Business Structure (Cambridge International A-Level Business): Exam Questions

[case-study] Charlie’s Chocolates (CC)

CC is a large public limited company that manufactures a wide range of chocolate bars. Production takes place in low wage countries so that costs can be kept low. CC has suffered recently from poor publicity due to the high levels of sugar used in the production of its chocolate. A national newspaper has recently published an article about how CC exploits employees in low wage countries. The Marketing Director, Alan, is aware of recent trends showing that consumers are becoming more ethical in their buying decisions. He thinks this might explain why sales decreased by 10% last year.

He has asked to meet with the Managing Director, Ikram, to discuss a major change towards more ethical production methods. This could mean re-locating production back to the home country. This will increase costs and involve the recruitment of additional employees. In response to recent Government guidelines to improve health, Alan wants to decrease the amount of sugar used in the chocolate bars.

Alan is also thinking about the financial accounts for this year that he received this morning from Ikram (see Table 1 and Table 2).

Table 1 – Extract from Income Statement

	$000s
Revenue	7000
Cost of sales	4150
Gross profit	2850
Profit for the year	1350
Retained earnings	565

Table 2 – Extract from Statement of Financial Position

	$000s
Non-current assets	3000
Current assets	900
Current liabilities	400
Working capital	500
Net assets	3500

With sales declining from last year, Alan has to think carefully about the next steps for marketing. He knows that the product range is of good quality – the problem is the poor image of the company. For example, he is aware that a local consumer group is trying to organise a demonstration outside one of CC’s factories in the next few weeks.

Define the term ‘public limited company’.

[case-study] Barbecue House (BH)

BH is a fast food restaurant and takeaway business, which sells a range of burgers, kebabs, pizzas and side orders. BH also has a delivery service to the local area.

BH is owned by Amir who mortgaged his home to finance the start-up of the business. Amir operates BH as a sole trader. His son also works within the business as a chef. Amir has been advised to change the legal structure of BH and to become a private limited company to protect the business and himself.

BH is located on a busy high street. There are many other similar businesses on the high street and in the surrounding area. Amir knows that the continued success of the business requires him to identify a gap in the market and develop a unique selling point (USP). Amir has carried out some market research (see Table 1.1 and Fig. 1.1).

Table 1.1: Market research data about competitors within 2 km of BH

Total number of competitors	8
Number of competitors who offer delivery services	4
Number of competitors who do not sell Asian food	6

Fig. 1.1: Market share data for competitors within 2 km of BH

The two market leaders are Wok’s and Chao’s. Both businesses specialise in Asian food but neither has a delivery service. Amir would like to increase BH’s market share. He is considering starting to sell Asian food. None of his employees have any experience cooking or selling Asian food but Amir believes that the possible increase in income would be worth any extra costs.

Explain the term ‘sole trader’.

[case-study] Great Resources (GR)

GR is a business partnership that creates educational resources. It sells direct to schools and teachers via its own website.

Sanjay, Rukmal and Boris are entrepreneurial teachers who formed the GR partnership. One year ago, they identified a gap in the market to supply interactive, digital resources. GR’s website is subscription only. An online marketing campaign, which used penetration pricing, attracted 250 subscribers in the first six months of operation. The start-up costs were financed with a $5000 bank overdraft, which is GR’s only debt.

Reviews for GR’s products in teaching journals are positive, but cash flow is poor. Many customers have taken advantage of a recent sales promotion for one month’s free membership and posted positive reviews. Unfortunately, few have then taken out a regular subscription.

As revenue has not increased as much as the entrepreneurs had hoped, they must now consider alternative promotion methods. They have researched possible promotion methods and decided to advertise in an educational newspaper. The newspaper has a readership of half a million people.

Expert Materials (EM) is a large national company that also advertises in the newspaper. EM is GR’s closest competitor. The EM brand is well-known and trusted in the educational resources market. Table 1.1 shows some marketing data.

Table 1.1 Marketing data

	GR	EM	Total market
Revenue ($000)	15	300	500
Number of customers	300	5000	700
Annual advertising spend ($000)	7.5	45	60

Explain the term 'partnership'.

Define the term ‘social enterprise’.

Define the term ‘franchise’.

