| Date | November 2018 | Marks available | 20 | Reference code | 18N.1.HL.TZ0.5 |
| Level | Higher level | Paper | Paper 1 | Time zone | Time zone 0 |
| Command term | Recommend | Question number | 5 | Adapted from | N/A |
Question
Sam and Finn are having difficulties resolving their disagreements. Finn was convinced that the problems at AFA should be resolved by a change in the organizational structure. Sam, however, was convinced that he should strengthen the organizational culture. Sam reluctantly accepted the need for greater delegation but insisted that there should be more training for all employees on the culture and ethics of AFA.
As part of greater delegation, Kim was given responsibility for the relationship between AFA and its suppliers. Kim is concerned that she spends a lot of time chasing orders that do not arrive and dealing with the poor quality of orders. Some products have to be thrown away because they have passed their sell-by dates*. Others have to be returned to suppliers because the outlet managers do not accept the poor quality and therefore cannot be sold.
AFA’s stock of fair trade woollen hats has now reached 500, with an annual sales average of around 1250 for the whole business. Kim wants to introduce lean production including total quality management (TQM) throughout AFA’s operations and has created a Gantt chart to show the stages in implementation.
Figure 1: Gantt chart for the implementation of lean production including TQM at AFA
* sell-by dates: dates printed on the packaging of products that state the date after which the product can no longer be sold.
Sam is still impatient and keen to grow the business. He is becoming increasingly frustrated by problems with suppliers, particularly AB Clothing (ABC). Frequently, orders are late and wrong, and quality is becoming a major problem. Sam has heard rumours of disagreements amongst ABC’s board members and discontent from major shareholders. ABC’s share price has fallen 25 % in the last month. Productivity has fallen and strikes have been threatened. Recently, several press reports linked ABC to using child labour and suggested that the company did not always use organic materials for its products. Sam is wondering whether to take over ABC. He is sure that many of the problems at ABC could be resolved and that ABC would become, once again, a reliable supplier.
Sam has put together some information. Figure 2 relates to AFA and shows a summary of issues and additional information. Tables 1 and 2 provide data on ABC.
Figure 2: Fishbone diagram of the current situation at AFA
Table 1: Accounts for ABC for the years ending 2017 and 2018
Table 2: Selected marketing information for ABC
Refer to the As Fair As case study (SL/HL paper 1 Nov 2018).
Using the case study, resources and appropriate business tools, recommend whether AFA should take over ABC.
Markscheme
Refer to Paper 1 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.
Arguments for:
- Might solve supply problems, such as lateness of deliveries and wrong orders.
- Better control of quality is possible particularly as lean production is an option.
- Easier to manage the supply chain.
- Could be a good time to buy – ABC’s share price is low (down 25 %), shareholders are dissatisfied and at the current share price the business seems cheap.
- Sam is impatient to grow the business – vertical integration would help.
- Market growth is very strong (forecast 10 % in 2019).
- More marketing by ABC may solve ABC’s problems.
- ABC has potential to exploit this growth by maintaining its market share (market share forecast to fall in 2019).
- An increase in ABC’s marketing budget may produce good results
- Sam is ambitious
Arguments against:
- Potential for bad publicity about ABC to damage AFA. Not using organic materials would destroy Sam’s business model.
- Productivity is falling, strikes are threatened. Can Sam solve these problems?
- Maybe solve other problems first, eg disagreements, poor management, unresponsiveness, lack of training, quality issues.
- Falling sales at ABC may be due to poor products (sales forecast down from $6.5m to $5.9m).
- Doing nothing is always a useful option.
- ABC has liquidity problems. The current ratio decreases from 1.0 to 0.6.
- Business is highly geared – should Sam take this on? Is it a risk? Gearing up from 400 % to 500 %, high and rising. High and rising gearing is a worry.
- Falling sales and profits at ABC are a real worry.
- Falling return on equity for ABC (equity constant, huge drop in profits (from $1m to $0.25m)
- Growing number of competitors. (competitors forecast up from 5 to 20 in 2019)
- Increasing worries of growing current liabilities (up from $2m to $5m in 2019).
- Falling share price. Why?
- Managerial conflict at AFA – could they take on more problems?
The decision is likely to hang on the extent to which Sam/AFA can solve ABC’s problems.
Accept any other relevant discussion.
Marks should be awarded according to the paper 1 mark bands for May 2016 forward, section C.
Criterion A: possible theories, management tools and techniques include: Accounting techniques and ratios, interpreting data, mergers/takeovers, Fishbone, Boston Matrix, Ansoff, marketing issues, HRM/management issues, SWOT/Force Field/Decision trees (if used with a sense of purpose), the importance of assumptions.
For [4]: Tools, techniques and theory understood and developed well with some relevance to the additional stimulus material.
For [2]: some understanding of at least two tools, techniques or theories, but not developed.
Criterion B: the tools, techniques, theories and stimulus applied to the decision. Application will be judged by the use of the stimulus material.
For [4]: relevant tools, techniques and theories are applied well to the case study context and additional stimulus material, the application is convincing and relevant.
Remember, understanding has been rewarded in Criterion A.
For [2]: some limited context/application but not developed. Use of tools limits candidate’s ability to make reasoned arguments.
Criterion C: Takeover discussed in balanced way, conclusions drawn and recommendation
made/supported.
For [4]: There needs to be a clear recommendation supported by the data.
For [2]: Some limited arguments but not justified. Or limited analysis (e.g. one-sided argument) but candidate arrives/draws a reasoned conclusion.
Criterion D: Structure: This criterion assesses the extent to which the student organizes his or her ideas with clarity, and presents a structured piece of writing comprised of:
- an introduction
- a concluding paragraph. Please note this can be different from the concept of a conclusion/recommendation in Criterion C. D can be rewarded without a recommendation.
- fit-for-purpose paragraphs. This means: not too long, each focused on distinct issues,
- structure. This means how the reader is guided through the discussion, how the paragraphs are sequenced.
For [4]: all four elements present, clearly organized.
For [2]: No logical structure but other elements present or logical structure with other elements missing.
Criterion E: Stakeholders:
- individuals: Sam (most likely), Finn, Kim, individual consumers.
- groups: Managers, employees, (both at either business) customers, communities, governments.
For [4] Individual(s) and group(s) are considered in a balanced way. ie needs 1 or more of both individuals and groups
For [2]: one individual or group considered appropriately, or several individuals or groups considered superficially.
