| Date | May 2019 | Marks available | 20 | Reference code | 19M.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
Refer to the Radeki de Dovnic Manufacturing case study (SL/HL paper 1 May 2019).
If RDM builds a new production facility in Europe, an immediate consequence will be an increase in capacity. At current levels of output this would lead to a reduction in capacity utilization. The current output of RDM’s factory is 20 000 units a year, with a productive capacity of 21 000 units a year before the new facility is built. If the new production facility is built, the greater capacity for the whole business will, at current levels of output, result in the capacity utilization falling to 50 % until production at the new facility starts.
Xi, the marketing manager, suggests that this increased capacity provides the opportunity for market development to be achieved by entering the United States (US) market.
The US market has similarities with Europe, with an aging population and low birth rate. Demand for customized healthcare devices is high. However, the healthcare system in the US is very different, with a much greater role for private sector healthcare compared to Europe, where much of the healthcare is state funded. In the US, 18 % of gross domestic product (GDP) is spent on healthcare compared with an average of 11 % in Europe. Advertising spend in the US is very high for the typical healthcare equipment business, which uses TV and the internet to reach individuals, whereas in Europe healthcare equipment businesses typically negotiate with government organizations. Average incomes in the US are higher than in Europe. Competition in the US is very high, although some major healthcare equipment businesses dominate the market. Industrial/ employee relations in the US are generally more decentralized than in Europe, with a lower level of unionization.
To assess the best way to enter the US market, some senior managers may have to move to the US and Xi may need to recruit some new staff in the US with specialized knowledge of US laws and regulations, as well as some additional marketing employees. Xi is aware that industrial/ employee relations are different in the US. Existing staff will have to get used to new ways of working and are concerned about having to work with new staff in the US.
[Source: © International Baccalaureate Organization 2019]
Jan is considering two options for the long-term development of the business: market development and diversification.
Option 1: Market development
Although Jan, with his strong associations with the US, likes the idea of developing the US market, he has concerns about it. Over the last four years, the exchange rate has fluctuated between €1 = $1.40 and €1 = $1.03. There is some evidence that the US wants to discourage imports and prefers foreign businesses to invest directly in the US. Jan thinks there are other markets in and closer to Europe that could be developed more easily without significant changes to the distribution channels or the culture of the business. He has suggested the United Kingdom (UK) market as an alternative, which has a health service similar to those in other European countries. In most other respects the UK market is similar to other European markets. The main worry is that the UK market would be difficult to enter, as established suppliers are likely to be preferred by the health service and there may be financial constraints on the health service.
Option 2: Diversification
Jan is also considering a proposal by Heinrik Langer, a business analyst. Heinrik’s idea is for diversification. He thinks that RDM should develop a service role. RDM’s directors and workforce have all of the skills and experience needed to help other businesses convert from traditional production methods to automated robotic production processes. This service (known as a consultancy) would require recruitment of more engineers and computer specialists as well as highly skilled and experienced consultants. Heinrik’s proposal is based on:
- the likely low long-term growth prospects for RDM’s healthcare products. Population trends in Europe due to the low birth rates (Table 1) will lead to an aging population in the short and medium term. However, in the long term there could be economic and demographic problems arising from the eventual decline in population that is predicted to occur when the birth rate is less than 2.1
- his view that every business should have a service role
- possible financial pressures on European governments, potentially reducing healthcare spending
- his data market research results on robots and robotics (Table 2).
[Source: © International Baccalaureate Organization 2019]
Table 1: Population birth rates
[Source: © International Baccalaureate Organization 2019]
Table 2: Market research on robotics
[Source: © International Baccalaureate Organization 2019]
Nikita, RDM’s director of corporate strategy, has asked both Jan and Xi to provide data on each option to help her construct a decision tree to present at the next board meeting. The decision tree below summarizes the issues involved in the decision.
Decision tree based on Jan’s and Xi’s estimates
[Source: © International Baccalaureate Organization 2019]
Using the case study and the resources, recommend whether RDM should choose Option 1 or Option 2.
Markscheme
Refer to Paper 1 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.
Option 1: Market development
Arguments for:
- Good use of capacity.
- Looks good on decision tree. EV US=$11m; EV UK=$10m
- US high cost($5m), UK lower cost ($3m), both more than Option 2
- UK market similar to those in other European countries.
