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2020 Standard Level Paper 1 Mock Examination P S Trawlers Exemplar Answers Interactive Click or Tap to go Question 1 1 A B Question 2 A B Question 3 A B Question 4 A B C D

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com M20 3 BUSMT SP1 ENG TZ0 XX BUSINESS MANAGEMENT STANDARD LEVEL PAPER 1 Practice examination 2020 P S Trawlers 1 hour 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 P S Trawlers 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 A calculator is required for this examination paper The maximum mark for this examination paper is 40 marks Jump P a gto e 2 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION A Answer two questions from this section QUESTION ONE a Outline two advantages of low labour turnover for P S Trawlers line 40 4 marks Labour turnover is the rate at which employees leave a company and are replaced by new employees expressed as a percentage Two advantages to PST having a low a low rate of labour turnover are as follows Cost Savings It is costly for PST to lose one employee and then hire and train a replacement especially a highly skilled employee such as a trawler captain Recruiting hiring processes and training time with the new employee are common costs Additionally PST has an opportunity cost resulting from lower productivity with a new employee High Motivation Over the course of time the employees at PST develop bonds with coworkers Dealing with regular turnover affects those left behind and makes it more likely they will eventually leave as well PST has a high morale culture where employees have good working relationships and this contributes to the effectiveness of the business In the fishing company employees who know each other well more easily collaborate on production and work through glitches Award 3 4 marks if the student s answer meets the following criteria b The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material With reference to P S Trawlers distinguish between a partnership and a private limited company lines 9 and 10 6 marks A partnership is a business legal structure where two or more associates are carrying on a business in common with a view to make a profit e g architects engineers It is owned by two or more people and up to 20 this may vary from country to country The firm is managed by the partners Capital comes from partners Partners can pool funds together to make more funds Jump P a gto e 3 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com A private limited company is a business legal structure characterised as being a small to medium sized business that is owned by shareholders who are often members of the same family This company cannot sell shares to the general public PTS has changed from a partnership to a private limited company It remains a family owned private company with shares tightly held between the immediate family Students should be ready to evaluate the advantages and disadvantages of changing from a partnership to a private limited company The change in legal ownership makes a lot of sense Company directors can still be held responsible and liable for damages if they have been shown to be willingly negligent in their duties e g gross safety issues and the death of a crew member preventable oil and diesel spillages causing significant environmental damage etc However companies have limited liability which means that the business owners shareholders are not personally liable for business debts Therefore the owners will not have to sacrifice their personal assets if the business is unable to repay all its liabilities This could be a very important consideration considering the possibilities of setting up new businesses e g fish retail shops or purchasing new and larger fishing trawlers Continuity becomes easier We are not given precise information on how old Shae and Patsy the parents are but we confidently assume that they are getting on It is likely that their shares will transfer to the children in time The more shares a person has in a business the more influence they have in business decisions as each share counts for one vote 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 Jump P a gto e 4 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com QUESTION TWO a Outline two examples of intangible assets that could feature on the balance sheet of P S Trawlers Appendix 1 4 marks This is an asset that is not physical in nature an asset being any resource owned by the business Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset Goodwill brand recognition and intellectual property such as patents trademarks and copyrights are all examples PST may have intangible assets in the form of brand recognition and trademarks Brand recognition is the extent to which PST s target market fish shops restaurants etc can identify PST s brand by its attributes such as being a reliable supplier of very high quality fish A trademark is a type of intellectual property consisting of a recognisable sign design or expression which identifies PST s products from those of other competitors It may be displayed on boxes of fresh fish delivery vehicles and promotional materials such as emails to customers Award 3 4 marks if the student s answer meets the following criteria b The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material Explain methods of external finance that P S Trawlers could use to open its own retail fish shops line 112 6 marks External financing describes funds that firms obtain from outside of the firm It is contrasted to internal financing which