Question
Healthy Start (HS)
Tom Donat started Healthy Start (HS), a national chain of stores preparing and selling healthy snacks, which are produced in batches. HS’s target market is teenagers and young adults. Tom was concerned about high levels of fast food consumption and youth unemployment. His vision statement for HS is: “To encourage life-long healthy eating habits and to train school leavers (drop outs) in acquiring work skills”.
$H S$ hires many school leavers without qualifications. Because of the valuable social service that $H S$ provides, an independent online media provider will feature $H S$ in a new online reality TV show.
All employees, including managers, start at the lowest level of the organizational hierarchy and train on the job. Job enlargement, job enrichment and intrapreneurship opportunities are available. $20 \%$ of all profits earned are put back into HS to finance these opportunities. Staff turnover is lower than the industry average.
Competition from global fast food restaurants has intensified. Their economies of scale mean that $H S$ struggles to increase its market share. Online reviews indicate that some customers perceive HS’s snacks as healthy but overpriced and with small-sized portions.
Tom is considering two options:
- Option 1: Implement flow production. HS will buy new technology and assign each employee to a specific job on the production line. HS will increase portion sizes and keep prices the same.
- Option 2: Implement a new social media marketing campaign linked to the new online TV show. The campaign will focus on the health benefits of $H S$ ‘s snacks.
a. Describe one role of a vision statement for $H S$.[2]
b.i. Explain how the following can benefit $H S$ :
job enlargement
b.ii.Explain how the following can benefit $H S$ :intrapreneurship.[2]
c. Explain two possible economies of scale available to global fast food restaurants but not $H S$.[4]
d. Discuss the two options that Tom is considering for $H S$ in response to the intense competition.$[10]$
▶️Answer/Explanation
Ans:
a.A vision statement for HS is likely to help the organization set its short-term and long-term objectives. It is likely to act as an important driver for recruitment, selection and motivation of its young unskilled workforce made up of school leavers.
Award [1] for describing one role of a vision statement. Award an additional [1] when candidates apply their response to the stimulus.
N.B. Do not reward responses suggesting that one of the roles of a vision statement is to promote the business.
b.i
Job enlargement will increase the range of skills and tasks able to be performed by the school leavers who may lack direct experience of working in a national chain and/or batch production. As recruits will hopefully become future managers, it will be important for effective future leadership in the stores to have experience in all jobs offered by HS.
Award [1] for identification of an appropriate benefit and an additional [1] for an explanation of the benefit and application to the stimulus. Application may not be merely nominal. Be sure that the candidate is explaining the benefit to HS.
b.ii.
PLEASE NOTE: Intrapreneurship is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
Intrapreneurship allows for risk taking, creativity and innovation within HS. Given the intense competition from the global fast food restaurants, the opportunity to develop new healthy snacks will be vital to maintain market share.
Award [1] for identification of an appropriate benefit and an additional [1] for an explanation of the benefit and application to the stimulus. Candidates do not have to define what a vision statement is. Rather, they should describe a role. For [2], candidates must also link that role to goals or aims.
Application may not be merely nominal. Be sure that the candidate is explaining the benefit to HS.
c.
Possible economies of scale available to the global fast food restaurants include:
Marketing economies of scale: the global fast food companies are likely through their global reach to experience significant economies of scale in marketing/selling across a whole range of markets. HS is a national chain and will not be able to spread advertising costs, for example, across a whole range of markets. Unit costs of marketing will be much lower for the global restaurants.
Bulk-buying economies of scale: to develop and meet global demand and to fill supply chains, global fast food manufacturers are likely to achieve significant economies through the bulk-purchase of raw ingredients (a number of fast food manufacturers have vertically integrated with suppliers to ensure that logistics are in place). Again, unit costs of operations are likely to be lower than HS’s.
Financial economies of scale: being present in global markets allows global fast food manufacturers to borrow funds for expansion at much lower rates than a national chain. It is indicated in the stimulus that HS finances its training and professional development through retained profits.
Accept any other relevant economy of scale.
N.B. Economies of scale may be without the exact name. For example, “bulk buying discounts” is rewardable. Candidates do not have to say purchasing economies of scale.
Mark as a 2 + 2.
Award [1] for identification of an appropriate economy of scale and an additional [1] for an explanation and application to the stimulus. Application may not be merely nominal.
Maximum award per economy of scale: [2]
d.
The first option, which is to implement flow production, is likely to lead to an increase in production and productivity because of the new technology and specialized roles. Currently, HS uses batch production. With improved productivity, HS can increase its portion size without raising prices. As a result, HS may be able to compete more effectively with the global fast food manufacturers.
However, the introduction of flow production may result in a reduction in the opportunities for job enrichment and intrapreneurship. If the new production process is going to lead to specific jobs on the production, then apart from job enlargement or rotation, the current employees may become demotivated through a restriction on personal growth and development opportunities. Staff turnover may increase as employees seek more innovative or challenging work. It is likely to be expensive to implement flow production both in terms of the financing and inevitable changes in organizational culture at HS.
The second option may be quicker to organize and much cheaper. The online reality TV show will have established HS firmly in the minds of existing and potential customers. A social media campaign will amplify the brand value of HS and should increase market share.
However, measuring the success of social media on market share will be difficult even though the target market should be familiar with this method of promotion. The biggest factor against this campaign, however, is that as a competitive tool against the global manufacturers there will still be this perceived difference in portion size. A social media campaign will not address this aspect. In fact, there is a danger that negative response to the campaign make reduce market share even further.
