| Date | November 2019 | Marks available | 2 | Reference code | 19N.2.SL.TZ0.5 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Describe | Question number | 5 | Adapted from | N/A |
Question
FrioAire Appliances (FA)
FrioAire Appliances (FA) manufactures medium-priced and medium-quality refrigerators. It is a multinational public limited company. Its factory is located in a less economically developed country that has high unemployment, a tradition of autocratic leadership and labour costs lower than FA’s home country. The factory is profitable, and FA pays consistently good dividends. Market growth for medium-priced and medium-quality refrigerators is limited.
As part of a strategic objective to increase productivity and to enter a fast-growing market for high-priced and high-quality refrigerators, FA is considering building a new factory in and relocating production to Germany. This would require closing the factory in the less economically developed country. The new factory will:
- use innovative technologies, including advanced robotics and 3D processes
- require fewer employees, but those it does require will need to have better skills and qualifications.
Germany has a highly skilled, qualified and productive workforce. The new factory would allow FA to reposition its products. However, FA would need to raise significant finance to build and equip the new factory.
FA’s leadership style at the factory in the less economically developed country is autocratic. Members of FA’s board wonder whether this style would be suitable for the new factory in Germany, where workers have more bargaining power because of their high skill level and the labour-friendly cultural traditions. In Germany, FA would have to follow more regulations regarding the environment, health and safety, and employee rights.
FA workers in the less economically developed country are very loyal to FA, which has continued operation through a civil war at significant cost to itself (for security). If FA were to close in the less economically developed country, the workers would not find such good jobs.
Describe one disadvantage of operating as a public limited company.
Explain one benefit and one cost to FA of using an autocratic leadership style.
Explain one positive and one negative impact of FA on the developing country.
Evaluate the option of building a factory in, and relocating, to Germany.
Markscheme
Disadvantages of operating as a public limited company include:
- The expense of going public and the ongoing expenses of reporting to the government or shareholders.
- Loss of privacy, as the company must report to the public and to shareholders.
- Strategic decisions can take longer, as management has responsibility to communicate with the board, shareholders, and, often, other stakeholders.
- Risk of takeover.
Unless candidates otherwise have elements in their response deserving marks, do not award any marks for statements such as “dilution of control” or “the owner will not have full control.” Answers such as these two show a significant misunderstanding.
Award [1] for an identification of a disadvantage and another [1] for sufficient description thereof.
In the stimulus it is indicated that FA has an autocratic leadership style. This style appears to dovetail with the culture of the less economically developed country. Also, the factory is profitable and has been efficient through lower costs. It is possible that the leadership style fosters loyalty in this country because of the cultural fit.
The costs to FA include that autocratic leadership may stifle creativity and innovation, which could be available in a more democratic system. Productivity in Germany could be higher than in a less economically developed country. The fact that FA’s leadership is thinking of relocating to Germany indicates that they see problems in moving to a new higher-price segment.
Mark as 2 + 2.
Award [1] for each relevant benefit / cost explained and [1] with application to FA. Award up to a maximum of [2] per benefit/cost explained.
[2] cannot be awarded per benefit / cost if the response lacks either explanation and / or application.
For example: For an identification/description of a benefit / cost with or without application [1]. For explanation of a benefit / cost with no application [1].
Positive impacts of FA on the developing country include:
- Provides employment at wages better than those available in the less economically developed country.
- Was loyal during the civil war.
Theoretically possible other positive impacts include:
- Technology and skill transfers from FA’s host country to the less economically developed country.
Negative impacts of FA on the less economically developed country include:
- FA relies on an autocratic leadership style.
- FA does not use the most advanced technology in the less economically developed country.
- FA could leave the country, leaving many people who are currently dependent on the company out of work.
- FA does not provide the same employee rights provisions or health and safety provisions that it would in a less economically developed country.
Theoretically possible other negative impacts include:
- FA may pollute to a level in the less economically developed country that it would not in Germany.
Mark as [2 + 2]. For [2], candidates must identify a positive and a negative impact, explain it, and apply to the less economically developed country.
Award [2] for a positive impact with application to the less economically developed country.
Award [2] for a negative impact with application to the less economically developed country.
If there is no application to the less economically developed country at all then the maximum mark per impact is [1].
Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.
The option of building a factory in and relocating to Germany is a major strategic decision. In certain respects, FA would be an entirely different company: new products, new processes, new types of workers and new leadership styles, as well as a wholly new cultural context. Going into highly sophisticated high-tech manufacturing with robots has the potential to position FA for a future of highly automated manufacturing. Without making these changes, FA runs some risk of remaining stuck in much lower value-added processes, which in the long run are less profitable. The risks are very high. The potential rewards are high as well.
Perhaps a strategy for FA would be not to sell the older factory but to continue to operate it and rely on those profits to support the new factory as it gets started. Whether FA’s balance sheet is strong enough to operate both factories is an open question, as is the question of whether its management has sufficient depth to operate two major plants.
Balance in this context means having two arguments for opening the plant in Germany and two arguments against, which could be partially couched in a discussion of leaving the old plant open.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