consists mainly of profits retained by the firm for investment There are many kinds of external financing The two main ones are equity issues IPOs or SEOs but trade credit is also considered external financing as are accounts payable and taxes owed to the government External financing is generally thought to be more expensive than internal financing because the firm often must pay a transaction cost to obtain it e g bank fees and interest payments Examining PST s financial information they have two main methods of external finance that the company could use to open new retail fish shops issuing equity and long term banks loans Given the long term nature of the investment and the tens of thousands of euros required to finance the venture other short term external sources of finance are unlikely to be used Short Jump P a gto e 5 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com term finance would be advisable to finance a short term need such as increasing stocks or paying creditors Long term investments should be matched with long term financing A long term bank loan is probably PST s preferred method of external finance This would involve money being given to PST by a bank in exchange for future repayment of the loan value or principal amount along with interest and or finance charges It is difficult to foresee any issue with the company being able to secure a bank loan of the size required the firm is profitable and has millions of euros in assets and no long term liabilities Smaller bank loans are likely to be repaid within five years and larger loans over a longer time frame The longest credit period being extended by PST is three months the supermarket meaning that the company could likely delay spending on capital equipment and or reduce dividend payments to pay the loan back faster and save on interest payments Issuing equity is another possible source of external finance PST could use to finance the opening of retail fish shops This is the sale of new equity or stock by a firm to investors Equity issuance in this case would involve a private sale in which the transaction between investors and the firm takes place directly and not an IPO the amount of finance required is too small to justify the costs and time required PST s management would likely seek equity finance from friends family and fools the 3Fs of capital funding The big advantage of a share issue over a bank loan is that PST will not have to pay the money back A bank loan must be repaid and there will be interest on top of the repayments If PST issues shares to an investor it is a different setup Instead of the regular repayments the firm gets an injection of cash that it can use to build up the business open new retail fish shops The investor may be entitled to receive dividend payments and if PST can grow the company big enough for it to be worth serious money later if the shareholders the owners sell the company then the investor could get far more than their initial investment A share issue would have a positive effect on PST s cash flow and we know that the company has liquidity problems which means that it can get on with growing the business and pay for the resources it needs to build it more quickly Some level of control of the company must be given up by the current four family members in return for equity finance the investor would have a share in the ownership of the company 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 Jump P a gto e 6 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com QUESTION THREE a With reference to P S Trawlers analyse job rotation as a non financial method of motivation line 87 4 marks Motivation The intrinsic and extrinsic factors that stimulate people to take actions that lead to achieving a goal Job rotation taps into employees intrinsic motivation that which comes from the satisfaction derived from working on and completing a task Job rotation involves the movement of employees through a range of jobs in order to increase interest and motivation Job rotation can improve multi skilling but also involves the need for greater training In a sense job rotation is like job enlargement This approach widens the activities of an employee by switching him or her around a range of work For example an administrative employee at PST might spend part of the week looking after the reception area of the business dealing with customers and enquiries Some time might then be spent contacting customers and updating them on the type of fish that PST has in stock and then rotating again to inputting data onto PST s database Job rotation may offer the advantage of making it easier to cover for absent colleagues but it may also reduce productivity as workers are initially unfamiliar with a new task Unmotivated or demotivated staff will not perform effectively offering only the minimum of what is expected Motivation levels have a direct impact on productivity levels and the competitiveness of PST Highly motivated workers have high productivity and this reduces unit costs Motivated staff will be keen to stay with PST reducing costs of labour turnover PST has low labour turnover They will be more likely to offer useful suggestions and to contribute in ways other than contractual obligations They often actively seek promotion and responsibility 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 Jump P a gto e 7 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com b Examine the impact of one technological and one social factor that could arise in the external environment that P S Trawlers operates within 6 marks