Question
Nigris & Speroni (NS)
Nigris & Speroni (NS) is a national grocery store chain. In the tertiary sector, it benefits from economies of scale, including purchasing economies of scale. Its stores use sophisticated computerization to manage stock and monitor customers’ purchasing habits. NS is currently experimenting with cleverly placed products and short-term promotions to increase impulse purchases, which occur when a customer makes unplanned purchases. Something in the store – a smell, a vivid display, samples of products – triggers a customer’s desire for items.
NS has above-average prices compared to the industry average, but at least one other chain is more expensive. The grocery store industry is competitive and grocery stores use many different pricing strategies. NS is considering adopting an online ordering and delivery service for customers, which would operate from its stores.
Each of NS’ stores is give
n a number to identify it. Store number 507 is called NS 507.
Table 3: Selected financial information for NS 507 for 2019
On 1 January 2020 , an organic grocery store, U-Foods, opened near NS 507. U-Foods sells high-quality foods, including organically produced fruits and vegetables, organically raised meats and sustainably sourced seafood (not from fish farms). It charges higher prices than $N S 507$ and has higher margins. The few processed foods that it sells are organic and low in salt. Unlike $N S 507$, U-Foods does not sell cigarettes or high-sugar beverages and cereals. It is also not considering an online ordering and delivery service like $N S$ is.
In the first six months of 2020 , however, NS 507 lost market share. Sales revenue was $12 \%$ lower than in the first six months of 2019 , even though the number of customers and transactions did not change.
a. State two types of business, other than grocery stores, that operate in the tertiary sector.[2]
b. Explain two elements of U-Foods’ marketing mix other than price.
c.i. Calculate, for 2019 , NS 507’s gross profit margin (no working required).
c.ii.Calculate, for 2019, NS 507’s net profit before interest and tax (no working required).
d. Explain one economy of scale, other than purchasing economies of scale, from which NS might benefit.[2]
e. Discuss two possible methods that NS 507 could use to regain lost market share.$[10]$
▶️Answer/Explanation
Ans:
a.The tertiary sector is the service sector of an economy, including retail outlets.
Candidates may name any type of service sector business. Do not give credit for “online grocery stores” but award a mark for convenience store (or some other small shop where some grocery items might be sold).
Award [1] for each type of business in the service sector identified up to [2].
b.The four Ps of the marketing mix that candidates may write about are place,
promotion, and product. In the stimulus, place and product can be identified:
- Place: retail stores.
- Product: According to the stimulus, U-Foods sells all-organic foods. High-quality, all-organic products are its USP.
Award [1] for identification of one of the three Ps and an additional [1] for application to the stimulus and explanation.
Mark as [2 + 2].
N.B. If the candidate mentions promotion, award a maximum of [1], as nothing in the stimulus would allow for application. Thus, if a candidate explained promotion with some theoretical types and, then correctly explained and applied product, the total mark would be [3]: [1] for promotion and [2] for product.
c.i. $\frac{\$ 5300000}{20000000} \times 100=26.5 \%$ Gross profit margin is $26.5 \%$
Award [1] for the correct answer.
c.ii.Net profit before interest and tax $=3 \% \times 20000000=\$ 600000$
Award [1] for the correct answer.
d. Other economies of scale from which NS might benefit include:
- Marketing economies of scale
- Financial Economies of scale
- Managerial economies of scale
- Human resources economies of scale
- Network economies of scale
Accept any other relevant economy of scale.
Award [1] for identification of an appropriate economy of scale and an additional [1] for appropriate application to and explanation of the stimulus. Maximum award: [2].
e.
The stimulus provides some guidance to the students on ways to recover lost market share. The fact that sales revenue is down 12 % suggests that NS 507 has lost some sales to U-Foods. Given that the number of transactions has remained the same suggests that some customers continue to shop at NS but also go to U-Foods for certain items. One way that NS could attempt to recover those lost sales is to determine which specific items have seen their sales go down. It is likely that, for these items, shoppers are going to U-Foods. Once NS has identified which items customers are going to U-Foods for, NS can make modifications: improve the product, alter the price, or have better promotions. A disadvantage to this strategy is that it may not work or may be too expensive to work. For example, some customers are probably going to U-Foods for locally produced organic meats. However, probably few opportunities exist for economies of scale when U-Foods (or NS) purchase this type of meat. For U-Foods, passing on high costs to customers is probably not a problem. U-Foods is more expensive than NS and customers expect that. For NS customers, however, prices lower than U-Foods is the expectation. Were NS to start charging more, many customers may resist.
Another strategy is to use more aggressive pricing. NS is a huge firm, and it could lower its prices to try to gain more customers. Predatory pricing is probably illegal, but NS 507 could, with the backing of the whole organization, be very aggressive in its pricing – just short of predatory – to win back customers or the specific purchases that are going to U-Foods. The problem with this strategy is that NS already has thin margins – typical of the grocery store industry – and lowering prices even further may be a problem.
A third option is to start allowing customers to order online and have home delivery. This option would be expensive to set up and operate, and NS would lose impulse sales.
Accept any other relevant way that NS 507 can recover lost market share.
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”.
HS hires many school leavers without qualifications. Because of the valuable social service that HS provides, an independent online media provider will feature HS 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 HS 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 HS’s snacks.
a. Describe one role of a vision statement for $H S$.[2]
b.i. Explain how the following can benefit $H S$ :[2]
job enlargement
b.ii.Explain how the following can benefit $H S$ :[2]
intrapreneurship.
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 $H S$ 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 $H S$.
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 $H S$. 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 $H S$.
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 $H S$ ‘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]
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.