Question
Refer to the Ducal Aspirateurs case study (DA)
Question Standard level paper1 (2020)
a. Outline one benefit of Viv’s leadership style and one benefit of Salah’s leadership style (lines 82-84).
b. Explain suitable sources of finance for Option B.[6]
▶️Answer/Explanation
Ans:
a. Leadership styles identified:
Viv: Autocratic when re-establishing business. Benefit is that it got things done and she had very clear determination. Later more democratic when she consulted engineers. Benefit is that manager may have been in a better position. Overall situational which may be appropriate for an evolving business.
Salah: Largely laissez-faire although some elements of democratic. Candidates will have to identify this for themselves. Creative employees work best when left alone – suitable for the innovation division.
There is no need for answers to identify the leadership style – the question is about benefits.
Award [1] for relevant benefit identified and [1] for a description of how that benefit relates to DA. Award a maximum of [2] per benefit.
b.
Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Key factors:
Amount: It’s a large amount needed.
Private limited company: so shares could be issued to family members but may not raise a lot. Would family members be able to buy more shares?
Converting to public limited and raising share on the stockmarket
Family business: so ownership and control very important so venture capitalists, business angels and other external investors may not be suitable unless argued otherwise
Retained profits: Seems like a major impact on Dividends. Would shareholders be happy with that?
Loans/mortgages/Debentures: has a policy of internal finance. With disagreement in the business would it be willing to change this policy?
Leasing the necessary machinery for the option
Short term sources: Overdrafts, debt factoring, trade credit, hire purchase/leasing not sufficient finance. Short term sources are not suitable.
Sale of assets: not suitable – no evidence of underused or unused assets but is contextual with leaseback
Selling shares on the stockmarket is not suitable unless linked with converting to plc.
Remember the concept of positive marking – full marks can be achieved with more than one suitable method even if some unsuitable methods are identified.
Accept any other relevant explanation.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section A.
Award a maximum of [3] for a theoretical answer (unsuitable methods) or if there is only one source.
Award a maximum of [5] if the explanation is mainly descriptive, but in context. E.g. if most of the context is mentioned but not developed.
Question
Copper Health $(\mathrm{CH})$
Copper Health $(\mathrm{CH})$ was the market leader in the production of anti-venom* vaccines to treat poisonous snake bites. $\mathrm{CH}$ ‘s mission – influenced heavily by corporate social responsibility (CSR) – is to put customers first and profits second in the treatment of snake bites.
Despite 100000 deaths worldwide each year from snake bites and 400000 serious injuries, $\mathrm{CH}$ recently announced that it will no longer produce antivenom vaccines. Several large Mexican, Brazilian and Indian pharmaceutical companies have entered the market selling anti-venom vaccines at a much lower price than $\mathrm{CH}$.
A spokesperson for $\mathrm{CH}$ said: “We will remain a private limited company where corporate social responsibility (CSR) remains an important driving force for our mission. Our medical research is only financed from retained profit. When the lower-priced competition arrived, our sales and profits of antivenom vaccines decreased significantly. Treating snakebites no longer makes financial sense. Instead, the technology used to produce anti-venom vaccines will be used to research and develop (R\&D) other life-saving vaccines”.
A non-governmental organization (NGO) has demanded action. ” $\mathrm{CH}$ is the largest manufacturer of anti-venom vaccines in the world. Although $\mathrm{CH}$ ‘s competitors are increasing their production of anti-venom vaccines they will not be able to produce enough to satisfy demand for the next two years. There will be a major shortage. This will result in many life-threatening injuries and deaths.”
The non-governmental organization (NGO) has urged $\mathrm{CH}$ to seek new sources of finance to continue the production of the anti-venom vaccine.
* anti-venom: a medication made from antibodies that is used to treat venomous bites and stings
a. Define the term retained profit.
b. Explain one advantage and one disadvantage for $\mathrm{CH}$ of having a mission statement.
c. Explain two possible external sources of finance $\mathrm{CH}$ could use to continue production of anti-venom vaccines.[4]
d. Discuss $\mathrm{CH}$ ‘s decision to stop producing anti-venom vaccines.[10]
▶️Answer/Explanation
Ans:
a. Retained profit is profit that is not given to shareholders in the form of dividends but is held back as part of shareholder equity to provide a source of funds for possible future activities.
