| Date | November 2021 | Marks available | 4 | Reference code | 21N.2.SL.TZ0.5 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 5 | Adapted from | N/A |
Question
Office Supplies (OS)
Office Supplies (OS) is a family-owned private limited company that, for 40 years, has operated three retail office supply stores in a small city. OS offers a wide range of office products (such as computer paper and stationery) and office machinery (such as computers and printers). When each store opened, OS purchased the buildings using long-term loan capital. OS’s objective is to have enough profit to finance the company’s working capital and pay annual dividends.
OS has no clear marketing strategy. Traditionally, OS competed with several other office supply stores operating in the same city. The market was not competitive, however, and most customers went to the nearest office supply store. OS’s prices were comparable to those of other retail office supply stores, and the company did little promotion.
Nationally, the retail office supply store industry is declining. Many retail office supply stores have had to close, and new competitors have entered the market, many of which benefit from some or all of the following:
- Specialization in particular office products
- Economies of scale leading to more competitive prices
- Greater convenience, including e-commerce with door-to-door delivery
Like other physical retail stores, OS has seen its sales decline. Gross and net profit margins have fallen. Last year, to ensure enough funds for capital expenditure and revenue expenditure, OS’s board of directors chose not to pay dividends. OS also anticipates the need for additional finance next year. OS’s board is considering changes to the company’s marketing mix in response to new competitors.
State two marketing objectives that a company might have.
With reference to OS, explain one advantage and one disadvantage of operating as a private limited company.
With reference to OS, explain the difference between capital expenditure and revenue expenditure.
Discuss possible changes to any two elements of OS’s marketing mix.
Markscheme
Marketing objectives include:
- attract new customers
- enter new market
- improve brand loyalty
- increase awareness
- increase market share
- increase profit
- increase revenue
- increase sales
- retain existing customers.
Accept any other valid marketing objective.
Award [1] for each objective identified up to a maximum award of [2].
Advantages of operating as a private limited company include:
- Compared to sole traders and partnerships, private limited companies typically can raise more capital.
- Control of the company cannot be lost to outsiders.
- Members of the board of directors, many/most of whom are major shareholders in the company, can make decisions with fewer concerns about shareholder and/or market reaction.
- Owners have limited liability.
- Private limited companies do not have to disclose fully their financial information.
- The business continues if one of the owners dies.
For OS, one advantage to operating as a private limited company is that OS could make changes in dividend policy without affecting perceptions of the company in the marketplace. When OS realized that it needed to preserve cash, it suspended dividend payments for one year and said it possibly would for a second year. When a publicly traded company lowers or eliminates dividend payments to preserve cash, the share price typically falls, sometimes significantly, which can make capital sufficiency issues even worse.
Disadvantages of operating as a privately limited company often include:
- If a shareholder wants to sell their shares, finding a suitable buyer may take time.
- Often (though not always) private limited companies are relatively small organizations which possesses lesser expertise than large, publicly traded companies.
- Opening a private limited company takes time and has some legal expenses.
- Private limited companies cannot sell shares to the public, thus limiting the amount of capital than be raised.
- Profits have to be shared with more people/owners compared to a sole trader or most partnerships.
OS is currently facing a difficult moment, as its industry is changing, a situation that has led to a decline in sales and a contraction of margins. As a private limited company, OS may not have the expertise to face this situation. Currently, the company has no real marketing strategy and may not have the marketing expertise to make appropriate adjustments.
Additionally, many potential adjustments OS may make will require capital, which, as a private limited company, OS has lesser access to than if it were public.
Mark as [2 + 2].
Award [1] for identification of an advantage and an additional [1] for an explanation thereof with application to the stimulus.
Award [1] for identification of a disadvantage and an additional [1] for an explanation thereof with application to the stimulus.
Maximum award: [4].
Capital expenditure refers to any expenditure for assets with a life of more than one year. The stimulus refers to three instances of capital expenditure in the company’s history: each time OS purchased a building location.
Revenue expenditure refers to those expenses that will be accounted for fully in the year in which the expense occurs. In the case of OS, revenue expenditures mention in the case are expenditures for inventory.
Mark as [2 + 2].
Award [1] for an explanation of capital expenditure and an additional [1] for an explanation with application to the stimulus.
Award [1] for an explanation of revenue expenditure and an additional [1] for an explanation with application to the stimulus.
Refer to Paper 2 markbands for 2016 forward, available under the "Your tests" tab > supplemental materials.
Ways that OS could modify its marketing mix to match and compete with the new competitors.
- Product: Changing its product range (either contracting or expanding its product range).
- Price: Adopting a different pricing strategy.
- Place: Modifying its distribution strategy to include e-commerce.
- Promotion: Initiating a more aggressive promotion strategy.
For each of the four Ps, OS could make modifications. Modifying each has advantages and disadvantages. For example, contracting its product range could give the organization more focus and require lesser investment in stock. On the other hand, assuming that OS process its products properly, each inventory item makes some contribution to fixed costs. Further, any termination of a product line means that customers for that product, however few, will have to go to a competitor for that product.
OS could modify its prices, particularly try being more aggressive with its pricing. Whereas that may attract more customers (advantage), margins will be thinner.
An ecommerce shift with a door-to-door aspect will change OS’s supply chain considerably. Time and resources will need to be devoted to this task
There is a sense that OS is a traditional business and new aggressive forms of pricing and promotion will be required. Will they know how to do the latter? Do they need to introduce a social media campaign backed up with a membership or loyalty programme?
Candidates are expected to provide a conclusion with a substantiated judgment.
Grade according to the paper 2 markbands for May 2016 forward.
For one relevant modification to the marketing mix that is one-sided, award a maximum of [3].
For two relevant modifications, but the discussion of both is one-sided, award a maximum of [4].
For two relevant modifications, one treated in a balanced way and another in an unbalanced way, award a maximum of [5].
For two relevant modifications, both treated in balanced ways, but no real conclusion, award a maximum of [6]. Conclusions must be more than nominal (for example, when a candidate opens a final paragraph with “In conclusion . . . “ but then has no real conclusion), award a maximum of [6].
Examiners report
Many students could state two marketing objectives that a company might have.
Candidates struggled a bit with application but otherwise had sound theoretical knowledge for this question.
Many candidates did not know the what capital and revenue expenditure mean and, when they did, application to the stimulus was often not very effective application.
This question proved surprisingly challenging. Many candidates had “place” one of their elements of the marketing mix, but then wrote about location. The other somewhat common problem was that many students did not provide balance in their response.
