| Date | May 2021 | Marks available | 2 | Reference code | 21M.2.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | State | Question number | 3 | Adapted from | N/A |
Question
Soft Skin Cosmetics (SSC)
Soft Skin Cosmetics (SSC) is a private limited company that produces a small range of face creams and soaps. Its products are designed and produced in the United States, and are made from safe, natural ingredients.
SSC has a product-orientated marketing approach. Tiffany Presley, one of the company’s co-founders, believes that SSC’s consumers value health above fashion. “The skincare market is full of toxic products, but ours are healthy even if they don’t smell or look as nice,” she says. Chelsea Presley, SSC’s other co-founder, wants to develop the first sunscreen free of synthetic chemicals. However, product innovation is costly and risky. If the new sunscreen is a failure, several years of research and development costs will be wasted, which SSC cannot afford. SSC currently lacks the scale to innovate.
SSC does not pay for advertising. It relies on social media and word-of-mouth promotion. Its brand awareness is very high among young women, and customer reviews are very positive about SSC’s quality and effectiveness. The company only sells online, not in retail outlets. To reach unsatisfied demand domestically and internationally, SSC would have to broaden its current distribution channels.
SSC practises corporate social responsibility (CSR). It does not test its products on animals, and supports several charities protecting endangered species. Pressure groups publicly recognize SSC’s commitment to animal welfare.
Currently, multinational companies dominate the global skincare market. Small emerging companies rarely survive. Chelsea wants to convert SSC to a public limited company, but Tiffany disagrees: she argues that shareholder pressure toward profit maximization could jeopardize consumer and animal safety.
State two features of product innovation.
Explain one advantage and one disadvantage for SSC of having a product-orientated marketing approach.
Explain one advantage and one disadvantage to SSC of practising corporate social responsibility (CSR).
Discuss Chelsea’s idea to convert SSC into a public limited company.
Markscheme
Product innovation features could include:
- the development of a new, redesigned goods or services – creative innovation
- quality improvements made to a product
- the inclusion of new components, materials or desirable functions into an existing product – adaptive innovation.
- It results from successful research and development which can be expensive, time consuming and risky
Accept any other relevant feature of product innovation. Candidates are not expected to word their responses exactly as above. Award [1] for each relevant feature of product innovation identified. Award a maximum of [2]. N.B. do not credit features which are in fact repetitions.
As a product-orientated business, SSC can:
- concentrate resources and efforts to produce high quality products. Customers reviews are very positive about SSC’s quality ad effectiveness. It seems that SSC has built a good brand image and a good brand awareness by focusing on the product
- be the first to develop and produce innovative products, such as the first sunscreen free of synthetic chemicals, to get the first mover advantage in a highly competitive market
- avoid spending money in market research, to know what customers dictate or the type of products to develop. Market research costs are usually very high and SSC can devote more finance into research and development or into corporate social responsibility practices
- benefit from economies of scale. As SSC only produces a small range of high quality facial creams and soaps focusing on quality products, they can benefit from economies of scale due to greater product specialization
- develop new products and be able to sell them with relatively little marketing. SSC has an established customer base that trusts them. So far they have relied on social media and word of mouth only.
However:
- SSC faces higher risks. Without market research, the risks that customers may not be interested or like their new products, such as the sunscreen free of synthetic chemicals, are higher. If the sunscreen free of synthetic chemicals doesn't sell losses could be substantial.
- Research and development costs are usually steep in the cosmetic industry. SSC is already facing difficulties in financing the development of new products.
- New ideas from customers may emerge from a market research. As a product-orientated business, SSC may not get this valuable information in a highly competitive market.
Accept any other relevant and applicable advantage/disadvantage.
Mark as 2 + 2.
Award [1] for identifying or describing the advantage/disadvantage of having a product-orientation and a further [1] for a development with respect/application to SSC.
Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.
For example:
- for an identification or a description of an advantage/disadvantage with or without application [1].
- for explanation of an advantage/disadvantage with no application [1] for explanation of an advantage/disadvantage and application [2].