[case-study] Farm Produce (FP)

FP is a primary sector co-operative made up of six farms in country G. Each farm grows a range of fruit and vegetables. FP employs 26 workers across the farms and distribution centre. Each farm transports its fruit and vegetables to the distribution centre where they are packaged and sent to customers’ homes. Table 1.1 contains data about the farming industry in country G.

Table 1.1: Data about the farming industry in country G

- Farms producing fruit and vegetables are given an annual government grant. - Most farms are labour intensive. - The government promotes the importance of eating fresh fruit and vegetables. - Most farms are small family businesses. - Minimum wage for farm workers will increase by 10% next year.

FP’s customers pay for a box of seasonal fruit and vegetables that is delivered each week. Data about the different box sizes sold by FP is shown in Table 1.2.

Table 1.2: FP’s cost and price data

Box size	Variable cost per box ($)**	**Allocated monthly fixed costs ($)	Price per box ($)	Sales in April 2022
Small	8	2000	10	400
Medium	10	2000	20	300
Large	15	2000	35	150

FP is concerned about the profitability of the small box size. It believes it should stop selling this product.

Explain the term ‘co-operative’.

[case-study] Seaside Hotel (SH)

SH is a large hotel located in a tourist area of country H. SH has 120 rooms and employs 42 workers during the peak (busiest) season which is from April to September.

Table 2.1 shows employee data for SH’s peak season.

Type	Number	Main tasks
Manager	3	- decision making - supervising other employees
Cleaner	12	- cleaning rooms, corridors and reception area to required standard - maintaining a clean and safe working environment
Customer service	16	- greeting guests upon arrival - making sure guests are satisfied
Marketing	7	- designing promotional materials - promoting hotel to increase number of guests
Other	4	- various

SH makes half of the cleaners and customer service employees redundant at the end of the peak season.

To break even, the hotel must sell 72 rooms per night. The hotel offers good views of the sea and it is very busy in the peak season when the weather is hot. Table 2.2 shows SH’s sales of rooms.

Table 2.2: SH’s sales of rooms 2021–2022

Time period	Average percentage of rooms sold per night
April 2021 – September 2021	95%
October 2021 – March 2022	45%

SH does not have a restaurant. It has a joint venture with a restaurant close to the hotel where SH’s customers receive a discount on their food and drink. The hotel advertises the restaurant on social media and the restaurant advertises the hotel on its menu.

Tia is one of the managers of SH. She has an autocratic leadership style and is responsible for the cleaners and marketing employees.

The directors of SH aim to increase the value added to the service that SH provides.

Explain the term ‘joint venture’.

Explain two problems a sole trader might have if they change the legal structure to a partnership.

Define the term ‘partnership’.

[case-study] Tin Mines (TM)

TM is a private limited company in the primary sector. Tin is found underground and is extracted by mining. TM operates seven mines in country C. There are several job roles at each mine, including skilled engineers, managers and miners.

TM has recently discovered a new source of tin in a remote area of country C. TM has permission to develop a tin mine but will have to construct transport links. It will need new buildings such as offices, warehouses and employee housing. The Human Resources Director is developing a workforce plan to recruit miners and managers for the new mine.

TM’s Financial Director has produced a cash flow forecast for the new mine for the next five years. This is shown in Table 2.1.

Table 2.1: Cash flow forecast for the new mine ($m)

Year	2022	2023	2024	2025	2026
Opening balance	X	-80	-95	-85	5
Sales	0	0	25	105	Y
Development costs	60	15	0	0	0
Operating costs	0	0	15	15	15
Closing balance	-80	-95	-85	5	240

The remote area of country C, where the new tin mine will be located, has a high level of unemployment, and average incomes are low. TM intends to recruit employees from the local area and buy resources from local suppliers, if they are available. The market for tin is likely to be affected by increased demand for electric vehicles. The batteries in electric vehicles contain tin. The government of country C believes that the tin mine will be of great benefit to both the local community and the national economy. However, tin mining can result in pollution of local water supplies.

Define the term ‘primary sector’.

[case-study] Auto Bike (AB)

AB is a private limited company that repairs and maintains motorbikes. AB has nine garages in country J and employs eight highly qualified mechanics in each garage.

Two of the most popular motorbike services that AB sells are the standard service and the advanced service. Table 2.1 contains price and cost information for these services.

