Question
FrioAire Appliances (FA)
FrioAire Appliances (FA) manufactures medium-priced and medium-quality refrigerators. It is a multinational public limited company. Its factory is located in a less economically developed country that has high unemployment, a tradition of autocratic leadership and labour costs lower than FA’s home country. The factory is profitable, and FA pays consistently good dividends. Market growth for medium-priced and medium-quality refrigerators is limited.
As part of a strategic objective to increase productivity and to enter a fast-growing market for high-priced and high-quality refrigerators, FA is considering building a new factory in and relocating production to Germany. This would require closing the factory in the less economically developed country. The new factory will:
use innovative technologies, including advanced robotics and 3D processes
require fewer employees, but those it does require will need to have better skills and qualifications.
Germany has a highly skilled, qualified and productive workforce. The new factory would allow FA to reposition its products. However, FA would need to raise significant finance to build and equip the new factory.
FA’s leadership style at the factory in the less economically developed country is autocratic. Members of FA’s board wonder whether this style would be suitable for the new factory in Germany, where workers have more bargaining power because of their high skill level and the labour-friendly cultural traditions. In Germany, FA would have to follow more regulations regarding the environment, health and safety, and employee rights.
FA workers in the less economically developed country are very loyal to FA, which has continued operation through a civil war at significant cost to itself (for security). If FA were to close in the less economically developed country, the workers would not find such good jobs.
a. Describe one disadvantage of operating as a public limited company.[2]
b.Explain one benefit and one cost to FA of using an autocratic leadership style.[4]
c.Explain one positive and one negative impact of FA on the developing country.[4]
d.Evaluate the option of building a factory in, and relocating, to Germany.[10]
▶️Answer/Explanation
Ans:
a. Disadvantages of operating as a public limited company include:
The expense of going public and the ongoing expenses of reporting to the government or shareholders.
Loss of privacy, as the company must report to the public and to shareholders.
Strategic decisions can take longer, as management has responsibility to communicate with the board, shareholders, and, often, other stakeholders.
Risk of takeover.
Unless candidates otherwise have elements in their response deserving marks, do not award any marks for statements such as “dilution of control” or “the owner will not have full control.” Answers such as these two show a significant misunderstanding.
Award [1] for an identification of a disadvantage and another [1] for sufficient description thereof.
b.
In the stimulus it is indicated that FA has an autocratic leadership style. This style appears to dovetail with the culture of the less economically developed country. Also, the factory is profitable and has been efficient through lower costs. It is possible that the leadership style fosters loyalty in this country because of the cultural fit.
The costs to FA include that autocratic leadership may stifle creativity and innovation, which could be available in a more democratic system. Productivity in Germany could be higher than in a less economically developed country. The fact that FA’s leadership is thinking of relocating to Germany indicates that they see problems in moving to a new higher-price segment.
Mark as 2 + 2.
Award [1] for each relevant benefit / cost explained and [1] with application to FA. Award up to a maximum of [2] per benefit/cost explained.
[2] cannot be awarded per benefit / cost if the response lacks either explanation and / or application.
For example: For an identification/description of a benefit / cost with or without application [1]. For explanation of a benefit / cost with no application [1].
c.
Positive impacts of FA on the developing country include:
Provides employment at wages better than those available in the less economically developed country.
Was loyal during the civil war.
Theoretically possible other positive impacts include:
Technology and skill transfers from FA’s host country to the less economically developed country.
Negative impacts of FA on the less economically developed country include:
FA relies on an autocratic leadership style.
FA does not use the most advanced technology in the less economically developed country.
FA could leave the country, leaving many people who are currently dependent on the company out of work.
FA does not provide the same employee rights provisions or health and safety provisions that it would in a less economically developed country.
Theoretically possible other negative impacts include:
FA may pollute to a level in the less economically developed country that it would not in Germany.
Mark as [2 + 2]. For [2], candidates must identify a positive and a negative impact, explain it, and apply to the less economically developed country.
Award [2] for a positive impact with application to the less economically developed country.
Award [2] for a negative impact with application to the less economically developed country.
If there is no application to the less economically developed country at all then the maximum mark per impact is [1].
d.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
The option of building a factory in and relocating to Germany is a major strategic decision. In certain respects, FA would be an entirely different company: new products, new processes, new types of workers and new leadership styles, as well as a wholly new cultural context. Going into highly sophisticated high-tech manufacturing with robots has the potential to position FA for a future of highly automated manufacturing. Without making these changes, FA runs some risk of remaining stuck in much lower value-added processes, which in the long run are less profitable. The risks are very high. The potential rewards are high as well.
Perhaps a strategy for FA would be not to sell the older factory but to continue to operate it and rely on those profits to support the new factory as it gets started. Whether FA’s balance sheet is strong enough to operate both factories is an open question, as is the question of whether its management has sufficient depth to operate two major plants.
Balance in this context means having two arguments for opening the plant in Germany and two arguments against, which could be partially couched in a discussion of leaving the old plant open.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
Question
Top Star (TS)
Top Star (TS) manufactures sports footwear. Its products are sold through retail outlets and online. Sales of TS’ footwear in retail outlets are falling. However, because e-commerce is growing rapidly, online sales are increasing. In $2018, T S^{\prime}$ total domestic sales were $\$ 5000000$ and total domestic market sales for the same time period were $\$ 50000000$.
