Define the term revenue streams.

Explain one advantage and one disadvantage of WE changing its legal status to a public limited company.

With reference to WE, distinguish between internal and external growth.

Discuss whether WE should retain its programme of corporate social responsibility (CSR).

Revenue streams refer to the different sources of sales revenue that a firm may have. Often, as firms grow, they attempt to diversify revenue streams as a way to find sales growth in saturated markets or as a way to offset risk (if sales revenue from one revenue stream declines, perhaps it can be offset by sales growth in another revenue stream).

Award [1] for a partial answer that conveys some understanding and [2] for a complete response that shows full understanding. Candidates do not have to word exactly as above. Simple exemplification is insufficient for a second mark. There must be some definition or description.

Advantages of changing legal status to a public limited company include:

• Access to greater sources of finance, either debt or equity, which WE may well want given its plan to grow externally through acquisition.
• Greater prestige and name recognition, which may help WE as it approaches and acquires additional business.

Disadvantages of changing legal status to a public limited company include:

• The initial and ongoing cost of being a public company, which requires extensive paperwork and filings with the government, as well as regular communication with shareholders. As WE is struggling to maintain margins, having additional expenses may further contribute to lower profitability.
• Public disclosure to shareholders and media prevent WE from being more private in how it operates. Greater privacy with respect to strategy and direction could help WE more easily implement its strategies.

Accept any other relevant advantage or disadvantage.

Mark as 2 + 2.

For [2], candidates must identify an advantage or disadvantage, explain it, and apply it to the stimulus.

Internal growth occurs when a business increases sales revenue through expansion of current operations, typically by building more capacity, hiring more sales people, or having more channels of distribution. WE’s growth, up until it decided on a programme of external growth, was always internal and in the carpet industry.

External growth occurs when business grows through some activity related to another business external to the original one. When WE decided to purchase additional companies, it was acquiring revenue streams and operations from other firms, which allowed for rapid growth.

Accept any other relevant advantage or disadvantage.

Mark as 2 + 2.

For [2], candidates must identify an advantage or disadvantage, explain it, and apply it to the stimulus.

Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.

Much debate exists around the question of CSR. Some companies advocate it, arguing that CSR is a way to balance corporate power with corporate responsibility despite the fact that having a programme of CSR increases costs in the short term and that there is no certainty that it will enhance business performance in the long run (though a slight positive correlation appears to exist).

Others argue that a company’s only responsibility, other than obeying the law, is increasing profits for shareholders. CSR makes a company less efficient. If all businesses in an economy are operating at less than optimal efficiency, the economy as a whole will suffer (just as each individual business will).

In the case of WE, the question of CSR is complicated. On the one hand, the brand identity of WE was built first on ecological sustainability and, later, on a full programme of CSR (thus economic and social sustainability as well). To suddenly change focus and adopt a totally profit-oriented mentality, as Milton Friedman argues, could hurt WE’s brand identity in the marketplace.

On the other hand, WE has experienced a steady erosion in margins (and, thus, profitability). Were the company to continue to allow this to occur, in the long run, WE would put itself at risk. Some disagreement internally exists, with the CEO believing the issue is the costs of expansion while the CFO has suggested that it is the costs of CSR.

WE should undertake a full marketing audit to determine the impact of CSR on its brand identity, as well as a thorough financial and managerial costing analysis to determine the true source of declining profitability. Without that investigation, WE will have difficulty knowing whether it should continue with CSR.

For a balanced argument, a candidate must have two arguments for and two arguments against CSR. At least one of the arguments for and against can be purely theoretical, while at least one argument for and one argument against must be based upon application to the stimulus. If the candidate does not make judgments on conclusions, maximum award: [6].

Marks should be allocated according to the paper 2 markbands for May 2016 forward.

Many candidates struggled with this question, in part because they did not have a clear idea of what revenue is.

Many candidates knew one advantage and one disadvantage changing legal status, but often they failed to apply their response to the stimulus.

Application to the stimulus was much stronger on this question than with 4 (b).

Candidates often knew many advantages of corporate social responsibility but often knew only one disadvantage, cost. Thus, responses tended not to be fully balanced.