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Model (exemplar) answers to the IB Business Management mock exams for the Paper 1 Higher Level (HL) case study - Mikumi Secondary School

Question 1
1
Question 2
Question 3
Question 4
Question 5
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2017 Higher Level Paper 1 Mock Examination
Mikumi Secondary School: Exemplar
Answers
B
B
B
A
B
C
ERQ recommendation
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N17/3/BUSMT/HP1/ENG/TZ0/XX
BUSINESS MANAGEMENT
HIGHER LEVEL
PAPER 1
Practice examination 2017 Mikumi Secondary School
2 hours 15 minutes
INSTRUCTIONS TO CANDIDATES
Do not open this examination paper until instructed to do so.
A clean copy of the IB Business Management case study Mikumi Secondary School is
required for this examination paper.
Read the case study carefully.
A clean copy of the IB Business Management formulae sheet is required for this examination
paper.
Section A: answer two questions.
Section B: answer question 4.
Section C: answer question 5.
A calculator is required for this examination paper.
The maximum mark for this examination paper is [60 marks].
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SECTION A
Answer two questions from this section.
QUESTION ONE
a. Outline the importance of market research (line 38) to Mikumi Secondary School in
achieving growth in student numbers. [4 marks]
Enrolment targets are the short-term plans of action that MSS uses to achieve its student
enrolment growth objectives. For example, this may be to increase the number of fee paying
students by 15% from 2017 to 2018. Enrolment targets will feed into MSS’s strategic objectives,
especially around growth objectives.
Marketing research involves the action or activity of gathering data and other information
about consumers' needs and preferences. Good market research will help MSS discover the
preferences of existing and potential customers. Some market research will be undertaken on
a regular and ongoing process; for example, government complied economic statistics. Other
research will be undertaken if and when necessary (ad hoc).
In the example target stated above, market research would inform MSS as to how it could
alter its marketing mix to help the school increase its student numbers and grow total revenue.
For example, market research may inform MSS that there are large market segments in the
wider catchment area of Dodoma, the capital city that could be targeted in a new
promotional campaign. Such market research could also be informative to MSS on average
incomes, discretionary income and how much such targets typically spend on their children’s
education each year. This market research may provide MSS with more surety with its growth
plans (e.g., expanding the residential accommodation) or decreasing its prices to increase
demand.
Award 3-4 marks if the student’s answer meets the following criteria:
The student demonstrates knowledge and understanding.
Appropriate terminology is used and explained.
The response is applied to the stimulus material.
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b. Using information in the case study, prepare a SWOT analysis based on your assessment
of the internal and external factors that may influence Mikumi Secondary School
achieving its objectives. [6 marks]
Strengths (internal):
Wealthy owner actively involved: Jacob has the personal funds to be able to guarantee
any bank loan the school may use to finance its expansion. Being actively involved in all
aspects of the school (finance, operations, strategic planning, human resources, etc.),
Jacob has good institutional knowledge of the school.
Residential boarding facilities: Allows the school to secure students who reside too far
away to commute. Student numbers are higher than they would be without this facility,
and this increases total revenue for the school.
Strengths (internal)
Wealthy owner actively involved
Residential boarding facilities
Clear organisational structure
Established organisation
Government is supportive
School receives charitable grants and gifts
Varied extracurricular activities available
for students
Strong CSR
Strong academic achievement of students
Positive word-of-mouth endorsements
Fees are 20% lower
Computer equipment
Building available for IT centre
Weaknesses (internal)
Non-independent board/CEO
Location limits numbers of potential
students
Recruiting teachers
Retaining teachers
High labour turnover of 30%
Poor living conditions for teachers
Teachers have difficulty teaching in English
No possibility of teacher career
development (flat organisational
structure)
No possibility for professional development
No IT facilities
Opportunities (external)
Poor secondary school opportunities
Equal rights for women/girls in constitution
Global humanitarian award
Market development (Dodoma and
neighbouring countries)
Increased student numbers lead to
economies of scale
Few local schools have IT facilities
Threats (external)
Low incomes of families
Future governments may not be so
supportive
Supply of electricity is unreliable
Students use Ki-Swahili
No internet access
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Clear organisational structure: The chain of command and channels of communication
are established which makes for more efficient communication between personnel.
Established organisation: The school has been operating for five years already so it
obviously has the support of the community and has built up a good degree of trust with
the organisations assisting with its finances (i.e., the government and charities).
Government is supportive: Facilitates funding and staffing of the school, and this may
reduce the amount of corruption the school has to contend with.