Accept any other relevant definition.
N.B. no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. A candidate must demonstrate an understanding that retained profit is part of shareholder equity and that it can be used as a source of funds for possible future business activities.
b.
Advantages for CH of having a mission statement include:
Provides an example of where a business currently sits in the eyes of its stakeholders, such as customers, employees and managers. CH produces vital anti-venom vaccines, but its mission statement demands that CH carry out its operations in a socially responsible manner. Mission statements can have an influential role in setting organizational objectives.
CH’s mission statement may act as a motivating force for employees and could lead to low staff turnover and/or benefits for the recruitment of new employees.
Disadvantages include:
Some mission statements may be written as vague statements of intent. It can be difficult to ascertain exactly what the business stands for in terms of setting sustainable business objectives. This may discourage some investors. CH is stating that profitability is secondary after CSR. Yet this profitability is being used to finance future growth and research. Investors may not commit funds given this perceived confusion from the mission statement.
Accept any other relevant advantage/disadvantage.
Mark as 2 + 2.
For an identification or a description of one advantage/disadvantage with or without application [1].
For explanation of one advantage/disadvantage with no application [1].
For explanation of one advantage/disadvantage and application [2].
Application must refer to the issues around CH having a mission statement.
c.
The question is sufficiently broad to allow candidates to explain a range of possible sources of finance, but any candidate who looks at internal organic sources, such as increasing sales/profits, must be not given credit.
Possible external sources include:
As CH is a private limited company, the decision could be taken to raise funds through an initial public offering. CH could be “floated or listed” on the appropriate local share market to raise funds.
Angel investors who have strong ethical/CSR intent could provide funds.
The NGO has demanded action. Given the number of deaths and injuries from snakebites, the NGO could be approached to provide new finance or governments in those countries predominantly affected. There could be the possibility of a private public partnership.
Accept any other relevant possible source.
Mark as 2 + 2.
For an identification or a description of one possible source of external finance with or without application [1].
For explanation of one source with no application [1].
For explanation of one source and application [2].
Application must refer to the possible sources of finance for production of anti-venom vaccines of anti-venom vaccines.
d.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
Answers at the top level will look at the ethical arguments of retaining the production of anti-venom vaccines versus the final implications for doing so.
CH’s mission statement alludes to “putting customers first and profits second”. The decision to stop producing the anti-venom vaccines will be viewed as hypocritical by stakeholders and will lead to a loss of its market leader status. There could be a consumer backlash/boycott, and this will hamper marketing attempts for any new life-saving vaccines. The drop in revenue could be considerable and as a result there may be no profits to finance research and development. The comments from the NGO are unhelpful and will bring increased scrutiny and further unwelcome publicity. Stopping production may damage the economic sustainability of CH to the point where they may cease to exist.
However, the increased competition and wave of price reductions cannot be ignored. We must assume that this new competition has a product that competes with CH on price because, as the market leader, we would assume CH has a certain degree of brand loyalty. Clearly, consumers see the competition from Brazil, Mexico and India as a substitute, and unit sales of CH’s vaccine have fallen significantly. If CH does not stop production and cut its losses now, it may not have time or finance to develop new life-saving vaccines, through which it may be able to recreate its market leader status.
The profit motive is the reward for entrepreneurial initiative and risk. CH is quite within its rights to stop production of a loss-making vaccine and switch to a market that may be underdeveloped, albeit one with considerably more risk. Ironically, if the decision to stop production is made quickly, CH may be the beneficiary of some panic buying, boosting short-term revenues before the anti-venom vaccine is withdrawn from the shelves.
Given the ethical and moral issues in this case, CH may be wise to wait and carry out some further market research on the competition. It is indicated that for two years, the new competition will be unable to fill the gap left by CH if it decides to leave this market. CH is still the market leader. Possibly CH could emphasize its product quality over the competition and see if this acts as a spur.
A conclusion with judgment is expected.
A balanced response is one that covers at least two arguments for and at least two arguments against.
Marks should be allocated according to the paper 2 markbands for May 2016 forward with further guidance below.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
Candidates cannot reach the top marks if there is no relevant reference/ application to the stimulus.