TS must consider several challenges:
- Some businesses in the sports footwear industry are finding that selling online leads to many problems and higher costs
- TS’ website is not user friendly. Customer complaints about the website and ordering problems are increasing
- TS’ presence in international markets is weak and its product range is limited. The directors of TS want to develop a new line of running shoes but the company has insufficient finance for research, development and creating brand awareness.
The directors think that TS should follow an external growth strategy. Two options are being considered:
- Option 1: Some directors propose a merger with a footwear manufacturer, the multinational company All Champion, which would allow TS to be more competitive
- Option 2: Other directors propose a merger with a footwear retailer that has a strong presence in domestic and international markets.
The finance manager believes that merging with All Champion could hurt TS’ reputation. TS’ factories may have to close, which the local population may resent.
a. Describe one feature of a multinational company (MNC).[2]
b. Calculate TS’ market share in 2018 (show all your working).[2]
c. Explain two disadvantages and one advantage to TS of selling its products online.[6]
d. With reference to TS, evaluate the two merger options.$[10]$
▶️Answer/Explanation
Ans:
a.
– MNCs operate in more than one country. Their headquarters are located in one country (home country) while operations are carried out in a number of other countries (host countries).
– Because of their international operations, they usually have large physical and financial assets and turnover.
– MNCs are often large-sized and exercise a great degree of economic dominance.
– MNCs may control production activity with large foreign direct investment in more than one developed and developing countries.
Award [1] for each feature stated and award an additional [1] for a description up to a maximum of [2].
For a statement like “A multinational company operates in two or more countries” but with no further description, award [1].
b. Market share $\%=($ firm’s sales /total market sales $) \times 100$
$$
\frac{5000000}{50000000} \times 100=10 \%
$$
Award [1] for the correct answer and [1] for correct working.
If no workings are shown, but the final answer is correct, award a maximum of [1].
c. PLEASE NOTE: E-commerce is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.
Like other businesses in the industry, TS may find selling online increasingly problematic due to the associated costs. Customer complaints about TS’ website and ordering problems are already increasing. Costs of dealing with customer complaints, technical issues and delivery problems may increase and reduce profit.
TS’ brand image may be eroded due to its inefficient way of dealing with online sales. Its unfriendly website and increasing customer complaints are probably eroding its brand image and market share. If TS wants to increase international presence and expand its market, it should improve its current online sales system.
On the other hand, TS’ sales and profits can increase by taking advantage of e-commerce’s rapid growth. It can also take advantage of a potential market opportunity left by the competing businesses in the industry that are experiencing problems with online sales.
TS’ international presence is weak; selling online can help to create brand awareness in international markets and reach a worldwide audience with relatively low costs.
Accept any other relevant explanation.
Mark as 2 + 2 + 2.
Award [1] for each correct advantage/disadvantage identified and [1] for a relevant explanation with application to TS. Award up to a maximum of [2] per advantage/disadvantage explained.
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.
For example: For an identification/description of an advantage/disadvantage with or without application [1]. For explanation of an advantage/disadvantage with no application [1].
For explanation of an advantage/disadvantage and application [2].
d.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
Merging with All Champion:
Top Star is a manufacturer. Prior to either Option 1 or Option 2, TS had no brick-and-mortar retail outlets. The merger with the footwear manufacturer All Champion (AC) will produce gains in economies of scale, and will give TS the possibility of growing.
As a multinational company, AC has access to more and cheaper resources such as finance. Additional finance will allow for research and development of new products. TS will be able to develop the new line of running shoes and expand its product portfolio.
Merging with AC will also allow for rationalization of resources, such as concentrating output on one site and concentrating managerial and technical capacities. For instance, TS will have access to larger IT and marketing departments to improve its website and deal with online sales more efficiently.
A merger with AC eliminates a strong competitor in the market. The two companies might have different strengths and experiences and they, therefore, could fit well together. The new merged company will probably be stronger and could therefore increase its competitive power in the market. AC´s market share (only 10 %) will increase.
On the other hand, a merger with AC may have a number of drawbacks. In a merger process, the smaller company, such as TS, could be cannibalized by the larger one. TS’ culture may be dissolved within AC’s way of doing things. There are also high chances that some of AC’s factories will be closed, causing discontent within the local community. The finance manager is right to be suspicious about this merger. TS’ reputation may be hurt due to the possibilities of closing factories and sales may fall.
Merging with a footwear retailer:
If TS merges with a footwear retailer with a strong presence in domestic and international markets, it will secure an outlet for its products. TS will be able to increase its domestic market share of 10 % and additionally access the
international markets, using the experience, knowledge and expertise of the footwear retailer. TS will keep the manufacturing process and then factories will not close. In addition, the risks of cannibalization of this option are low.
However, this merger may not exclude a strong competitor such as AC. Production economies of scale will not be gained, as the footwear retailer has no experience in the footwear manufacturing process.
Overall, merging with AC will give Top Star the competitive edge needed to grow and develop its product portfolio. On the other hand, merging with a footwear retailer also has some evident advantages, but it seems that merging with AC looks like a stronger choice.
It is expected that candidates provide a conclusion with a substantiated judgment.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
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].
If a candidate evaluates / addresses only one merger option, award a maximum of [5].
A balanced response is one that provides at least one argument for and one argument against each merger option.
Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.
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 the answer.