Technological Adopt new fishing technologies Fishing is evolving There are many recent technological developments Such technologies can be collaborative i e involving more than one stakeholder groups along the value chain or noncollaborative which are set up by governments to monitor the fisheries sector These include the increased computing power of handheld devices the proliferation of user friendly Global Positioning System GPS and Global Navigation Satellites Systems GNSS applications increased capacity for big data storage sharing and analysis variety and improved durability of drones and low maintenance radar stations accessibility and accuracy of satellite imagery continuous improvements in on board digital cameras and recorders expanded use of Automatic Identification Systems AIS and Vessel Monitoring Systems VMS and the internet at sea Only the largest fishing companies can adopt such new technologies and reap the benefits and spread this cost across their expanded fishing fleets defraying the average cost economies of scale Thus providing the biggest fishing operators with an even better ability to outbid rivals for fishing quotas This would be a driving force in favour of Pekka s wish to upgrade PST s fleet to bigger more efficient trawlers to catch more fish more efficiently and at a lower unit cost that increases profit margins Social Increasing demand for fish PST is operating in a market where demand for its product is growing and it can grow revenues as the market expands The increased demand for fish likely comes from an increasing social awareness of the negative effects of large scale livestock farming pollution deforestation CO2 and methane emissions as well as the poor health outcomes associated with eating red meat such as beef and lamb As people become more health conscious the demand for healthier proteins such as fish increases Increased demand for a product also results in an increase in price all other things being equal Further if the increase in demand is being driven at least in part by rising consumer incomes then PST is well positioned to reap the rewards of its premium pricing Moving to bigger more efficient trawlers and obtaining additional quota would capitalise on this increasing demand for fish However regulations and quotas may limit the company s ability to take advantage of this external opportunity 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 Jump P a gto e 8 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION B Answer the compulsory question from this section QUESTION FOUR The management of P S Trawlers PST have received a report back from a business consulting company which examines both strategic options the firm is considering pursuing to grow the company diversifying operations or increasing the scale of operations by purchasing new modern ocean going trawlers that are much larger than those currently operating The report suggests that opening new fish retail shops would be a better option for diversification than offering services and facilities to other fishing businesses or finding alternative uses for the trawlers these are markets that PST has no real experience or competencies in The report also concluded that increasing the scale of operations was also a viable option if financing could be obtained on reasonable terms Additional fishing quotas could be obtained from both the government and purchased from smaller fishing companies The business consulting company also warned that according to PST s own working capital projections for 2020 the firm was likely to experience liquidity problems Net cashflow forecasts have been prepared for both strategic options and these are shown in Table 1 and Table 2 below If PST can find suitable financing there are no real limits on the number of retail shops that could be opened or the number of large ocean going trawlers that could be operated The business consulting company is confident forecasted costs are accurate given the quality of the research and available data but less certain about the forecasted revenues as the price of fish is volatile and catch sizes and quotas are variable year to year Further sales revenues in each shop will be very dependent on the marketing mix PST chooses to employ and the effectiveness of its unique selling proposition The forecasted cash flows for each retail outlet PST chooses to open are as follows Table 1 Forecasted net cash flows per retail fish shop opened Year For each retail fish shop 0 60 000 1 10 000 2 30 000 3 50 000 4 70 000 5 70 000 Jump P a gto e 9 16 start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com The forecasted cash flows for each ocean going trawler PST chooses to operate are as follows Table 2 Forecasted net cash flows per trawler operated Year Trawler 1 Trawler 2 Trawler 3 Trawler 4 Trawler 5 millions millions millions millions millions 0 150 140 130 120 110 1 20 22 24 25 25 2 20 22 24 25 25 3 20 22 24 25 25 4 20 22 24 25 25 5 20 22 24 25 25 a Identify which sectors of the economy PST s fishing operations and retail activities operate in 2 marks PST s fishing operations occur in the primary sector of the economy PST s retail activities occur in the tertiary sector of the economy Award 2 marks if the student s answer meets the following criteria Two economic sectors are correctly identified b Ratio analysis using selected financial data for PST as shown in Appendix 1 i Calculate PST s return on capital employed ROCE in 2019 2 marks ROCE Net profit Capital employed x 100 Net profit Sales x net profit margin 14 5m x 13 1 885 000 Capital employed non current