Both of the responses have some merit, but it would appear that the first option is the most appropriate to tackle the issue of competition with the global fast food manufacturers. The changes in the production process will take some time to bed in and a few staff may leave to work for other snack food manufacturers who have more dynamic or challenging roles. However, the social media campaign will not close the perceived gap between the products offered by HS and those offered by their competitors and, thus, could backfire.
While the candidates are not expected to recommend an option (the question does not ask them to), they should come to conclusions and judgments (for top marks). Candidates may conclude that either option is better or they may conclude that HS should do both, given that Option 2 would not be very expensive.
Marks should be allocated according to the Paper 2 markbands for May 2016 forward.
Question
Refer to the Ducal Aspirateurs case study (DA) .
DA’s board must make two major decisions.
Decision 1: DA needs to reduce employment costs. A new system of pay and benefits is under consideration. This includes:
changing from an annual salary to low basic wages with profit-related bonuses
reducing social benefits for employees, such as paying market rents for the housing in Ville d’Ablet and having to pay for the use of the leisure facilities
offering generous compensation payments to employees who are prepared to leave the business.
Decision 2: The three options from DA directors (lines 105–143) must be considered.
Immediately prior to the board meeting, Mia withdrew her proposal (Option C).
There is now additional information available on the remaining options.
Option A: Louise’s proposal – market development
Louise plans to target the mass market and proposes using the brand name DuLow for the redesigned products. She is planning for DA to outsource production to Star Electrics (SE). SE uses mass production together with some customization of products. SE keeps costs low by importing cheap raw materials and paying low wages.
Ben, the human resource management director, is concerned about the impact this change would have on DA’s employees.
Option B: Salah’s proposal – product development
Salah’s plan requires new production lines, one for each product. Salah proposes using cellular manufacturing. The investment cost is estimated to be €500 million. Salah estimates the following net cash inflows (excluding the initial investment cost).
Table 1: Forecast financial information for Option B (figures in € millions)
Louise thinks the option is expensive. Dodi, the finance director, thinks that the investment is too large and he believes that some shareholders are also concerned about the size of future dividends. Salah believes that shareholders will be pleased about the revenues that this investment will generate. Mia is worried that the products would be expensive to produce and that demand might fall in five to seven years.
a. Define the term retained profit.
b.i. Using Table 1, calculate for Option B the average rate of return (ARR) (show all your working).
b.ii.Using Table 1, calculate for Option B the payback period (no working required).
c. Explain one advantage and one disadvantage for DA of replacing the current pay system and benefits with the proposed employment package (Decision 1).
d. Using the Ducal Aspirateurs case study and additional information, recommend whether DA should choose Option A or Option B (Decision 2). [10]
▶️Answer/Explanation
Ans:
a. Profit made by the business, calculated after all deductions, including dividends. It is reinvested into the business as an internal source of finance.
Award [1] for a partial definition and [2] for a full, clear definition. This answer does not need to be in context and can be worded differently to the above.
b.i.
$$
\begin{aligned}
& \text { Average rate of return }(\mathrm{ARR})=\frac{\frac{\text { (total returns-capital cost) }}{\text { years of use }}}{\text { captital cost }} \times 100 \\
& \mathrm{ARR}=\frac{\frac{((50+150+200+300+400)-500)}{5}}{500} \times 100=24 \%
\end{aligned}
$$
Award [3] for a correct answer which must include %.
Award [2] if there are no, or incorrect, units.
Award [1] if the working is not shown.
c. After 3 years $400m paid back so needs 4 more months
So payback = 3 years 4 months
Accept alternative formats such as “40 months” or “3 and 1/3 years” or “month 4 of year 4”
Award [1] for correct answer
Advantages include:
More motivated workforce as a result of bonuses, higher productivity (possible link to Taylorism)
Generous redundancy can encourage workers who are thinking about moving out of the village of Ville d’Ablet
Accept any other valid advantage.
Disadvantages include:
Less certainty for employees in terms of pay, which may affect motivation
Loss of current benefits will affect morale (possible link to Herzberg or Maslow)
Likely increase in staff turnover, reduced staff retention and more difficult to recruit staff.
Accept any other valid disadvantage.
Award [1] for each relevant advantage identified and [1] for a description of how that advantage relates to DA. Award [1] for each relevant disadvantage identified and [1] for a description of how that disadvantage relates to DA.
d.
Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Option A
Advantages include:
Much larger market
Some customization of products
Lower investment cost
Brand widely recognized so maybe strong market
Disadvantages include:
May impact on DA’s upmarket brands.
Cheaper raw materials, lower wages, issues with outsourcing.
DA employees may feel insecure
Ben, Salah, Mia do not like idea
Option B
Advantages include:
Good return (24 %) and 3 years 4 months payback and is likely to be longer than Option A payback.
Innovative
Increases sales, strengthens brand loyalty
New income stream – important because of low profits
Easy for customers and likely to be popular.
Disadvantages include:
High investment costs
Limited sources of finance
Sales benefits may not last
Only extends product life cycle – not a new product
Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.
Theoretical answer or context limited to naming the business or lack of development max [4].
Discussion of only one option marks limited to [5].
Discussion but no clear balance [6].
Options considered, good use of evidence, particularly from section B, but no effective conclusion award a maximum of [8].
For [10] the answer needs to be clearly relevant to DA with good use of context and a clear and supported recommendation.