Define the term product orientation.

With reference to Option 1, for KT, explain the relationship between the product life cycle, investment, profit and cash flow.

With reference to KT, explain two problems that a new business may face.

Recommend whether KT should choose Option 1 or Option 2.

A company following a production orientation chooses to ignore their customers’ needs and to focus only on efficiently building a quality product. They do not undertake market research identifying customer reactions to their proposed product before commencing production. This type of company believes that if they can make the best product their customers will come.

Candidates are not expected to word their responses exactly as above.

If the candidate says something to the effect of “The company focuses on the product,” award [1]. A second mark can be awarded if the candidate then offers a contradistinction such as “ignores the market,” “does not do market research,” “does not appeal to the market,” etc.

Award [1] for identification of one characteristic of a product-orientated business.

Award [2] for a full, clear description.

Initial research and development costs plus the costs involved in launching a product usually means a product will be a loss maker in its early years. Cash flows may be negative. As sales grow and the product moves into the growth phase, profits are likely to be positive but the company will require additional working capital Not until the product reaches the maturity phases of the life cycle are cash flows and profits likely to be positive. In the decline phase, cash flows and profits are likely to remain positive. The cash flows especially should be solid with the contraction of necessary working capital. For KT, the investment in R&D for the new battery will have had a negative effect on cash flow and profits. Once the product is launched, Option 1 forecasts see quite large sales and therefore large cash inflows. However, we do not know about the marketing costs, which will increase cash outflows. Sometime in year 2, further investment would be needed if sales targets in years 3 and 4 are to be fulfilled as projected sales exceed capacity. This investment would increase fixed costs and reduce profits.

If a candidate shows some understanding the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [1].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [2].

If the candidate shows some understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [2].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [3].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has detailed application to the stimulus, award [4].

If a candidate writes or draws some sort of table (such as exist in several of the textbooks IB students use) listing the stages of the product life cycle and showing the relationship between stages of the life cycle and their relationship to investment, cash flow and profit, accept and award [2] marks if well executed with no application to the stimulus and award [1] if poorly executed with no application to the stimulus.

If the candidate applies to the stimulus, either by making inserts into the table or with commentary before or after it, award an additional [1 to 2] according to the depth and quality of the application.

Problems any new business may face include:

• Competition – KT faces stiff competition in the market for batteries for consumer products from multinationals.
• Cash flow problems – KT suffered from cash flow problems in its first year of trading.
• Human resources issues, particularly finding the right staff.
• Insufficient marketing.
• Market research – KT is product orientated and therefore will not have undertaken market research before developing is products.
• Poor planning.
• Insufficient start-up capital.

Accept any other relevant problems that a new business may face.

Mark as 2 + 2.

For [2], candidates must identify a problem, explain it, and apply it to the stimulus.

N.B. If the candidate addresses an issue at the end of the time period specified in the stimulus and notes a problem that KT may face then, do not accept (as the business will no longer be new).

PLEASE NOTE: B2C option 1 is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.

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

Option 1: Selling car batteries directly to car owners. They currently sell B2B rather than B2C.

Advantages:

• Higher initial revenues per unit – KT will receive $400 per unit by selling directly to consumers, compared to only $250 per unit if sold to a car manufacturer.
• Sales are higher in option 1 for the first 2 years and at 410 000 over 5 years are 95 000 higher.
• Total revenues are higher at $164 000 000 compared with $78 750 000.

Disadvantages:

• KT has no experience of selling directly to consumers as it is currently a B2B business. It will need to decide HOW it will allow customers to order its products – via its website or by phone – both solutions will require additional spending.
• KT will need to undertake a marketing campaign to raise awareness of its new products. As a B2B business, KT has no experience of engaging consumers. Funds will need to be found to finance a marketing campaign to raise awareness of its product and to persuade consumers to buy the product.
• The data in Table 1 is only a forecast and therefore may exaggerate its potential. KT may sell much less than forecast which affects its profitability.
• Further investment would be needed to meet demand as full capacity is exceeded in years 3 and 4. The cost of this investment is unknown. KT has insufficient funds to invest in new capacity.

Option 2: Form a five-year strategic alliance with a manufacturer of electric cars.

Advantages:

• Sales are guaranteed as the partner in the strategic alliance has agreed to buy a set number for 5 years. This alliance provides the business with certainty.
• KT avoids capacity issues as maximum annual sales are 85 000 units (batteries), which is below KT’s capacity of 90 000 units.
• No additional marketing costs.

Disadvantages:

• Sales are lower than option 1 for years 1,2,3,4 and 5.
• Unit revenues are lower at $250 rather than $400 per unit.
• Total sales and sales revenue are lower at 315 000 units with a total revenue of $78 750 000.

Balance in the context of this question means having at least one advantage and one disadvantage for each option (and, thus, addressing both options).

Accept any other relevant evaluation.

These mark awards in the table below should be viewed as maximums.

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

More than a few candidates did not know what product orientation is.

Responses to this question were for the most part weak and characterized by vagueness and lack of application to the stimulus.

Most candidates could explain two problems that a new business might face and, in general, were effective in applying their response to the stimulus.

Many candidates knew the expectations of the ten-mark question and did a solid job. Candidates often made detailed use of the stimulus.