current assets current liabilities 2 600 000 ROCE 1 885 000 2 600 000 x 100 72 5 Jump to10 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com Award 2 marks if the student s answer meets the following criteria The calculations are correct ii Calculate the current ratio and the acid test ratio PST projects in 2020 2 marks Current ratio current assets current liabilities 300 000 400 000 0 75 Acid test ratio liquid assets i e current assets stocks current liabilities 150 000 400 000 0 375 Award 2 marks if the student s answer meets the following criteria Each calculation is correct c Analyse how opening new retail fish stores would allow PST to exert more control over its marketing mix 4 marks Thee marketing mix is a combination of factors that can be controlled by a company to influence consumers to purchase its products and when the product is a good such as fish rather than a service this typically includes product price place and promotion Tapio has floated the idea of the company opening its own fish shops and vertically integrate the business Vertical integration is the combination in one firm of two or more stages of production normally operated by separate firms i e fish producer and fish retailer This is an idea that makes intuitive sense as it provides PST with more control over its marketing mix and allows the firm to better differentiate its product i e creating a unique selling proposition a feature of a product that makes it different from and better than all its competitors products Essentially if this strategy was successfully implemented PST would be able to catch and sell more fish at higher prices price by differentiating its product through seizing greater control over its marketing mix Its fish would be perceived as less of a commodity product product and a brand identity could be built around locally sustainably and ethically sourced fish promotion Further nothing in this strategy precludes catching and selling its fish as it always has restaurants other fish shops supermarket chains and for export Further PST would eliminate an intermediary in the chain of distribution place and increase the price it receives for its product Jump to11 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com It would be difficult to develop a brand identity around a commodity product such as fish However creating a brand identity to differentiate its product would tie nicely with the strategic option of PST opening its own fish retail shops The brand would be based on something like the freshest fish of the highest quality being locally and ethically sourced More of its fish could be sold for a premium price Such brand development would likely be impossible if PST moved to increase the size of its catch using bigger trawlers 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 d Discuss Pekka s plan to upgrade PST s trawler fleet by purchasing new ocean going fishing trawlers 10 marks Currently PST has many strengths as a company and these specific strengths can act as a restraining force for change upgrading PST s trawler fleet as well as providing the company with a strong foundation for adopting such a change Relevant strengths and weaknesses of the company are discussed below in the context of the proposed strategic change PST is profitable with stable expenditures The company is profitable across the two years worth of financial data provided and the forecasted profitability for 2020 Net profit margins appear to move more or less in tandem with sales revenues indicating that PST has a tight rein on its expenditures On the one hand PST has below average net profitability for the EU fishing industry as a whole but on the other it is a profitable in the Finnish fishing industry which is experiencing overall net losses Thus PST is less competitive within the EU as a whole but very competitive in the context of Finnish fishing companies indicating that the company s experience in Finnish waters current boats and human capital stand it in good stead within Finland PST s ROCE is approximately 35 percent in 2020 if the company s forecasted projections are accurate this is outstanding With sales projected to be 11 9 million in 2020 a net profit margin of eight percent means that means that net profit is forecast to be around 900 000 Able to secure fishing quotas Within the EU fishing companies need a fishing quota to be able to catch fish to sell to market Fishing quotas are allocated by the EU to the different members countries who in turn allocate these to their own fishing companies Not everyone who wants a fishing quota will secure one PST is an established family owned fishing company that has been fishing the waters of Finland for generations As such it is likely to be at the front of the queue when the Finnish quotas are allocated each year and it is unlikely to be denied a fishing quota given the firm s ethical stance Quotas are a valuable commodity allowing PST to catch and sell fish and on sell its entire quota or part thereof If PST is efficient enough it may also make financial sense to purchase other fishing quotas and boost its income the case study provides no mention of the size or number of PST s fishing quota or quotas Jump to12 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com Existing product selling satisfactorily and it has diversified customers and markets PST has achieved a satisfactory level of sales of its product in the three years of financial data provided Sales are translating into profits although sales revenues are forecast to fall further in 2020 While profitable the case