Table 2.1: Price and cost information

	Price	Direct costs per service	Allocated indirect costs per service
Standard service	$250	$50	$60
Advanced service	$400	$60	$100

In April, AB sold 1000 standard services and 200 advanced services. The profit margin for an advanced service is higher than the standard service. The directors have decided to promote the advanced service to try and increase sales. Each garage has been given a budget to use for below-the-line promotion methods with an objective of increasing sales of advanced services in the next six months.

The level of motivation of the mechanics is low. Many mechanics believe that they are not paid well and the conditions of work are dirty and noisy. AB uses a time-based payment method which rewards each mechanic at the same hourly rate. In a recent survey, many mechanics complained that the payment method was unfair. They believe it rewards ‘lazy workers’ as much as those who work hard. It also does not take into account the difficulties involved in some jobs and the simplicity of others. The Human Resources Director has been asked to investigate a new payment method.

Explain the term ‘private limited company’.

[case-study] Van Man (VM)

Obi is a sole trader who operates a van service. He used to be employed by a similar business but realised that he likes to be in control. Obi used all of his savings to start his business so that he did not have to go into debt.

He owns three vans which can carry furniture, packages and other large items. He has eight full-time employees who drive the vans and move items. Customers can hire a van with two employees to move these items from one place to another. The cost per day of providing a van with two employees is $170. The prices of the service are shown in Table 1.1.

Table 1.1: Price of hiring one van (including two employees)

Price for the first day’s hire	Price for each additional day
$250	10% discount on the price for the first day’s hire

Demand for Obi’s service is growing fast. To supply this demand he needs a new van and he is investigating sources of finance. He has a choice of two vans. The details of the vans are in Table 1.2.

Table 1.2: Van details

	Van A	Van B
Capital cost	$30000	$40000
Estimated maintenance costs per year	$600	$450
Insurance cost per year	$500	$550
Expected life	7 years	9 years
Van owner reviews	- Easy to drive but not very fast - Boring but fuel efficient - Engine is very noisy, but reliable	- Fast and great fun to drive - Looks great and the range of colours is fantastic - It broke down a few times, but the manufacturer repaired it quickly

Define the term ‘sole trader’.

Define the term ‘private sector’.

Define the term ‘limited liability’.

[case-study] Market Solution (MS)

MS is a public limited company in the tertiary sector. MS advises businesses on elements of the marketing mix. Most of its customers are small businesses who cannot afford their own marketing department. MS designs marketing materials for these businesses to use.

Although MS uses computer aided design (CAD), the business is labour intensive. MS employs specialist marketing workers as well as administrative support workers. Table 2.1 shows some data about employees of MS.

Table 2.1: MS employee data

	Specialist marketing workers	Administrative support workers
Average number of workers in 2019	40	88
Payment method	Salary plus bonus	Performance related pay plus bonus
Number of workers who left in 2019	2	11
Average pay (compared to national average)	High	Low
Main need of the workers	Achievement	Affiliation
Main hygiene factors	- Pay - Flexible hours of work	- Staff restaurant - Holidays
Is a bonus expected in 2020?	Yes	No

MS has recently employed Hetti as the new Human Resources Manager. Hetti thinks that the ideas of the motivational theorists are important when managing employees. She is particularly worried about the labour turnover of the administrative support workers.

MS has recently taken on a new customer, named Books Outlet (BO). BO has an objective to increase its revenue by targeting a younger market segment. BO has provided MS with the following information about its current marketing mix (see Table 2.2).

Table 2.2: Current marketing mix for BO

Product - Books aimed at customers who are 30 years and older - Specialist books on many topics – BO is often the only seller in the area	Price - Price skimming
Promotion - Window display - Local newspaper advertising	Place - A retail shop on the main street - Postal sales from a brochure

Define the term ‘tertiary sector’.

[case-study] Super Heroes (SH)

SH is a leisure (theme) park aimed at 10–18 year olds. It is owned by two companies, X and Y, which started SH as a joint venture. Company X owns many leisure centres and swimming pools. Company Y owns many brands based on superheroes.

SH employs 200 full-time workers and an extra 50 seasonal workers during the busiest times of the year. The park has 10 large rides which take up 2km2 of land. There are also many smaller rides, restaurants, toilets and shops. The price of an entrance ticket is $11 per customer. Table 1.1 shows the costs for SH in 2019.