- UK market close
- UK market would not need major changes to distribution channels
- Lower risk in Ansoff
- Birth rates high in US, UK so possible aging population
The following points are in the resource so are not necessary for an answer but can be rewarded:
- US is a massive market with wealthy customers.
- Spending on health in US is higher, incomes in US are high.
- Likely long-term decline in Europe.
- Lower union power in US.
Arguments against:
- Fluctuating exchange rates make planning especially pricing difficult
- US likely to discourage imports and prefers direct investment
- No experience of either market.
- Difficult to enter the UK market
- Possible decline in healthcare markets especially US, UK
- There are already established suppliers in the UK market
- Reduced healthcare spending in Europe
The following points are in the resource so are not necessary for an answer but can be rewarded:
- US is highly competitive, dominated by multinationals.
- Recruiting could be expensive.
- Different rules and regulations in US may mean changes to product designs.
Option 2: Diversification
Arguments for:
- Existing product may go into decline phase of product life cycle.
- Rapidly growing and new market. (Table 2)
- RDM has wide experience.
- Possible reduction in Europe health care markets because of reductions in government spending.
- Importance of service industries, healthcare opportunities likely to decline especially in Europe
- Lowest cost ($2m) Highest chance of success (0.8)
- Decision tree gives best EV ($12m)
Arguments against:
- No experience.
- Higher risk in Ansoff.
- Recruitment may be difficult (high skills, experience needed)
Allow discussion of any reasonable related issue. Discussion of Brexit in the UK may help a candidate reach a conclusion but is not to be rewarded as the issue is external to the case.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section C.
Criterion A: Knowledge and understanding of tools, techniques and theories
Decision tree and data from case, the 7Ps, diversification, interpretation of data, stakeholder differences, pace of change, Ansoff, Risk. Force Field and SWOT, but both often misunderstood in which case not rewarded. Be careful, mention of market development/diversification does not necessarily show knowledge of Ansoff – the candidate could be quoting from the case.
For [4] Good understanding of a range appropriate tools/techniques/theories
For [2] Satisfactory understanding of a limited number of tools/techniques/theories
Criterion B: Application judged by use of stimulus, in particular the extra material.
Remember, understanding has been rewarded in Criterion A. So B is about USE
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.
For [2]: some limited context/application but not developed. Use of tools limits candidate’s ability to make reasoned arguments.
Criterion C Reasoned arguments
Options discussed in balanced way, conclusions drawn and recommendation made/supported.
For [4]: There needs to be a clear recommendation supported by the data and analysis.
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, which could be scene setting, or an executive summary (e.g. presenting/stating the recommendation)
- a concluding paragraph. Please note this can be different from the concept of a conclusion/recommendation shown in Criterion C. Criterion D can be rewarded without a recommendation. Also please note that if there is an executive summary at the beginning (e.g. presenting/stating the recommendation) then the concluding paragraph should be more than simply a repeat of the executive summary (i.e. more than simply re presenting/restating the recommendation)
- fit-for-purpose paragraphs. This means: not too long, each focused on distinct issues,
- structure. This means whether there is a clear flow to guide the reader 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.
Criterion E: Individuals: Heinrik, Jan, Xi; Groups: Directors; shareholders; employees; customers; competitors. Likely issues include what the individuals want, the impact on employees, whether employees/managers have right skills, etc.
For [4 Individual(s) and group(s) are named and considered in a balanced way. I.e needs 1 or more of both individuals and groups developed
For [2]: one individual or one group considered appropriately, or several individuals and/or groups considered superficially.
For [1] one individual and/or one group considered superficially
Examiners report
There was a wide range of answers for this question. The best answers showed a strong grasp of applying appropriate tools. Relevant tools could include, but not necessarily: decision trees, Ansoff, sometimes the Boston Matrix, SWOT and occasionally force field analysis along with relevant ideas such as motivation, marketing, risk, management of change, sources of finance. The choice of tools and ideas was more important than trying to include as many tools/ideas as possible – the choice being based on the need to be able to justify a recommendation. The best answers made good use of the tools/ideas and strong use of the information provided in the additional material. Few candidates scored well on Criterion E. For Criterion E it is important for candidates to build their answer around the various stakeholders in the business. Many candidates wasted marks on Criterion D by not structuring their answer well including such simple ideas as an introductory paragraph and a concluding paragraph i.e. a separate paragraph including a recommendation or a conclusion.
