State two types of external growth.

Explain one advantage and one disadvantage for FI of motivating its employees using Taylor’s motivation theory.

Explain two reasons why Jacques may have found the transition difficult when FI became a public limited company.

Recommend whether Henri should choose Option 1 or Option 2.

Types of external growth include:

• Mergers
• Acquisitions
• Strategic alliances
• Joint ventures
• Franchising

Award [1] for each type of external growth up to [2]. Maximum award: [2].

Taylor’s motivation theory will clearly have advantages for FI.

Advantages:

• Setting ‘specific targets’ enhances production levels for FI
• Having ‘close monitoring’ enables better control for FI
• Due to the ‘close monitoring’ quality standards can be maintained and errors reduced
• Limited consultation enables quicker decisions by management
• Careful planning of tasks allow optimal use of resources for FI.

Disadvantages:

• The need to ‘monitor closely’ requires more management/supervisory time
• Reducing all tasks to fixed routines reduces flexibility
• Using Taylor does not allow team working which might otherwise give efficiency benefits
• Does not encourage creativity and new ideas for production methods
• There is clearly potential stress under this motivational regime. Pressure to perform and meet international quality and safety standards. This could be demotivating for some workers and it could increase staff turnover at FI.

Award [1] for a theoretical response with an additional mark for application to FI.

Do not reward candidates who argue the advantages/disadvantages from the point of view of the worker and NOT the company.

Mark as a [2+2].

When FI became a public company, Jacques’s situation changed. As a largely autocratic leader, he had not ever had to explain his decisions to anyone. He was in control. Now that he is the head of a public limited company with many shareholders, he had to explain his decisions to a board of directors that he had not personally selected.

As head of a privately held company, Jacques could use company resources as he saw fit. If he made a poor decision and it hurt the finances of the company, he was only hurting himself. Now, as head of a publicly traded company, he has a fiduciary responsibility with the resources of the company. All resources should be used judiciously with the aim of improving the return to shareholders.

As a public limited company, FI was subject to greater media scrutiny, which meant that any issue or problem was potentially subject to public viewing through the press. Jacques had always valued privacy. He largely controlled what information got to the press. Now as head of a publicly traded company, FI had to adopt an aggressive public relations strategy as a way to minimize informational risk and maximize shareholder value.

Accept any other valid and relevant reason Jacques may have found the transition difficult.

Mark as [2 +2].

Award [1] for identification of a reason he may have found the transition difficult and an additional [1] for explanation and application.

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

The advantages of long-term debt are that FI gets money now and the repayment is over many years. Ownership is not affected by long-term debt, and, for a company as old and established as FI, financing from banks or other financial institutions would probably not be that hard to obtain.

The disadvantages of long-term debt are that interests costs will rise, which increases outflows and liquidity will decrease. Additionally, the bank may put some restrictions on FI in the loan agreement which might limit future liquidity solutions in the future.

The alternative method, issuing and selling additional shares of stock, has the advantage that it would raise equity, which has no interest payments. Thus, FI could raise money and invest it in current assets such that it could start taking trade and other discounts. Liquidity through increased cash inflow would improve.

The main disadvantage is that the ownership of FI would be diluted. The Fort family would own a lesser percentage of the company than they currently do. Further, with greater equity, return on capital employed ratios would probably initially go down. Stakeholders will be concerned by this perceived fall in profitability.

Any other strategies probably would not be appropriate or enough to fix the problems. Tinkering around with the composition of current assets is unlikely to make much of a difference. Presumably, FI turns its inventory as fast it can. Making debtors pay more quickly is not very likely to occur, as they will resist. This move could give FI’s competitors a competitive advantage if competitors do not alter payment terms.

“Balanced” means that the candidate has provided at least one argument for and one arguments against for each option.

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

Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Award a maximum of [6] if the answer makes no reference to the quantitative data in the question.

Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their response.

Generally good responses with quite a few candidates outlining vertical and horizontal integration. Sometimes the simplicity of a question leads candidates to think they need to provide more than is required.

Most candidates had some idea of Taylor, usually referring to pay or piece rate and very occasionally to close supervision or quality and output control. Disadvantages usually ended by discussing poor motivation and many candidate responses saying that poor quality runs along with Tayloresque principles (not true unless substantiated). Application was often limited with few responses associating the paramount need for safety and quality in the aircraft industry. Also, the question was focused on FI and not the employees, which many candidates failed to grasp.

There was plenty of stimulus material to support strong application in this answer and many candidates made good use of it. A number of responses focussed on the fact that Jacques would be disappointed with a loss of income (presumably from salary and dividends), but this was not really allowable since his decision to go public ( having founded the business 31 years earlier) was probably a financial one as he eased into retirement.

Some good responses were given making use of the ratios (which were themselves of limited value) although few candidates referred to F1's ratios in comparison to the industry average. Most mentioned gearing levels (even though we were not told what it was) and many responses were excessively descriptive and theoretical on the Loan v Share Capital arguments. Few candidates recognised that Henri was a different type of leader compared to Jacques, and may be more inclined to accept a loss of control than his father.