Table 1.1: SH costs for 2019

Total fixed costs (per year)	$12m
Variable costs (per customer)	$3
Total costs	$42m

One of the larger rides at SH is the Iron Blaster. The number of customers who use this ride has decreased each year for the last three years. This has led the management of SH to consider its options for internal growth.

Option 1 – A new virtual reality (VR) ride This option would involve developing the Iron Blaster into a VR ride. Most of the structure of the Iron Blaster could be used but customers would be given a VR headset to wear during the ride. The cost of developing the VR ride would be $2m. The Iron Blaster ride would be closed for a three month period during the off-peak season for the development to be carried out. No employees would be made redundant or dismissed.

Option 2 – A new hotel SH does not currently have a hotel. It could demolish the Iron Blaster to provide the space to build one. Many of the competitors of SH have a hotel near or within their leisure parks. Hotel customers would pay a high price for a room but have free access to the leisure park’s facilities. Market research suggests that the average hotel customer would spend twice as long in the leisure park than a non-hotel customer. The cost of developing the hotel would be $15m and take a year to build. All of the employees currently working on the Iron Blaster ride would face redundancy or dismissal.

Define the term ‘joint venture’.

[case-study] Flight Food (FF)

FF is a large secondary sector business that supplies airlines with in-flight meals. Meals are manufactured using batch production. A different variety of meal is made each hour with a five minute changeover time between batches. FF makes use of Just in Time (JIT) to manage inventory wherever possible. Trucks arrive each hour and deliver the materials needed for production.

The market for airline meals is very competitive. FF uses market segmentation when deciding which meals are most likely to appeal to different airlines. FF must adapt to changes in tastes and the demands of each airline.

FF is a labour-intensive business. The workers are employed with short-term (six-month) employment contracts. They are only offered new contracts if they meet their production targets. Table 2.1 shows some production data for FF’s two work teams.

Table 2.1: Worker data for FF

	Team A	Team B
Number of workers	100	50
Productivity (per worker per day)	300 meals	240 meals

The Board of Directors of FF is considering changing the manufacturing process to flow production. This would require purchasing computer-aided manufacturing (CAM) equipment and using a capital-intensive production process. Production targets would no longer be used for employees because the machinery would be set at a specific production rate.

Sabrina, the Operations Director, has put forward the following advantages for moving to flow production:

• more products made each hour
• lower employment costs
• improved quality.

Ben, the Human Resource Director, is worried about the change from a labour-intensive process to a capital-intensive process.

Define the term ‘secondary sector’.

Explain one reason why a business might remain a private limited company rather than change to a public limited company.

[case-study] Aashna’s Pies (AP)

AP produces and sells high-quality pies. Aashna set up AP five years ago when she spotted a gap in the market. AP is a private limited company, and Aashna is the majority shareholder. All of the pies use the AP branding, which is growing in popularity.

AP owns a factory where all the pies are produced. Pies are packaged and sold individually. The range of pies produced by AP is shown in Table 1.1.

Table 1.1: AP’s product portfolio

Name of pie	Filling	Price per pie	Annual change in sales quantity (2018 to 2019)	Stage in the product life cycle
Meaty Marvel	Chicken and lamb	$2.80	+3%	Maturity
Vegetarian Victory	Broccoli, cheese and carrot	$2.50	–10%	Decline
Fishy Fortunes	Cod, prawns and cheese	$3.00	+20%	Growth

The pastry case of each pie is exactly the same no matter what filling is used. All of AP’s pastry is made using flow production. However, each filling is made by specialist workers who use batch production.

Aashna is concerned about the sales of Vegetarian Victory pies and she is considering stopping production of this pie. However, the Operations Director has pointed out that AP might lose its economies of scale if the business reduces the total number of pies produced.

The Marketing Director would like Aashna to read his report about developing products in the future. He has done some market research (see Fig. 1.1).

- The price elasticity of demand for AP’s pies is price inelastic - Some consumers are worried about possible health risks of eating too much meat - The average family eats three pies per meal and chooses pies for a meal once every two weeks - The pies have a short ‘best before’ date – they must be eaten within two days of purchase - The average family has one member who does not eat meat.

Fig. 1.1: Market research to aid developing products in the future

Define the term ‘shareholder’.

[case-study] Braid Runner (BR)

Lewis is a hairdresser. He rents a small shop which he uses as a hairdressers called Braid Runner (BR). Lewis is a sole trader and he set up BR 25 years ago.