School receives charitable grants and gifts: This helps with the financing of the school and
reduces the amount spent on capital expenditure (e.g., purchasing computer equipment
and library books).
Varied extracurricular activities available for students: Students will be happier and
engaged with their school, this will lead to better academic results and feed back into
positive word-of-mouth promotion. Can be used effectively in the marketing mix.
Strong CSR: This is expressed as strong ethics and ecological and economic sustainability.
The goodwill of other stakeholder groups, resulting from socially responsible behaviour,
could lead to better relations with employees, suppliers, customers and the local
community.
Strong academic achievement of students: The school meets performance targets and
the strong external exam results can be used when marketing the school.
Positive word-of-mouth endorsements: All things being equal, this will increase the number
of students attending MSS.
Fees are 20% lower: Lower fees should increase the demand for places at MSS.
Computer equipment: MSS has computers and other schools in the area do not. This is a
point of differentiation with other schools in the area and can be used in the school’s
marketing.
Building available for IT centre: The school appears to have enough buildings (or even
surplus buildings) which it can convert to an IT centre. This is less costly than building an IT
centre from the ground up.
Weaknesses (internal):
Non-independent board/CEO: There are advantages to MSS of having an independent
board of directors/trustees. Stakeholders in a business rarely act without bias. Even when
driven by what they believe are the best interests of the organisation, their opinions are
informed by personal agendas and value systems. An independent board member can
take a fresh, objective look at business challenges and opportunities, and offer advice
that synthesises the perspectives of all parties while enabling the organisation to pursue
short- and long-term business objectives.
Location limits numbers of potential students: The school is physically located in a remote
rural region where the population density is low meaning that they have limited potential
customers (students) who can travel to the school each day.
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Recruiting teachers: The remote rural location is perceived as being less desirable for
potential recruits which limits the quantity and quality of new teachers education may
not be being provided as effectively as it could be.
Retaining teachers (high labour turnover of 30%): High labour turnover increases the costs
of recruiting and developing new teachers.
Poor living conditions for teachers: Contributes to the high labour turnover of teachers at
MSS.
Teachers have difficulty teaching in English: Affects the ability of teachers to be able to
perform their jobs effectively. This will also add to teacher stress and lower the quality of
the education MSS provides.
No possibility of teacher career development (flat organisational structure): Can lower
teacher motivation and contribute to high labour turnover.
No possibility for professional development. Can lower teacher motivation and contribute
to high labour turnover. Without professional development teachers may be delivering
education services at MSS at a lower quality than if they had access to good professional
development.
No IT facilities: There is likely to be strong demand for schools that have technology that
can be integrated into teaching and learning programmes. This affects MSS in two ways;
firstly, it is a marketing opportunity that has gone begging; and secondly, it would lower the
quality of education to the girls.
Opportunities (external):
Poor secondary school opportunities for girls in the area: As MSS is a good girls’ secondary
school relative to other educational opportunities for girls in the area, it has a point of
positive differentiation from other local schools.
Equal rights for women/girls in constitution: The growing status of women in society will
likely translate into increased demand for a quality education for girls.
Global humanitarian award: The work that MSS does in developing education is being
recognised by outside entities. Such an award can be used in the marketing of the school
and as an opportunity to increase the involvement of charitable organisations (e.g.,
increased donations).
Market development: New market segments (students in the city of Dodoma and from
neighbouring countries) may enable new students to be found if effectively marketed to.
Increased student numbers lead to economies of scale: If new students can be attracted
and the school’s roll expanded, then the average cost of providing schooling for each
student falls. This will increase the surplus that the school earns which can then be
reinvested into other projects (e.g., a building programme or teacher professional
development).
Few local schools have IT facilities: If MSS can obtain effective IT facilities, including a
good internet connection then this would serve as a unique selling point as competing
schools also do not have such facilities. Having good IT facilities will improve the quality of
the education MSS provides to its students.
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Threats (external):
Low incomes of families: Many families in the impoverished area where MSS is established
cannot afford the fees or struggle to make payment of the fees the school charges.
Agrarian incomes are very susceptible to natural events such as drought or flooding.
Future governments may not be so supportive: A change in government may see a
change in education policy that could negatively affect MSS. Further, the levels of
corruption that MSS has to contend with could also increase under a less effective and/or
more corrupt government.
Supply of electricity is unreliable: Power outages do not just affect the ability of MSS to
deliver its education services, but also because many of the girls and the teachers live on
site, living standards are probably lower than they need to be.
Students use Ki-Swahili: The low levels of English proficiency among MSS students,
teachers and the wider community would likely mean that many students would not
achieve a good level of success and drop out of school before their final year.
