| Date | November 2017 | Marks available | 2 | Reference code | 17N.2.SL.TZ0.3 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 3 | Adapted from | N/A |
Question
Davenport Electronics (DE)
Davenport Electronics (DE) is a small company that manufactures remote control electronic devices that open garage doors. The devices are kept in owners’ cars. For years, DE devices operated in a fashion similar to those of its three competitors. When an owner activated the remote control, a unique password was transmitted and the garage door opened.
Unit sales and revenue had not grown for several years until, four years ago, some computer hackers discovered how to steal passwords when remote controls are activated. With the passwords, hackers could later open garage doors and steal their contents. For DE and its competitors (whose products operated in a similar manner), sales began to decline.
DE responded by developing a way to change the unique password every time a remote control is activated. Thus, by the time a hacker successfully steals a password, the password no longer works. DE’s innovation significantly enhanced the security of a DE remote control.
The three competitors are all larger than DE.
As a result of this innovation, DE’s market share and scale of operation have increased. However, DE is now experiencing diseconomies of scale. Some managers also worry that, with the pressure to meet increased orders, the company will lose its focus on quality. Other managers believe that future success in the industry will depend on frequent innovation.
Define the term diseconomy of scale.
Using the table, construct a product position map/perception map for all four companies.
Using the table, construct a product position map/perception map for all four companies.
Explain how DE’s innovation is an extension strategy.
With reference to DE, discuss the merits of small organizations compared to large organizations.
Markscheme
Diseconomy of scale refers to an increase in average unit cost as a business increases in size.
Accept any other relevant definition.
Candidates are not expected to word their definition exactly as above.
N.B. no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding of the idea that a business can develop inefficiencies as it grows in size.
Award [2] for a full, clear description that conveys knowledge and understanding similar to the answer above. To receive [2], candidates must express the idea of an increase in per unit cost as a business increases in size. In some instances, a candidate does not have literally to say “per unit”. For example, if a candidate says “average cost” and the response is otherwise sufficiently strong so that a reader can know from context that the candidate intends per unit or average unit cost, award [2].
Award [1] for the overall layout of the map with both axes correctly labelled (price: high or low; quality: high or low).
N.B. It does not matter which one is horizontal / vertical.
The correct positioning is as shown above. Adjust appropriately if a candidate makes price the horizontal axis and quality the vertical axis.
Award [2] for a correctly labelled position map with two of the companies properly placed.
Award [3] for a correctly labelled position map with three of the companies properly placed.
Award [4] for a correctly labelled position map with all four companies properly placed.
If a candidate correct produces a position map, correctly labels the axes, places DE correctly on the x axis (if the position map is oriented as above), and has companies A, B, and C correctly placed in terms of price but slightly off-center in terms of quality, award [3] provided that A, B, and C are vertically aligned (or horizontally aligned if the map is oriented the other way).
In this case, the candidate has made one conceptual error – where to place medium quality – and repeated it two more times. Do not double and triple penalize. In effect, the candidate has drawn a correct position map and placed three companies correctly, assuming a “conceptual OFR”.
Award [1] if the candidate demonstrates some understanding of the product life cycle curve. Award an additional [1] if the candidate has correctly drawn the product life cycle curve, labelled both axes correctly, and identified at least four of the following stages: development, induction, growth, maturity, and decline (candidates do not have to use precisely those terms but they should be terms of roughly equal meaning). Award a maximum of [2].
N.B. If a candidate has at least four stages correctly drawn and identified and labeled correctly the x axis but labels the y axis “market share”, award [2].
DE’s sales appears to have been at a maturity. Then, after the hackers, sales began to decline industry-wide. By developing an innovation that prevented the hackers from affecting the security of their product, DE was able to extend the life of its product. Sales not only returned to prior levels but actually began to increase.
Award [1] if candidates convey some understanding of an extension strategy. Award [2] for a clear explanation.
If a candidate merely draws and labels an extension curve on their product life cycle, award [1] for 3 (c) (ii).
In general, advantages of large businesses include:
- an enhanced ability to survive
- economies of scale
- higher status
- market leader status
- increased market share.
In general, advantages of being small include:
- greater focus
- greater cachet
- greater motivation
- competitive advantage
- less competition.
In the case of DE, the above advantages would in general apply. However, the circumstances can be further nuanced based upon the stimulus. Traditionally, the company was small and had a focus on quality, arguably its unique selling point. As the company grew, many insiders worried that DE would lose its focus on quality. Now, if it is to have cachet, it will have to rebrand itself and base its USP more on the security that its product offers.
Although the company probably also experienced a number of economies of scale, it was also experiencing some diseconomies, which invariably reflect that some inefficiencies from growth have crept into the business. With growth, DE has probably expanded its workforce. An increase in employees could change the character of the organization. Communication would be more difficult, both in the literal sense (having to communicate to a larger number of people) and in the figurative sense (new employees do not know the “unwritten” rules and norms of an organization, so greater care has to be taken in all communications).
An increase in size brings both advantages and disadvantages. In general, the larger the organization, the more it can benefit financially from size – more product lines and products and, with a diversity of revenue streams, an enhanced ability to survive. However, in DE’s case, it still has only one product. If the company grows and it increases its fixed costs, it takes some risks. If one of its competitors develops an ability to provide comparable security to the product of DE, DE’s sales could fall – but it may now be committed to higher fixed costs.
Candidates are expected to provide conclusions and judgment.
Accept any other relevant answer.
Marks should be allocated according to the Paper 2 markbands for May 2016 forward with further guidance below.
A balanced response is one that provides at least two arguments for and two arguments against the option.
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.