BR is the smallest of all the hairdressers in city Y. Lewis works on his own. He has repeat customers who have been using BR for many years. However, there are many large franchises in city Y which offer a much cheaper haircut than BR.

Lewis is considering increasing the price of a haircut and he has outlined the costs and revenue of the business in Table 2.1.

Table 2.1: Costs and revenue of BR

Variable costs per customer	$3.50
Fixed costs per week	$675
Price	$8

Lewis would like to employ another hairdresser so that he can work fewer hours in BR. The new employee would have to be able to work in BR on their own. They would be responsible for taking bookings, dealing with customers and some financial transactions. Lewis has drawn up a person specification (see Fig. 2.1) that will be placed on a job website.

Characteristic	Essential	Desirable
Qualifications	- Hairdressing qualification	- A-Levels or high school standards in Mathematics and Business
Physical	- Must be between 18 and 30 years old	- Female
Experience	- None required	- Experience of dealing with customers/consumers - Experience of working alone
Personal qualities	- Able to work in a team - Good communication	- Friendly

Fig. 2.1: Person specification created by Lewis

Explain the term ‘franchises’.

Define the term 'limited liability'.

[case-study] Sana Textiles (ST)

Sana Textiles (ST) is a private limited company in country M that manufactures and sells premium cotton fabric. Its slogan is 'crafted for those who demand the best'. The market for fabric is very competitive, with ST facing growing pressure from cheaper foreign competitors. ST has traditionally used a price skimming strategy, targeting customers who value quality over price. However, ST has recently lost market share as more customers switch to lower-priced alternatives.

ST's products are currently sold exclusively through a network of authorised distributors across country M. The Finance Director has produced financial data for 2023, shown in Table 2.1.

Table 2.1 ST financial data 2023

Average selling price per unit ($)	25
Average variable cost per unit ($)	10
Total fixed costs ($000)	180
Total units sold (000)	20
Maximum capacity (000 units)	25

Employee motivation at ST has become a serious concern. Many employees report that their work is repetitive and offers little opportunity for personal development. Two senior supervisors recently left to work for a competitor. ST's management is considering introducing performance-related pay to motivate the remaining workforce.

Identify one characteristic of a private limited company.

Define the term 'franchise'.

Explain two advantages to a business of being a social enterprise.

Explain two advantages to a business of buying a franchise.

Explain two limitations of partnership as a business structure.

Explain two advantages that a business in the public sector may have that a business in the private sector may not.

Explain two disadvantages to a private limited company of changing to a public limited company.

Analyse two disadvantages to a sole trader of changing to a partnership.

Analyse two reasons why a sole trader might choose to become a private limited company.

[case-study] Barbecue House (BH)

BH is a fast food restaurant and takeaway business which sells a range of burgers, kebabs, pizzas and side orders. BH also has a delivery service to the local area.

BH is owned by Amir, who mortgaged his home to finance the start-up of the business. Amir operates BH as a sole trader. His son also works within the business as a chef. Amir has been advised to change the legal structure of BH and to become a private limited company to protect the business and himself.

BH is located on a busy high street. There are many other similar businesses on the high street and in the surrounding area. Amir knows that the continued success of the business requires him to identify a gap in the market and develop a unique selling point (USP). Amir has carried out some market research (see Table 1.1 and Fig. 1.1).

Table 1.1: Market research data about competitors within 2 km of BH

Total number of competitors	8
Number of competitors who offer delivery services	4
Number of competitors who do not sell Asian food	6

Fig. 1.1: Market share data for competitors within 2 km of BH

The two market leaders are Wok’s and Chao’s. Both businesses specialise in Asian food, but neither has a delivery service. Amir would like to increase BH’s market share. He is considering starting to sell Asian food. None of his employees have any experience cooking or selling Asian food, but Amir believes that the possible increase in income would be worth any extra costs.

Analyse one advantage and one disadvantage, for Amir, of BH becoming a private limited company.

[case-study] Anvil (AV)

Anvil (AV) is a private limited company in country W. It has manufactured metal components for washing machines and refrigerators since 1974 and employs 90 people at a single factory.

Country W's economy has changed considerably. Manufacturing has declined as appliance makers have moved production to countries where wages are lower, while banking, tourism and software have grown quickly. Table 1.1 shows how the economic sectors have changed.