study provides evidence of a looming liquidity crisis Sales levels and net profit margins should mean that PST would be expected to have a net positive cash flow rather than its current and forecast lack of working capital its current ratio is less than 1 00 The advantage to PST to selling product to Finland s biggest supermarket chain is that they can presumably sell a guaranteed volume of their catch this way and at a guaranteed price This is a secure source of cash flow for the company Their product is of good quality and is sold locally to fish retailers and restaurants at a premium price It has further diversified its sales channels by exporting to markets overseas A loss of a customer in one market is unlikely to cause major problems for the firm except for the Finnish supermarket chain probably its largest customer Although competition in the market is high the company takes a proactive approach to customer relationship management PST has industry knowledge and relationships with key stakeholders such as customers and its workforce that suggest it may be in a favourable position to sell the extra product that necessarily comes with the larger fishing trawlers PST obtains a premium price for its product PST s product is high quality meaning that the fish is treated well from being caught to packaged and distributed The freshness of the fish and the target species enables the company to achieve a high price for its catch in local markets Quality is likely to be PST s unique selling point the case study makes no mention of PST catching species of fish that are more desired by consumers which is perhaps in itself an opportunity for PST The USP is the differentiating factor that makes a company s product unique designed to motivate customers to buy Unless PST 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 PST from its competitors Without being able to do this PST will be supplying the market with a commodity product undifferentiated from its competitors and having limited pricing power within its marketing mix However the larger catch that comes from upgraded trawlers means that PST s fish will be perceived as being more of a commodity product and the premium price currently being achieved would be less likely to be obtained The company would likely have to decrease the price of a unit of fish to sell more Further the price point will drop as soon as PST s fish needs to be frozen All things being equal PST s fish will need to be frozen the further out to sea fish are caught because it takes longer to get back to shore the longer fish are held in the warehouse and the further it has to be transported to markets PST has 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 This benefits PST s business and product image as firm and product will be associated with a green and socially responsible approach This could become a major competitive advantage It also assists PST to attract the best motivated and efficient employees as many workers will prefer to work for and be associated with socially aware businesses It will also generate goodwill among other stakeholder groups resulting from socially responsible behaviour could lead to better relations with employees suppliers customers and the local community Higher long term profitability should result from all the factors above Upgrading trawlers and catching a much larger quantity of fish would place pressure on its CSR as PST would now likely be a significant contributor to the overfishing that is occurring in EU and international waters On the financial side of this decision PST has no long term liabilities and several millions of dollars in fixed assets low gearing Selected financial information provided in Appendix 1 indicate that the Jump to13 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com company is in a reasonable financial position The company is profitable without long term liabilities i e there are no long term loans that need to be serviced This means that there are company assets primarily its fishing fleet that can be used as collateral to finance to borrow for expansion PST has a low gearing ratio In a nutshell the firm s low gearing will enable it to borrow at reasonable rates form a bank providing it with options to pursue expansion opportunities However 2 5 million in net assets is not going to be able to secure a loan of 100 million to purchase a new pelagic trawler The company s unit costs higher than larger fishing companies We know that PST operates smaller fishing vessels than its more sophisticated rivals in the industry because Pekka s preferred growth strategy for the company is to buy updated and larger trawlers like those operated by overseas competitors The costs associated with operating more smaller trawlers rather than fewer larger trawlers is too high to catch and sell a lot of fish in the market and still remain price competitive Fish is primarily a commodity product and PST must keep its unit costs low However it will be difficult to keep costs low for the following reasons Absence of economies of scale High per unit distribution costs which increase significantly when chilled frozen distribution and storage is required They don t have their own warehouse cool store facilities Fuel and salaries are expensive and newer larger boats are going to require relatively fewer staff to operate and will be more fuel efficient Marketing costs averaged across units produced to boost brand awareness are likely to be relatively high in comparison to more established brands in the market Pekka s strategy is to focus on growing PST s core