No internet access: If other schools manage to obtain this before MSS then prospective
students may choose these schools over MSS and current students may transfer. Urban
schools are more likely to have internet connections which would make attracting students from
Dodoma more difficult.
Award 5-6 marks if the student’s answer meets the following criteria:
An analysis of the relevant issues is made with good use of business management tools (where
applicable), techniques and theories.
Appropriate terminology is used throughout the response.
There is effective use of the stimulus material.
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QUESTION TWO
a. Explain the importance to Mikumi Secondary School of having a unique selling point
(USP; line 54). [4 marks]
A unique selling point/proposition (USP): Differentiating factor that makes an organisation’s
product unique, designed to motivate customers to buy.
Unless MSS can pinpoint what makes its product unique in a world of homogeneous
competitors, its efforts to attract students will not be targeted effectively. Customers are often
attracted towards goods or services that offer a distinctive image, service, feature or
performance. Establishing a USP is about differentiating Utopia from its competitors.
USPs can be based on any aspect of the marketing mix:
Product
Price
Place
Promotion
And/or the extended marketing mix for service industries such as resort accommodation
(people, processes and physical evidence)
It is clear that MSS has created a USP around having a high quality school in a remote, rural
location that is not well served by quality schools. The marketing mix for MSS will likely be
integrated around its USP, and result in increased student numbers and/or increased pricing
power (i.e., it may be able to raise student fees). All of which should result in higher revenues
and greater surpluses which can then be reinvested into this non-profit organisation, when
compared to other schools which do not having such a clear differentiating factor.
Award 3-4 marks if the student’s answer meets the following criteria:
The student demonstrates knowledge and understanding.
Appropriate terminology is used and explained.
The response is applied to the stimulus material.
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b. Using information in the case study, construct a fishbone diagram for Mikumi Secondary
School and explain the root causes of its high labour turnover (line 42). [6 marks]
Four root causes have been identified causing the high labour turnover of MSS’s teaching staff.
These root causes are:
Limited financial incentives
Very limited career opportunities
Unsatisfactory working conditions
Non-financial factors that relate particularly to the living conditions of teachers
Limited financial incentives:
The pay of the teachers is relatively low. Remuneration is an extrinsic motivator.
There are limited incentives being offered to the teachers. For example, there is no mention
of performance based pay or teacher bonuses for a job well done.
Limited career opportunities:
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There is no opportunity for teachers to be promoted at MSS which removes another
incentive for teachers to perform at their best. The worst teachers and the best teachers
will always be on the same level at MSS.
MSS does not provide any opportunity for professional development. Strong intrinsic
motivation can be had from staff that strive to be the best they can possibly be in their jobs.
Without adequate professional development the teachers at MSS will take relatively longer
to become high performing teachers.
Working conditions:
Teachers are uncomfortable teaching in English, and it is likely that many of their students
are uncomfortable learning in an English medium. Unhappy students are likely to become
disruptive and make teaching more difficult and less enjoyable.
There are no real IT facilities at the school which makes it difficult for teachers to effectively
do their jobs. Computers and IT systems allow teachers to be far more productive and
efficient in their jobs. Computers facilitate everything from in-class presentations to record
and data keeping.
MSS has an unreliable electricity supply which not only makes it difficult for teachers to
perform their jobs in the classroom, but it would also affect their accommodation situation
at the school. Intermittent electricity is just another frustration that teachers have to
contend with which makes their life at MSS less enjoyable than it should be.
Non-financial factors:
The remote-rural location means that teachers are left feeling isolated from friends and
families. The closest shops, restaurants and movie theatres are too far away to visit during
term time.
Sub-standard living conditions make life after school uncomfortable for teachers and adds
to the frustrations and inconveniences that they are experiencing.
Award 5-6 marks if the student’s answer meets the following criteria:
An analysis of the relevant issues is made with good use of business management tools (where
applicable), techniques and theories.
Appropriate terminology is used throughout the response.
There is effective use of the stimulus material.
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QUESTION THREE
a. Using information in the case study, distinguish between capital expenditure and
revenue expenditure (line 16). [4 marks]
Revenue expenditure is the cash a business spends in sales revenue generation or the costs
associated with maintaining a revenue generating fixed asset. Fixed assets are those that are
expected to keep providing benefit for more than one year, such as the equipment and
buildings of MSS.
Capital expenditure are the funds used by an organisation to acquire or upgrade physical
assets such as property, buildings or equipment. This type of outlay would be made by MSS to
maintain or increase the scope of its operations. These expenditures can include everything
from replacing a roof to building a brand new IT centre.
