| Date | November 2020 | Marks available | 20 | Reference code | 20N.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 Ducal Aspirateurs case study (DA) (SL/HL paper 1 Nov 2020).
There are several important items to be discussed at DA’s board meeting, three of which are outlined below.
Item 1: Budgets. DA produces its budgets based on the functional areas of the business. For example, the Marketing, Production, Innovation and Corporate Social Responsibility (CSR) Departments are all separate cost centres. Pierre is proposing that budgets should be more detailed so that, for example, each of DA’s products has its own cost centre and each separate innovation project is also a cost centre.
Item 2: Recommendations from the management consultants. The management consultants propose bringing DA more up to date with employment practices by replacing the many benefits that employees get with a low basic pay and a profit-related bonus, and charging market rents for the housing in Ville d’Ablet. There will also be penalties on employees for failing to meet targets. The CSR department are opposed to this idea because they believe it will change the culture of the business, which has built up over many years.
Item 3: The manufacture of rechargeable batteries used in cordless products. DA currently makes its own rechargeable batteries. In 2019, it made 10 000 batteries. The variable cost is €15 per battery and the fixed costs are €30 000. XL, a public limited company, is a major manufacturer of batteries. DA has contacted XL to manufacture the rechargeable batteries, which they will buy from XL at €17 each.
The final item in the board meeting (Item 4) is to discuss and decide which of the directors’ proposals, Option A, B or C, to implement.
Mia withdrew her proposal (Option C), and there is now additional information available on the remaining two proposals.
Additional information on Option A: Market development
Louise plans to target the mass market and proposes using the brand name DuLow for the redesigned products. She is planning for DA to outsource production to Star Electrics (SE). SE uses mass production together with some customization of products. SE keeps costs low by importing cheap raw materials and paying low wages.
Ben, the human resource management director, is concerned about the impact this change would have on DA’s employees and about the impact of DuLow on DA’s other brands. He has collected relevant information on household electrical appliances (see Figure 1).
Figure 1: Data on household electrical appliances, France
Louise has estimated that the investment necessary to launch the DuLow product range will have a payback of about two years and an average rate of return (ARR) of about 30 %. This assumes high market penetration.
Additional information on Option B: Product development
Salah’s plan requires new production lines, one for each product. Salah thinks that cellular manufacturing, together with a flow production assembly line, would be a good way to manufacture the interchangeable modules. The investment cost is estimated to be €100 million if production lines are converted gradually and €20 million more if all conversions are done at the same time. Salah estimates the following net cash inflows (excluding the initial investment cost) (Table 1).
Table 1: Forecast financial information for Option B (figures in € millions)
Louise does not think DA can afford the project because profits are low. Dodi, the finance director, thinks that the investment is too large and he believes that some shareholders are also concerned about the size of future dividends. Salah believes that shareholders will be pleased about the revenues that this investment will generate. Mia is worried that the products would be expensive to market and it would be difficult to make a profit. She also
thinks that demand for these new products will be difficult to predict.
Additional information for both options
Figure 2: Decision tree
Using the case study and additional information from Sections B and C, recommend whether DA should choose Option A or Option B. You may find it useful to complete and use the decision tree and to analyse Table 1.
Markscheme
Refer to Paper 1 markbands for May 2016 forward, available under the "Your tests" tab > supplemental materials.
Option A Louise’s plan
Arguments for:
- Huge market, not just France
- High volume, mass production using technology, some customization
- Benefits of offshoring
- Reasonable ARR of 30 % and a 2 year payback.
Arguments against
- Salah and Mia object to offshoring
- Disadvantages of offshoring
- Impact on existing employees. Redundancies? Low morale? Fear of losing jobs. Not like family business
- Would there be an impact on ‘upmarket’ brands?
- High risk in Ansoff (new product, new markets)
- ARR based on many assumptions
- In decision tree most likely outcome gives little return. Disastrous if poor outcome.
Option B Salah’s plan
Arguments for:
- Innovative
- Very positive market research
- Benefits of cell production and flow production
- Could increase sales and brand loyalty
- New income stream need as poor profits at the moment
- High chance of good performance in decision tree
- Marginally better net expected value (38 million euros)
- Potential high returns if successful, small chance of low returns.
Arguments against:
- Higher investment costs €100m
- No dividends for 5 years
- Benefits may not last long – Louise thinks it only extend product life cycle
- Could lead to higher prices, lower sales
- 3 years 2 months, longer than option A 16 % ARR, lower than Option A (could miscalculate as 36 % which is higher)
- Opposed by Louise and Mia
- Will demand last (Mia thinks it will fall in 5–7 years, but that is a long time)?
Decision tree favours Option B, all products converted with EV €38m compared with €35m for Option A. ‘All products converted’ (€138m) is preferred to ‘gradual conversion of products’ (€126m). NB Some candidates might average the EVs for Option 2 and get the answer €32m. This is incorrect but allow OFR.
Option B seems to have higher chance of success and higher returns but at a higher cost.
Accept any other relevant discussion.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section C.
Criterion A: possible theories, management tools and techniques include: Investment appraisal, decision trees, interpreting data, Ansoff, importance of assumptions, also, possibly but less likely, marketing issues, HRM/management/motivation issues, SWOT/Force Field (Each of these needs to be used with a sense of purpose especially Ansoff, SWOT, FFA).
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 relevant tools, techniques or theories, but not developed.
Beware that if, for example the Decision tree is not used then that is recognized in the Criterion A mark and should not be reflected in Criteria B and C marks.
Criterion B: The stimulus and the tools, techniques, ideas, theories applied to the decision. Application will also be judged by the use of the stimulus 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: Options discussed in balanced way, conclusions drawn and recommendation made/supported.
For [4]: There needs to be a clear recommendation supported by a balanced comparison of the options using the relevant evidence and data for both options.
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 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 missing.
Beware of under-rewarding weaker work which may have all/most of the elements but very few paragraphs and little to say within them.
Criterion E: Stakeholders:
- individuals: Louise, Salah, Mia, Ben, possibly Pierre, Dodi
- groups: Employees, Shareholders (as a group as opposed to the individuals above) the Board, customers, communities, governments.
Please be aware that a simple mention of groups, for example using the phrase ‘shareholders will be pleased…’ which is a phrase from the case is insufficient to be consideration of a group.
For [4] Individual(s) and group(s) are considered in a balanced way. ie 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.
Examiners report
Candidates had a range of information sources to use in their answers and many candidates found these sources accessible. While many candidates were able to carry out relevant analysis of the issues and draw a conclusion/recommendation a significant number of candidates missed opportunities for marks through a lack of clear understanding of the marking criteria. For example, a wide range of scripts had no introduction and/or structured paragraphs and many candidates did not recognise the criteria that awards marks for developing consequences of decisions on groups/individuals.
Candidates are expected to use business tools in their answers. In this instance there were clear opportunities to use the given information relating to the decision tree and to interpret and use investment appraisal information.
Many candidates are good at identifying the key pieces of information however such information is often quoted with little development. To gain higher marks on criterion C candidates need to develop discussion along the lines of: 'this means that....' or 'because.... A....then....B....' or' on the one hand...on the other....'. This will help the candidate to think further than just the basic evidence. This should be part of the process of working towards a recommendation.