business fishing Growth would be achieved by purchasing bigger more efficient trawlers that have better technology on board This is a strategy designed to achieve economies of scale reductions in a firm s unit average costs of production that result in an increase in the scale of operations This makes sense in terms of being competitive in the quota tendering process Upgrading PST s fishing fleet to large pelagic trawlers has many advantages Catch more fish taking fewer trips Make big savings on fuel costs identified as a major source of expenditure for the company Make big savings on salaries i e fewer boats mean fewer captain and senior crewman as well as fewer deckhands as the most efficient boats are largely automated salaries have been identified as a major source of expenditure for the company Incorporate the latest fishing technologies and driving efficiencies e g time to locate the biggest shoals of the most valuable species Be granted more quota and purchase additional quota from less efficient firms i e PST can catch more product Have safer boats fewer accidents at sea and lower insurance premiums Provide the company with more market power when negotiating price in markets and with fish wholesalers Not only is PST competing against other EU fishing companies to sell its product it is also competing against the same firms to obtain fishing quotas Any fishing company can purchase a fishing quota Fishing quotas are allocated in a tendering process For example the Finnish government may allocate an annual quota for 100 tonnes of herring to the highest bidder Only the most efficient fishing firms can afford to purchase these quotas and large fishing companies running big efficient boats can outbid smaller less efficient companies and still make a profit PST is a smaller fishing company operating smaller trawlers If the company calculates that it will cost the firm 200 000 to catch process and Jump to14 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com distribute 100 tonnes of herring and that that herring will on average sell for 300 000 then PST can only afford to bid 100 000 for that particular quota to break even Whereas a bigger more efficient fishing company could catch the same quota for only 150 000 then it could afford to bid any extra 50 000 for the same quota And this is all assuming a level playing field We have information in the case study that foreign trawlers are behaving illegally or at least unethically These companies may obtain more value from their quota and therefore afford to bid more for a quota All these factors above are arguments for the economies of scale that drive efficiencies in the fishing industry decrease unit costs and increase the profitability of large fishing firms at least in theory This is the essence of the proposed business model behind Pekka s strategy of increasing the size of PST s trawler fleet increasing the scale of operations Larger newer fishing trawlers would be purchased to make PST s operations competitive with the larger international fishing companies also plying their trade in EU waters and beyond Productivity would increase and unit costs would decrease i e more fish could be caught for less money As a larger supplier PST would have greater negotiating strength with retailers and wholesalers The company could gain a higher price for its fish and its better ability to supply product may open new contracts to the firm especially in lucrative export markets Additional EU and Finnish fishing subsidies may also be obtained All of which would significantly increase the company s profitability This is a good strategy that builds on PST s core competencies However the real issue with this strategic option is the level of investment required The company would need to invest in open sea pelagic trawlers The purchase of just two new pelagic trawlers would be a capital investment of over 100 million This is a level of scale that towers above PST s current assets a mere 2 5 million In terms of financing we do not believe that PST has the balance sheet to secure a bank loan of this size If the company were to issue shares to raise the necessary capital a minimum of 100 million would need to be raised from investors the rest could then be secured with debt financing Ownership and control of PST would effectively be transferred to the new investors This may be worth it it is often more lucrative to individuals to own a smaller slice of a much larger pie However we also see the issue of finance in this strategic option to be compounded further by the size of the new company which clashes with PST s corporate culture a family owned ethical and sustainable characterised by a friendly working environment In conclusion the scale of the investment needed to pursue Pekka s preferred option would necessitate a relinquishing of family ownership and control and a change to PST s corporate culture This would negate much of the advantages accruing to the firm from achieving economies of scale and greater profitability Therefore this option is discounted and it is recommended that PST should investigate a different growth strategy perhaps one that is built on the concept of vertical integration and the opening its own retail fish outlets Tapio s strategic proposal Jump to15 16 Page start

IB Business Management Standard Level Paper 1 Examination IB Business Management www BusinessManagementIB com 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 Evidence of balance is consistent throughout the response The judgments are relevant and well substantiated Jump to16 16 Page start