The difference between the two is that revenue expenditures are costs that are incurred on a
regular basis and the benefit from these costs is obtained over a relatively short period of time.
Whereas capital expenditures are typically one-off purchases of tangible (physical) assets that
are relatively expensive and has a useful life longer than one year.
b. Analyse the potential economies of scale (line 36) that Mikumi Secondary School may
experience from further expansion. [6 marks]
Increasing the scale of operations and achieving further economies of scale are two of the
potential benefits to MSS arising from its growth objective.
Scale of operation is the maximum output that can be achieved using the available inputs
(resources) this scale can only be increased in the long term by employing more of all inputs.
Increasing the scale of operations is not without risk. There are risks and costs involved in
increasing the scale of production additional land, buildings, equipment, and employing
more staff and the capital used for this will always have alternative uses (the opportunity cost
Award 3-4 marks if the student’s answer meets the following criteria:
The student demonstrates knowledge and understanding.
Appropriate terminology is used and explained.
The response is applied to the stimulus material.
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of the decision). Organisations such as MSS expand capacity by increasing the scale of
operations to avoid turning business away (i.e., turning students down) and to increase market
share, but they also benefit from the advantages of larger-scale production these are called
economies of scale.
Economies of scale is the second potential benefit to MSS.
Economies of scale are reductions in an organisation’s unit (average) costs of production that
result from an increase in the scale of operations. Thus, MSS would reduce the average cost
per student as more and more students enrolled at the school. At least up to a point, when
diseconomies of scale would begin and average unit costs would increase.
These cost benefits can be so substantial in some industries and education is one of these.
Take for example the salary of teachers. The salary of a teacher is typically fixed, and it does
not matter whether that teacher has 10 or 30 students in her class. The cost benefits of scale
in the coffee industry arise for five main reasons.
i. Purchasing economies
These economies are often known as bulk-buying economies. Suppliers often offer substantial
discounts for large orders. This is because it is cheaper for them to process and deliver one
large order rather than several smaller ones. This could be especially beneficial to MSS as they
are remote and transportation/delivery charges may otherwise be high.
ii. Technical economies
There are several sources of technical economies. In this case, a larger school with more
students is more likely to be able to justify the cost of the technical equipment such as
computer systems is often expensive and can usually only be afforded if the school has
enough students paying fees. Such expense can only be justified by larger school with larger
student bodies so that average fixed costs can be reduced, allowing the school to be more
price competitive (i.e., to charge lower fees) and/or make a greater surplus which can then
be invested back into MSS.
iii. Financial economies
A larger school would have at least one cost advantages over smaller schools when it comes
to raising finance. First, banks often show preference for lending to a larger organisations with
a proven track record and these rates are often lower than the rate charged to smaller, less
established schools.
iv. Marketing economies
Marketing costs obviously rise with the size of an organisation, but not at the same rate. Even
a small school will need to dedicate some management time to marketing activities such as
promoting the school and meeting with prospective students and parents. A larger school with
greater revenues may employ an advertising agency to design adverts and arrange a
promotional campaign. These costs can be spread over a higher level of fee revenue for a
larger school and this offers a substantial economy of scale.
v. Managerial economies
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As a larger school, MSS should be able to afford to attract better specialist functional teachers
and even managers who should operate more efficiently than perhaps more general
teachers or managers, helping to reduce average costs, and increase the efficiency and
effectiveness of teachers of MSS.
Award 5-6 marks if the student’s answer meets the following criteria:
An analysis of the relevant issues is made with good use of business management tools (where
applicable), techniques and theories.
Appropriate terminology is used throughout the response.
There is effective use of the stimulus material.
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SECTION B
Answer the compulsory question from this section.
QUESTION FOUR
Jacob Wendo knows that the school must invest in new infrastructure if it is going to be able
to grow and expand by being able to attract new students. He has decided to personally
guarantee a bank loan of $50,000 to the school for such a purpose.
One option Jacob is considering is updating and expanding the residential boarding house
from its present 50 bed capacity to 100 beds. A smaller residential wing would be included to
better accommodate some of the teachers and their families.
Jacob has further investigated costs and conducted market research to identify potential
customers. He is concerned at how many of the 100 residential beds for girls could be filled for
the venture to be worthwhile. He forecasts the following:
Fixed costs: US$1000 per month.
Variable costs: US$35 per residential student per month.
Residential boarding fee: US$50 per residential student per month.
A boarding house manager would need to be employed to cater for the increased number
of students staying in the newly expanded residence. To help offset the cost of the new
boarding house manager, the position of general manager would be disestablished.