Table 1.1: Share of country W's national output by sector

	2010	2025
Primary sector (%)	18	16
Secondary sector (%)	34	21
Tertiary sector (%)	48	63

Six of the appliance manufacturers that AV supplied in 2010 have since closed their factories in country W or moved them overseas.

Table 1.2: AV selected data

Revenue in 2020 ($m)	6.2
Revenue in 2025 ($m)	4.1
Average age of production workers	49
Applications per skilled machinist vacancy, 2015	11
Applications per skilled machinist vacancy, 2025	2

AV's Operations Director notes that school leavers in country W increasingly train for work in offices, hotels and software firms rather than factories.

AV's directors are considering whether the business should begin servicing and repairing domestic appliances, rather than only manufacturing the parts that go into them.

Analyse two consequences for AV of the changing relative importance of the economic sectors in country W.

[case-study] Spoke (SP)

Spoke (SP) is a workers' co-operative in country V. It sells and repairs bicycles from six shops in and around the capital city.

SP was formed nine years ago. Its founder was retiring and had no family willing to take over the business, so he sold it to the people who worked there. Today all 48 employees are members of the co-operative. Each member owns an equal share, has one vote at members' meetings, and receives a share of any surplus the business makes at the end of the year.

Table 1.1: SP selected data

Members (employee-owners)	48
Shops	6
Revenue in 2025 ($)	3,400,000
Surplus shared among members in 2025 ($)	210,000
Labour turnover at SP (%)	6
Average labour turnover, bicycle retail in country V (%)	19

Two national bicycle chains have opened branches in the capital city in the past three years. Both sell at lower prices than SP, but neither offers a repair service. SP's members believe their reputation for skilled repair work is what keeps customers returning.

SP's members have been discussing whether to open a seventh shop, which would cost around $140,000. Because SP cannot sell shares to outside investors, the money would have to come from surpluses the members would otherwise share between themselves. At the last members' meeting the proposal was postponed for a year.

Analyse two advantages to SP of operating as a co-operative.

Extract:

AerCore (AC)

Omar is the founder and Chief Executive Officer (CEO) of AC, a private limited company. AC was founded in 2000 and manufactures fitness equipment in country K. Membership of fitness centres is increasing in country K as a result of rising incomes and greater awareness of the benefits of exercise. AC sells and leases fitness equipment such as treadmills and rowing machines to fitness centres, hotels and large corporations. AC does not currently sell directly to consumers. AC exports to a neighbouring country though sales have declined there in the past two years. Foreign manufacturers have begun to sell their fitness equipment in country K due to the growth of the market. Control from the centre Omar and six other family members own all the shares of AC and they are the only directors. Omar keeps control of all aspects of the business. Organisation is hierarchical and centralised. Managers have only limited authority. AC has expanded gradually over the years, financed by retained profits and bank loans. AC has made sufficient profit to give shareholders a good return. Table 1 shows selected data from AC’s latest annual accounts. Table 1: Selected data from AC’s annual accounts as at 30 September 2021 ($m) Revenue 84 Cost of sales 44 Expenses 36 Total dividends 2 Current assets 3 Current liabilities 2 Non-current liabilities 40 Shareholder equity 25 Omar has plans to significantly expand AC in the next three years. Omar believes this requires the board to consider two key questions: • Should AC convert to a public limited company (plc)? • Would decentralisation benefit AC? Consumer fitness equipment market AC currently focuses on the industrial sector of the fitness market. Marketing relies on promotion at trade fairs, advertising in industry magazines and direct selling to hotels, gyms and corporate offices. Omar’s brother Khalil is the Marketing Director. He has identified that there is rapid growth in the consumer equipment fitness market. In this market people purchase fitness equipment to use in their own homes. Khalil believes that price is important to these consumers. The equipment does not need to be as durable as for the industrial sector His research suggests the increasing number of people who are overweight is a driving factor for growth in the use of fitness products at home. The Board of Directors has agreed to his proposal to develop products more suitable for entering the consumer market in 2022. Khalil has researched the consumer fitness equipment market in country K. Table 2 gives a summary of his research. Table 2: The consumer fitness equipment market in country K in 2020 Market share of the three biggest suppliers of fitness equipment 60% Number of suppliers of fitness equipment 50 Change in advertising expenditure by the market leading brand +30% Average spend on fitness equipment $550 Growth of consumer market 3% Proportion of households with fitness equipment 5% Proportion of consumers buying fitness equipment online 75% Khalil will outline his proposed marketing strategy to the Board of Directors next week. He will recommend an objective of achieving a market share of 5% within 2 years. Manufacturing problems AC’s employees are skilled and there is a production line for each product. Quality control inspectors are employed to ensure that fitness equipment conforms to the quality standards set by AC. However, Omar is concerned about the increase in the proportion of substandard output. The operations manager estimates that the average cost to AC of correcting substandard output is $70 per unit. The operations manager has also reported that production of treadmills was recently stopped for two days due to late delivery of an important component. Table 3 contains factory data. Table 3: Factory data for 2020 Number of employees 80 Number of days lost through absenteeism 600 Average monthly output (units of equipment) 5100 Percentage of substandard output 3% Omar asked the operations manager to investigate the problems and make a recommendation for change. The operations manager reported the following: • Production line workers are paid approximately 90% of the industry average. • Labour turnover in 2020 was 15%. • Workers feel that they are not valued by AC. • Workers do not feel that they are trusted. The operations manager has recommended that AC should introduce Total Quality Management (TQM). He has also told Omar that he has insufficient authority to make the necessary decisions to manage operations effectively.

