectives of Amandi. Enables consistent approach across the business so maintaining brand image. Structure based on geography could bring benefits as WTZ expands abroad. Might enable decisions to reflect local/national differences so meeting needs of customers more effectively and resulting in increased sales. Flatter structure might promote greater delegation and empower employees resulting in a more innovative culture. Delegation empowers employees and may increase motivation resulting in higher productivity. Decentralisation passes decision-making powers down the hierarchy to area or product managers and could lead to WTZ being more responsive to customer needs and increase sales. Evaluation Only award EVAL if the candidate has also demonstrated APP. A judgement about the most appropriate structure with supporting evidence. Evaluation of the relative benefits/limitations of different structures Elements that the judgement may depend on such as: – Difficulty of changing structure as it may also require a change in culture. – Attitude of directors such as Amandi. – Reaction of employees. – Key influence. Importance of other factors driving growth and innovation such as culture. Make no changes as the business has been innovative and successful as it is. 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 to WTZ of external environment analysis 20 (PEST) as a framework to develop business strategy. Note: If there is no reference to or knowledge of PEST analysis then limit to K 2 APP 2 AN 0 EVAL 0 for other points related to strategic analysis as a framework for developing business strategy. Knowledge PEST – Political, Economic, Social and Technological [reward even though clearly signposted in case] Understanding of different elements of PEST: – Political – laws and regulation – Economic – factors influencing demand and macroeconomic environment – Social – demographic change – Technological – advances in automation Identification of PEST analysis as a strategic analysis tool. Strategic analysis is the first stage in strategic management answering the question, where are we now? Need to understand the external environment – requiring a detailed PEST analysis. Understanding of business strategy – outlines a plan of action to achieve the vision and set objectives of an organisation and guides decision-making processes. Role of objectives in developing business strategy. Explanation of other strategic analysis techniques – SWOT, Porter’s Five Forces, Boston Matrix, core competencies. Application WTZ appears to have objective to expand given its history and the growth strategies being considered. Core competency of WTZ is recycling waste materials links to Option 2. PEST applied to WTZ – making use of information in Appendix 1 to illustrate usefulness of PEST. – Political - increased regulation provides opportunities and threats to WTZ’s core business. Link to potential takeover of Lacpac. – Economic - economic growth in country R is stable and high, giving opportunities for further expansion decisions. – Economic - interest rates set to decrease and link to financing decisions. – Social – increasing interest in environmental considerations link to increased focus on CSR. – Technological – innovations in processing of waste materials e.g. use of computer controlled machinery. Other techniques applied to WTZ e.g. SWOT. – Strengths e.g. brand reputation. – Weaknesses e.g. high gearing linking to financing any future expansion. – Opportunities e.g. market growth in countries R and S. – Threats e.g. competition from Hippo Barrel. 6 Analysis Analysis is about the use of the techniques to shape strategy Analysis of how PEST might guide strategic decisions: – Reduction in interest rates may enable more ambitious strategy such as Option 1. – Opportunities to process plastic waste from developed countries e.g. Option 2 – Regulation on food packaging may favour takeover of Lacpac. – Anticipating changes to the external environment will enable WTZ to take decisions to reduce risk and take advantage of opportunities. Analysis of how other SA techniques can shape strategy: – Focus on strengths and core competencies in choosing strategy will reduce risk to the business. – Identification of weaknesses that need to be addressed when making decisions or alternative sought e.g. financing. Evaluation Only award EVAL if the candidate has also demonstrated APP. Clear conclusion as to the usefulness of PEST and strategic analysis to developing business strategy including: Critical comments on PEST: – PEST on its own is not enough to develop strategy - need understanding of internal factors as well – WTZ operates in a dynamic environment so analysis may quickly become outdated. Importance of understanding where the business is now in order to generate ideas and/or support for expansion. Subjective interpretation of the models – one manager’s opinion of SWOT may be very different to another. 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 Evaluate the strategic choice techniques that could help WTZ choose 20 between option 1 and option 2. Option 1: Takeover Option 2: Expansion of Lacpac into country S Driving forces Rapid market growth Builds on core in use of recyclable competencies of non-plastic WTZ packaging in the food industry Restraining forces High cost Competitive market in country S Capital cost $20m $10m Accounting Rate of Return 15% 10% (ARR) Decision tree: Expected monetary value $9m $4m Probability of success 60% 70% Note: Focus should be on strategic choice techniques NOT strategic analysis techniques If there is no reference to, or knowledge of SC techniques then limit to K 2 APP 2 AN 0 EVAL 0 for other factors related to the choice between options 1 and 2. Knowledge Strategic choice is part of strategic management and involves the process of identifying and deciding between different options. Strategic choice techniques such as Ansoff Matrix, Decision trees, Force Field Analysis and investment appraisal. Strategic choice techniques help evaluate the risks and rewards from different strategic options. Understanding of different choice techniques: – Investment appraisal: payback and ARR. How quickly investment is recovered and the average profitability of the investment. – Decision trees: inclusion of probability to calculate the monetary outcomes from investments and make choice based on quantitative data – Force field analysis: considers driving and restraining factors in a decision – Ansoff’s matrix: considers risk of growth strategies with reference to product and market Quantitative and qualitative factors. Reference to strategic analysis techniques when preparing for choice such as SWOT, PEST, Boston matrix, Porter’s Five Forces, Core competencies and others. 7 Application Use of the techniques/factors for two options – Appendix 2 examples. Ansoff’s matrix: – Option 1 is diversification (new product development) – Option 2 is market development. Option 2 has higher probability of success and less risk Option 1 has higher net return and ARR Option 2 capital cost is $10m greater – link to gearing 63.6% Amandi is willing to take risks Driving and constraining forces: – Competition in country S but risk is still estimated to be lower – High cost of option 1 and link to gearing. Analysis Techniques encourage directors to consider the possible quantitative outcomes of each strategy. This will help decide which is the best and therefore reduce risk. 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 the negative effects of those restraining forces. Better decision-making by considering the quantitative aspects of the choices: – Use of probabilities in decision trees therefore reducing risk for WTZ of option choice – ARR enables WTZ to choose option with highest return which may be important to shareholders as will influence dividends. The use of techniques to analyse aspects of the options. Interpretation of Ansoff’s matrix to compare the relative risk of each option therefore guiding decision-making. e.g. option 2 might be considered to be market development and therefore lower risk than option 1 so is therefore a better option Evaluation Only award EVAL if the candidate has also demonstrated APP. Judgement/evaluation about usefulness of strategic choice techniques supported by e.g.: – Is Ansoff useful in this case as risk more influenced by factors such as potential regulation and market growth. – Subjective nature of Force Field Analysis – Limitations of using only quantitative or qualitative techniques. Elements that the evaluation/judgement might depend on such as: – Accuracy of estimates for quantitative techniques – Other information 7 Evaluation of other factors that influence choice such as: – Attitude of directors – Attitude to risk – Influence of strategic analysis – Corporate objectives of WTZ – Impact of different strategies on stakeholders – Long-term v short-term impacts – Other information that might be useful – Capital available. Justification of most useful technique(s) with supporting argument.