Two new positions of responsibility would be created a head of the upper school (Years 7-
12) and a head of the lower school (kindergarten to Year 6).
In addition to these two organisational changes, Jacob is considering a change to the
organisational structure at Mikumi Secondary School.
a. Define the term word-of-mouth promotion. [2 marks]
WOMP is any oral or written recommendation by a satisfied customer to the prospective
customers of a good or service (often considered to be the most effective form of promotion).
For MSS, word-of-mouth promotion is likely to come from students who enjoy school and
parents who are satisfied that their daughters are getting a good education at MSS. Satisfied
students and parents will be effectively promoting MSS to their friends, family and
acquaintances.
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b. Using information above calculate:
i. The forecasted break-even quantity (students per month) for the residential
boarding house (show all of your working). [2 marks]
Contribution per unit: Selling price of a product less variable costs per unit.
The break-even point is:
Fixed cost = $1 000 = 67 students per month
Contribution $50 - $35
ii. The difference between the forecasted monthly surplus if Mikumi Secondary
School is able to operate its boarding house at 100% capacity and 80% capacity
(show all of your working). [2 marks]
80% capacity = 80 students
(87 67) x $15 (unit contribution) = $300 per moth
100% capacity = 100 students
(100 67) x $15 (unit contribution) = $495 per moth
Difference = $195 per month
Award 2 marks if the student’s answer meets the following criteria:
An accurate definition.
There is effective use of the stimulus material.
Allow own figure rule (OFR). Do not double penalise candidates.
Allow own figure rule (OFR). Do not double penalise candidates.
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c. Using information in the case study, explain the importance of economic and
ecological sustainability in operations management practices at Mikumi Secondary
School. [4 marks]
Economic sustainability is as much about taking a long term view of where the organisation
will be in ten years’ time, not six months’ time. Managers such as Jacob could make short term
decisions, MSS could borrow heavily, hire unqualified teachers, suppress working conditions
and pay, engage in price wars with competing schools, market substandard products, reduce
quality standards (such as inflating achievement scores to make the school look good), and
so on and such forth to boost short-term targets, temporarily inflate student numbers and
revenues. None of this is sustainable in the long term. A school engaging in this sort of short-
termism is not going to be economically sustainable in the long term.
On the other hand, investing in expensive green technologies, paying less skilled workers a
'living wage' and being fair to suppliers can place MSS at a competitive disadvantage,
possibly jeopardising its long-term economic viability. It is a balance the school is required to
achieve to be financially viable and maintain good student numbers in both the short-term
and the long-term.
Regarding ecological sustainability, which is the capacity of ecosystems to maintain their
essential functions and processes, and retain their biodiversity in full measure over the long-
term. Rural areas in developing countries such as Tanzania are especially vulnerable to
environmental degradation caused by the over grazing of cattle, farming practices which
strip nutrients from the soil and exploit scarce water resources. Often there is little, if any,
effective oversight by authorities. The community where MSS draws its students will be
especially vulnerable if the environment cannot be cared for and the land becomes
unproductive in the long term. The incomes earned from farming will cease to be sustainable
in the face of environmental degradation and families will be forced to leave the area taking
the students that MSS relies on.
Sustainability here refers to service and production processes that use resources in ways that
do not harm ecological systems that support both current and future human existence.
Sustainability measures often go beyond traditional environmental and economic measures
to include measures that incorporate social criterial in to decision making.
Because they fall within the realm of operations, operations management is central to dealing
with these issues. Sometimes referred to as ‘green initiatives’, the possibilities include reducing
packaging, materials, water and energy use, and the environmental impact of the supply
chain, including buying locally. Other possibilities include reconditioning used equipment
(e.g., printers and copiers) for resale and recycling.
MSS is guided by strong ethical principles and the fact that it grows food for the students and
staff points in the direction that MSS takes its responsibility for the environment seriously.
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d. Jacob is considering a change to the organisational structure.” Recommend an
appropriate organisational structure for Mikumi Secondary School. [10 marks]
Organisational structure: The internal formal framework of a business that shows the way in
which management is organised and linked together and how authority is passed through an
organisation.
The organisational chart shows:
Who has overall responsibility for decision-making.
The formal relationships between people and departments.
The chain of command.
The span of control.
Formal channels of communication.
Identity of the supervisor or manager to whom each worker is answerable and should report
to.
I recommend the above organisation structure for MSS.
In this organisational structure there is a clear chain of command which is the route through
which authority is passed down an organisation from the chief executive and the board of
Award 3-4 marks if the student’s answer meets the following criteria:
The student demonstrates knowledge and understanding.