Growth strategies

Competitive rivalry in the fitness industry is high. Existing businesses aim to maintain market share. Growth is mainly driven by entering new markets. Research and development focuses on product development. As well as entering the consumer market in country K, Omar will present two other strategies for growth at the next Board meeting. These are outlined below: Option 1: market development. Enter the fitness market in country P. Initially this would target the industrial sector. Option 2: diversification. Diversify into the tertiary sector by opening a chain of fitness centres in country K. These would target the premium segment of the market. Omar has researched both options and estimated sales and costs to help make the decision. Extracts from his research are shown in Appendix 2. Appendix 1: Forecast economic data for country K 2022 2023 2024 Annual growth in real GDP (%) 3 5 3.5 Inflation rate (%) 6 9 10 Indirect tax rate (sales tax) (%) 10 12 12 Direct tax rate (income tax) (%) 24 26 26 Unemployment rate (%) 9 7.8 7.4 Interest rate (%) 6 8 8

Read the following extract before answering

Evaluate whether Omar and his family should convert the business to a public limited company (plc).

Extract:

Urban Bee Hive (UBH) Co-working After Amit Menda graduated from university, he started work for a business in the US. The business specialised in designing workplace environments that aim to improve productivity. Whilst working in the US, Amit observed the growth of co-working. Co-working provides office space and support services for businesses. It offers a flexible solution for businesses which need an alternative to traditional long-term leasing or ownership of office space. In 2018, using his knowledge and experience, Amit founded UBH, a private limited company. It is based in country W, where co-working is still a relatively new idea. UBH focuses on providing office space to entrepreneurs and small businesses as and when they demand it. UBH calls its co-working centres ‘beehives’. There are three shareholders in UBH, all of whom are directors. Amit owns 50% of the shares while the other two shareholders own 25% each. A difficult economic climate Until 2020, UBH’s expansion was rapid. This internal growth was mainly financed by bank loans. However, in 2020 UBH came close to failing. There was a recession in country W when economic output fell by 10%. Many of UBH’s small business customers became insolvent during the recession. UBH was left with significant unused capacity and almost no working capital. The government responded quickly to the recession and made the following changes to its economic policies: • increased investment in infrastructure including road and rail transport • reduced income tax • reduced central bank interest rates • delayed payment of business and property taxes. Amit believes that without these changes to economic policies UBH would have failed. Marketing strategy UBH’s marketing strategy has targeted entrepreneurs starting new businesses and small, established businesses. Each UBH co-working centre (beehive) provides customers with shared kitchen facilities and snack vending machines. Customers are offered flexible contracts from 1 day to 1 year. They can either lease a hot desk (any desk available that day), a dedicated desk (the same desk for the duration of the contract) or a private office. Customers can also rent meeting rooms of various sizes by the hour. All customers benefit from unlimited internet access and printing facilities.

