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
Copper Health (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.[2]
b. Explain one advantage and one disadvantage for $\mathrm{CH}$ of having a mission statement.[4]
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.