Appropriate terminology is used and explained.
The response is applied to the stimulus material.
Chair of trustees
Other trustees
Head teacher
Head of primary
Head of boarding
Non-teaching staff
Primary teachers
Secondary teachers
Head of secondary
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directors. Here, Jacob is at the top of the hierarchy, as before. The level of hierarchy is a stage
of the organisational structure at which the personnel on it have equal status and authority.
The head teacher now has a span of control across three key departments primary,
secondary and boarding. However, his or her management load is not necessarily increased
because the newly established positions of heads of primary and secondary, as well as the
head of boarding are responsible for managing the rest of the staff at MSS, whereas before,
the head teacher was directly responsible for managing all of the teachers at MSS. Thus, it is
likely that the head teacher’s span of control is actually reduced.
Span of control: The number of subordinates reporting directly to a manager.
With the head teacher’s span of control curtailed, he or she may be better able to spend time
in strategic planning, engaging with the local community and the general marketing of MSS.
There are still four hierarchies to the new organisational structure I have recommended, but
now the channels of communication are clearer. The accountability of staff and the
responsibility of managers are more circumscribed.
Options have now been opened for promotion. Teachers can now aspire to become heads
of the respective schools, and perhaps head teacher in time. Non-teaching employees could
be promoted to manage the boarding school and the other non-teaching staff if they show
the right aptitudes and attitudes.
This is still a relatively flat (less hierarchical) organisational structure as it has few levels of
hierarchy and a wider span of control where managers will be responsible for many
subordinates and many management functions will be delegated.
Delegation: Passing authority down the organisational hierarchy.
A hierarchical (bureaucratic) organisational structure is an organisational structure where
there are fewer and fewer people on each higher level, and this is the case here, however,
when compared to an organisational structure of a typical school, it is relatively non-
hierarchical. For example, here a teacher will have just two managers above him or her (an
average teacher does not have any real contact with the chairman of the board). Whereas
in another school he or she is likely to have assistant principals, heads of departments, and
assistant heads of departments in the hierarchies above.
Advantages of hierarchical organisational structures:
If MSS is structured hierarchically with a narrow span of control it is likely to benefit from the
following advantages:
There is quicker communication between smaller teams
Feedback from subordinates should be more effective
Clearer (but longer) lines of communication between the different layers of
management
Smaller teams are easier to control and manage
Greater specialisation and division of labour can help increase efficiency and
productivity
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There are greater opportunities to earn promotion more levels exist in the hierarchy
This is then weighed against the advantages of less hierarchical organisational structures
wide span of control:
Delegation becomes a relatively important part of managing an organisation extra
responsibilities for subordinates and, therefore, faster career development.
Delegation: Passing authority down the organisational hierarchy.
Communication may be improved (it should be faster) overall since there are fewer
layers in the hierarchy.
It is cheaper to operate a wider span of control because there are fewer levels of
management (management functions will be eliminated or delegated).
Smaller 'psychological distance' between those at the top and those at the bottom of
an organisation perhaps reducing an 'us and them' culture where workers feel
alienated from senior management.
I believe that the organisational structure recommended here manages to achieve many of
the advantages of less hierarchical organisational structures, even though there are the same
number of levels of hierarchy as there is under MSS’s current structure, albeit largely because
MSS is a relatively small organisation where everyone knows each other well and
communication is probably often informal. This organisational structure offers two clear
additional advantages opportunities for promotion and a reduced span of control for the
head teacher, allowing this person to engage in more strategic planning and marketing
activities to the benefit of the school and roll growth.
Award 9-10 marks if the student’s answer meets the following criteria:
Good understanding of the demands of the question, including implications, where relevant.
Relevant business management tools (where applicable), techniques and theories are
explained clearly and applied purposefully, and appropriate terminology is used throughout the
response.
Effective use of the stimulus material in a way that significantly strengthens the response.
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SECTION C
Answer the compulsory question from this section.
QUESTION FIVE
Besides using the bank loan to finance an expansion of the residential boarding house, Jacob
is considering another option building a dedicated IT centre for the school.
A portion of the bank loan would be used to enable the school to install a satellite receiver,
allowing the school to qualify for the Tanzanian government’s Rural Broadband Initiative,
which is the government's initiative to provide fast broadband to areas outside the urban
copper and fibre networks. It uses long range fixed wireless towers to provide broadband
coverage over a relatively fast 4G network to homes, schools and businesses within range.
However, the school would face upfront associated costs to implement the technology, as
well as ongoing network usage and data costs.