The Marketing Director has produced a situational analysis for the Board of Directors to consider. Selected details are given below. • In 2020, capacity utilisation fell to a low of 50%. • During 2021, following the recession, UBH opened 3 new beehives. UBH now has 10 beehives in country W. • In 2021, two international corporations entered the market in direct competition with UBH. • Customer feedback shows a high level of satisfaction with UBH’s facilities. • Customer feedback rates price, flexible contracts and distance from key transport hubs as the three most important factors in choosing a co-working centre. • Price elasticity of demand for leasing desks is estimated to be –0.5. • Most new business start-ups are unaware of the benefits of co-working. • Social media advertising has been the most cost-effective method of attracting customers. • Some larger businesses, including multinationals, make use of co-working centres in country W. However, they demand premium facilities and more space per desk than UBH currently provide. • Forecast market growth for co-working in country W in 2023 is 10%. Table 1: Price per month for leasing desks at UBH and market leader UBH ($) Market leader ($) Hot desk 150 140 Dedicated desk 300 280 Private office 2500 2300 Amit is concerned that capacity utilisation across UBH’s 10 beehives averages 80% compared to the target of 100%. He has asked the marketing department to propose changes to the marketing strategy to increase sales and reach target capacity. Managing co-working centres and Human Resource Management (HRM) Amit has delegated authority to centre managers to make decisions about local advertising, day-to-day operational issues and hiring of employees such as cleaners, IT technicians and security. Each UBH beehive also has a customer relationship manager. UBH encourages its beehives to hold special events to promote their facilities and increase customer interaction. Recent events include educational talks and business advice sessions. UBH employees have flexible employment contracts. Employees can spend 5% of their time working on individual projects of interest. All new recruits receive extensive training. UBH’s vision includes ‘Our people are our greatest strength and we are committed to providing opportunities for each individual to fulfil their potential. Our team is energetic with an entrepreneurial spirit, ready to face challenges.’

Beehive 811 UBH is scheduled to open its new centre, Beehive 811, very soon. The Operations Director prepared a network analysis at the start of this project and predicted it would finish within Amit’s deadline of 45 days. Table 2 and Fig. 1 provide details of the network analysis and diagram. Table 2: Network analysis Activity Activity detail Preceding activities Duration (days) A Agree and sign lease with landlord None 5 B Draft building plans None 3 C Order and delivery of building materials A & B 5 D Building work and inspection C 20 E Order and delivery of office equipment A & B 10 F Installation of office equipment D & E 8 G Employee recruitment A 24 H Employee training G 10 J Initial marketing of centre A & B 30 K Fire inspection and certificate F 5 2 5 5 1 0 0 3 5 5 4 10 10 5 A B 3 C 5 D 20 J 30 F 8 K 5 E 10 G 24 H 10 5 6 30 30 7 38 38 8 43 43 Fig. 1: Network diagram The project started 10 days ago. The delivery of office equipment is delayed by 12 days. Amit is concerned that any delay in opening will lead to a loss of income if prospective customers decide to go elsewhere.

Going public? After making a loss in 2020, UBH returned to profit in 2021. UBH has ambitious expansion plans for the next 18 months. As well as opening Beehive 811, UBH is aiming to open 3 more centres in 2022 and 10 more in 2023. Office buildings are expensive in country W so UBH uses a combination of long-term leases and joint investments with landlords to reduce cash outflows. UBH will need to invest $16m to finance this expansion. Amit is in favour of changing UBH to a public limited company (plc). UBH could offer its shares for sale to the public by early 2023. The other two shareholders warned Amit that the cost of a stock exchange flotation is likely to be very high. The Finance Director predicts that interest rates in country W will increase from 2% to 4% by 2023. Table 3 provides data from UBH’s latest financial statements. Table 3: Extracts from UBH’s financial statements 2021 ($m) 2020 ($m) Income statement Revenue 14.4 6 Profit/loss for the year 1.5 (3) Dividends paid 0.5 0.2 Statement of financial position (at end of year) Non-current liabilities 12 9 Share capital 2 2 Retained earnings 3.5 2.5 Trade receivables 1.1 0.7 Cash and cash equivalents 0.7 0.1 Current liabilities 3 4.5

Read the following extract before answering.

Recommend whether UBH should change into a public limited company (plc). Justify your recommendation.

Evaluate whether a joint venture is the best way for a business to enter a new international market.