By practising corporate social responsibility, SSC will be able to:
- increase their customer base. Consumers that are compromised with the environmental or animal cause and health seekers, may be drawn to buy SSC’s products. Customers with this profile may be willing to buy from companies that have a reputation of being good corporate citizens
- keep support from pressure groups. SSC already receives public recognition from animal support pressure groups. As SSC only relies on word of mouth and social media, keeping good publicity from these groups is vital for reputation and brand image
- attract investors. SSC’s image plays an important role in attracting investors. If SSC is engaged in CSR their image may get boost and attract capital/investors to finance research and development.
However:
- Practising corporate social responsibility increases costs to relatively small businesses like SSC. For instance, not testing on animals can increase SSC’s production costs. Charity support may also increase SSC’s expenses, reducing finance availability for product innovation.
- May preclude access to certain markets like China who insist that cosmetic products ARE tested on animals (ref – reach unsatisfied demand internationally)
- Senior management must be fully committed otherwise risk backlash if actions seen as inconsistent or half-hearted (ref – IPO would make company decisions much more visible).
Accept any other relevant and applicable advantage/disadvantage.
Mark as 2 + 2.
Award [1] for identifying or describing an advantage/disadvantage of corporate social responsibility and a further [1] for a development with respect/ application to SSC.
Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.
For example:
- for an identification or a description of an advantage/disadvantage with or without application [1]
- for explanation of an advantage/disadvantage with no application [1]
- for explanation of an advantage/disadvantage and application [2].
Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.
If SSC converts to a public limited company they will be able to finance product innovation, research and development. SSC is already facing difficulties to fund internally the development of a sunscreen free of synthetic chemicals. If the company goes public, they will be able to sell shares in the stock market to raise the required capital to develop and produce it.
With share capital, SSC will also be able diversify their production and offer a wider range of creams, soaps and other innovative cosmetics. Through the expansion of their product portfolio, it is likely that SSC’s customer base and sales will increase.
SSC is probably missing sales opportunities by selling online only. As a Plc, they will have the financial means to develop alternative distribution channels, to reach unsatisfied national and international demand. Sales turnover may increase and SSC will ultimately grow.
Share capital will also open up advertising possibilities. SSC will be able to finance costly above the line advertising instead of relying on social media and word of mouth.
However, converting to a public limited company could be is a risky move. The cosmetic market is dominated by multinational companies. If more than 50 % of shares are bought by another company Tiffany and Chelsea will lose their control over SSC.
New shareholders may have a different perspective in several aspects such as SSC corporate social responsibility or SSC product orientation. Clashing perspectives may arise. Tiffany is already worried about losing control. New shareholders may replace SSC’s ethical objectives and focus on profit maximization. Tiffany’s commitment to the animal cause may be lost. Pressure groups may react as well as stop their support to the company.
It is likely that as a bigger company SSC may also change into market orientation. SSC may decide to produce what the market wants instead of focusing on high quality healthy products. Healthy products may be replaced by nice smelling and looking ones. Current customers may perceive this change and stop buying SSC.
Overall, it seems that SSC needs to grow externally. The cosmetic market is highly competitive and it is dominated by multinational companies. SSC has no chances of expansion with its current level of finance, thus converting to a Plc has clear advantages to SSC. However, Tiffany and Chelsea will have to make several concessions. It is unlikely that more capital will come without new perspectives, new ways of doing things and a new ethos.
Marks should be allocated according to the paper 2 markbands for May 2016 forward.
A balanced response is one that covers at least two arguments for and two arguments against the option.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
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.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
Examiners report
It was important here for candidates to pay attention to the command term, state. It was not necessary to explain at length about product innovation.
Many candidates could see the disadvantage of producing something that the consumer did not want and wasting vast sums in research and development and production. Finding an advantage was more difficult for candidates with many just describing what product orientation was with little attempt to link to the question.
Generally, this question was well answered but a significant number of candidates didn’t provide application to SSC.
Many candidates wasted a lot of time by repeating the question or simply lifting sections of text from the stimulus. Many candidates further wasted time explaining how becoming a public limited company would give SSC limited liability when they already have it. Also, many candidates forgot the concept of a Board of Directors – namely that it is not required to consult every shareholder with every decision made.
Few candidates mentioned the ability to develop new distribution channels.