Jacob has carefully analysed the expected costs of each option: IT centre versus
accommodation. There is less certainty around the projected financial benefits as forecasting
the additional revenue that could be gained from each option is difficult.
However, his market research has indicated that the following net cash flow figures are the
best available estimates. Buildings and equipment would likely be written off after five years.
Year
Net Cash flow
Option 1: Accommodation
Net Cash flow
Option 2: IT Centre
Discount rate to
be used (@6%)
0
(50,000)
(40,000)
-
1
$14,000
$10,000
0.9434
2
$14,000
$12,000
0.8900
3
$14,000
$12,000
0.8396
4
$14,000
$12,000
0.7921
5
$14,000
$12,000
0.7473
Using the case study and the additional information on pages 3 and 5, recommend whether
Mikumi Secondary School should implement option 1 or option 2.
You will find it useful to calculate the payback period, average rate of return and the net
present value at a discount rate of 6% for each option. [20 marks]
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Payback period:
Option 1: Accommodation
Option 2: IT Centre
Payback period
Between years 3 and 4
Between years 3 and 4
Difference
$8,000
$6,000
Average monthly cash inflow
$14,000 ÷ 12 = $1167
$12,000 ÷ 12 = $1,000
Number of months
$8,000 ÷ $1167
$6,000 ÷ $1,000
Payback period
3 years and 7 months
3 years and 6 months
ARR:
Option 1: Accommodation
Option 2: IT Centre
Project profit
$70,000 - $50,000 = $20,000
$58,000 - $40,000 = $18,000
Average annual profit
$20,000 ÷ 5 = $4,000
$18,000 ÷ 5 = $3,600
ARR calculation
$4,000 ÷ $50,000 x 100 = 8%
$3,600 ÷ $40,000 x 100 = 9%
ARR
8%
9%
Net present value:
Year
DR
Net Cash flow
Option 1: Accommodation
Net Cash flow
Option 2: IT Centre
1
0.9434
$13,208
$9,434
2
0.8900
$12,460
$10,680
3
0.8396
$11,754
$10,075
4
0.7921
$11,089
$9,505
5
0.7473
$10,462
$8,968
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Total
$58,947
$48,662
Cost
$50,000
$40,000
NPV
$8,974
$8,662
Investment appraisal summary:
Payback period
ARR
NPV
Option 1: Accommodation
3 years and 7 months
8%
$8,974
Option 2: IT centre
3 years and 6 months
9%
$8,662
There are arguments that can be made in favour of each strategic option that have been
suggested building new residential accommodation for students and teachers or building
the new IT centre. There are no real arguments that can be made against either option,
because these two pieces of infrastructure are both needed by the school. It is likely that both
options will be pursued, in turn. Thus, it is a matter of deciding which option will take
precedence.
Perhaps the greatest advantage of choosing to build the IT centre is that it provides MSS with
a unique selling point. This is a differentiating factor that makes MSS’s product unique,
designed to motivate parents to send their daughters to MSS and not a rival school.
Unless an organisation can pinpoint what makes its product unique in a world of
homogeneous competitors, its sales efforts will not be targeted effectively. Customers are
often attracted towards goods or services that offer a distinctive image, service, feature or
performance. Establishing a USP is about differentiating a company from its competitors.
USPs can be based on any aspect of the marketing mix. Here the IT centre for MSS is an aspect
of product it is something that MSS could provide that other schools cannot. If this particular
aspect was something that especially appealed to the target market the market segment
that a particular product is aimed at then more parents are going to want their daughters
to attend MSS and enrolment numbers will grow. This will help MSS achieve its expansion
objective.
The IT centre could appeal to the local community segment of the market and result in an
increases in student numbers at MSS. However, there is no market research to support this as
of yet. Therefore it is strongly recommended that Jacob conduct primary market research by
perhaps conducting a survey of a representative sample of the local community, or
convening focus groups. Such market research acts to reduce the risks associated with new
product launches, and to predict future demand changes from such a change as an IT centre
to the marketing mix.
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The IT centre is unlikely to add anything of value to another market segment and possible
target market residents of Dodoma, the capital city. It is assumed that residents of the capital
city are far more likely to take such IT infrastructure for granted, and many of the schools in the
capital city would likely have, at least adequate, IT facilities. Thus, there would be no point of
differentiation within this particular market segment of making an investment in the IT centre.
On the other hand, if it decided not to invest in the IT centre then MSS may be perceived as
being an inferior product to parents, students and potential students currently residing in the
capital city. Parents would then be less likely to send their daughters to MSS and pay residential
fees, even if this option was 20% less expensive than city schools.
The dilemma may be seen as being similar to the ‘chicken or egg’ problem; which comes first?
New accommodation may open up a lucrative market segment residents of Dodoma.
However, without MSS having adequate IT facilities, MSS may be seen as inferior and there
may well be no increase in demand for MSS if it builds the IT centre, amongst this market
segment. If on the other hand it is decided that the IT investment takes precedence, then the
residents of the capital city who may now view MSS more favourably would be limited in their
ability to send their daughters to MSS because accommodation would be in short supply.
The greatest advantage to the accommodation option is that it does open up a new market
segment and the opportunity for MSS to grow and expand as more girls from Dodoma would
enrol.
It could be argued that the accommodation option would result in the teachers at MSS being
happier, and that this would help lower the high rate of labour turnover amongst teachers.
However, in my opinion, if we examine the root causes of the high teacher turnover at MSS we
see that poor IT facilities contribute as much to teacher disaffection as poor living
accommodation does. Each investment option, in effect, cancels each out because both go
some way to reducing the teacher dissatisfaction MSS currently experiences.
Another point to consider is that having a good functioning IT centre with a decent internet
connection would reduce the sense of isolation and remoteness teachers currently
experience at MSS. With good internet teachers would be able to communicate with friends
and family over email, messaging apps, social media and video applications such as Skype.
The investment appraisal does not paint a clear picture of which option would be preferable.
The results of the payback period are insignificant with a single month separating each option,
a period of time which would likely fall within the realm of the margin of error of cost estimates
and expected future cash flows of each investment.
The results of the NPV analysis are also insignificant and, again, well within margins of error.
The results of the ARR are more significant. A 1% difference between the two investments may
not seem that great of a difference, however an extra 1% per annum return on an investment
compounded across five years definitely favours the construction of the IT centre, assuming
that the cost estimates and expected cash flows are reasonably accurate.
The main problems in forecasting such figures include:
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Inaccuracy of predictions: Attempts to look into the future are speculative and often the
forecasters’ biases and subjectivity can be influential in determining the result. For example,
if Jacob consciously or unconsciously favoured the IT centre then he may choose a lower
estimate of forecast revenues or higher costs to justify this.
Limited information: Forecasting is an estimated prediction based on trends in past data.
Estimates are only as good as the quality of the data and information available at the time.
External influences: There are so many factors outside of MSS’s control that can influence
student numbers and their fee revenues at any time. The economy may suddenly boom
benefiting all, a drought may reduce agrarian incomes in the region, or another school
may launch something great and capture market share. The external environment can be
significant.
Jacob and stakeholders involved in this strategic planning decision must be aware of these
(and other) limitations when conducting investment appraisal.
One factor which is important is the cost of the two investments. The accommodation option
is estimated to cost $50,000 while the IT centre is costed at $40,000, meaning that the
accommodation option is 20% more expensive than the IT centre. There is greater risk involved
in borrowing a larger sum of money. If things go wrong with whichever investment is chosen,
then $40,000 is going to be less burdensome to the school (or Jacob who has personally
guaranteed the bank loan) than $50,000 would be. And in Tanzania, an additional $10,000 is
a relatively large amount given low average incomes and the high purchasing power of such
an amount.
In terms of the two strategic options that have been tabled, I favour building the IT centre if
market research is carried out to support the facility becoming a unique selling point in the
marketing mix of MSS. I make this recommendation for the following reasons:
It has a better ARR and less downside financial risk as it has a 25% lower cost.
It should provide a unique selling point which can be used in the school’s marketing mix.
More students from the surrounding areas should enrol as a result of this.
It will help to alleviate teacher dissatisfaction with the working and living conditions at MSS.
However, building the IT centre will have a very real opportunity cost in terms of MSS being
able to target a lucrative market segment residents of the capital city. As well as continued
teacher dissatisfaction with their present accommodations.
In sum, Jacob and his team should ask themselves this question: What is the core business of a
school? And the answer must be: Education. Schools exist to provide student learning and
help children to grow and develop. Of the two options that would best help MSS achieve this,
the IT centre must win out over the accommodation option.
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Award 15-20 marks if the student’s answer meets the following criteria:
Good knowledge and understanding of relevant business management tools, techniques and
theories, as stated and/or implied by the question. This includes using appropriate business
management terminology.
The relevant business management tools, techniques and theories are well applied to explain
the situation and issues of the case study organisation. Examples are appropriate and illustrative.
Relevant, balanced arguments are made and these are well justified.
Well structured: introduction, a body, a conclusion and fit-for-purpose paragraphs.
Balanced consideration is given to relevant individual and group perspectives.