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Nov 2019 Higher Level Paper 1 Mock Examination Accord 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 Question 5 ERQ recommendation C D

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com N19 3 BUSMT HP1 ENG TZ0 XX BUSINESS MANAGEMENT HIGHER LEVEL PAPER 1 Practice examination 2019 Accord 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 Accord 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 Page Jump to start 2 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION A Answer two questions from this section QUESTION ONE a With reference to Accord distinguish between revenue and capital expenditure line 93 4 marks Capital expenditures are for fixed assets which are expected to be productive assets for a long period of time An example is the bottling machines that Accord has purchased to produce its energy drink Revenue expenditures are for costs that are related to specific revenue transactions or operating periods such as the cost of goods sold salaries and wages or repairs and maintenance expenses Thus the differences between these two types of expenditures are as follows Timing Accord s capital expenditures are charged to expense gradually via depreciation and over a long period of time Accord s revenue expenditures are charged to expense in the current period or shortly thereafter Consumption Accord s capital expenditure is assumed to be consumed over the useful life of the related fixed asset Accord s revenue expenditure is assumed to be consumed within a relatively short period of time For example ingredients of Enrich are used in the production process They are purchased used and sold hopefully in relatively quick succession which is why they are classified as cost of goods sold a revenue expense Size A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value if not it is automatically designated as a revenue expenditure However certain quite large expenditures can still be classified as revenue expenditures as long they are directly associated with sale transactions or are period costs The initial capital expenditures at Accord when they are expanding their manufacturing facility will be high However perhaps after this revenue expenses such as wages salaries or raw materials components will be larger Information about Accord s revenue expenditures would typically be found in the firm s profit and loss statement and its capital expenditures are found in Accord s balance sheet fixed assets 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 Page Jump to start 3 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com b With reference to Accord explain why organisations set ethical objectives 6 marks Corporate or strategic objectives are important broadly defined targets that a business much reach to achieve its overall aim Ethics are the moral principles and values that underpin human behaviour Morals are concerned with what is right or wrong Ethical objectives are therefore the moral principles that underpin business behaviour in pursuit of its overall aim Whether actions carried out by organisations and their employees are morally acceptable must however be judged in the context of the society and the times in which they operate An ethical business such as Accord is one which applies a set of moral principles to all interactions with stakeholders such as its treatment of employees customers suppliers and shareholders Being ethical means Accord will go beyond merely complying with laws and regulations but makes choices about what it is prepared to do and what it will not Therefore an ethical business strategy may exclude behaviour which is legal but conflicts with the businesses ethical policy such as marketing energy drinks with high caffeine and sugar levels at teenagers Setting ethical objectives is the process by which organisations apply ethical values to their targets and the actions by which they will achieve them These ethical values should cover all the actions of the organisation from tactical to strategic Accord may be faced with some of the following issues which have ethical dimensions Should it promote products that might damage health Should it seek to undermine our competitors Should it pay minimum wage rates to our employees Should it seek the lowest cost suppliers Firms such as Accord will set ethical objectives for reasons that follow Ethical objectives and profits As with any business decision much will rest on whether it is costeffective to adopt an ethical stance Some firms for example Accord make an ethical stance part of their unique selling point USP However the majority of large corporations claim to have high ethical standards and have a range of policies on their websites that support their claims and so it is now harder to use ethics as a USP Ethical objectives and corporate culture Accord s ethical approach could have a number of benefits including improved motivation among employees feel good factor many employees will be more committed if they can see an ethical approach adopted by Accord reduced labour turnover improved motivation is also likely to result in improvements in the recruitment and retention of staff who will be more loyal to an ethical company like Accord improved customer perception consumers will often react positively to a more ethical approach and this is used as a USP for Accord It also helps provide the brand with a more positive association which should enhance brand values Page Jump to start 4 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Ethical objectives and investment Many investors would prefer to invest in a business with ethical objectives guiding their strategy and business operations We can see this as Accord has attracted a potential angel investor who is interested in investing in ethical businesses Such investment would enable Accord to grow and expand 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 QUESTION TWO a Describe two disadvantages of Accord using job production line 65 4 marks Job production is producing a one off item specially designed for the customer Job production is normally used to produce single one off products The products may be small or large and are often unique In order to be called job production each individual product must be completed before the next product is started At any one time there is only one product being made New small firms such as Accord often use labour intensive job production before they get the chance to expand and purchase advanced equipment However this production method has distinct disadvantages It tends to result in high unit costs This is a big disadvantage for Accord We can see this with the pricing information in the case study Accord has a significant price premium over its competitors Aran wants to lower unit costs It often takes a long time to complete because it is usually labour intensive Comparative to other production methods e g the mass flow production that MNCs likely use job production therefore uses more man hours multiplied by more units of labour per bottle of Enrich produced 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 Page Jump to start 5 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com b With reference to Accord explain the importance of brand value line 52 6 marks A brand is an exclusive name symbol or design used to identify a specific product or business And a brand identity is how a business presents itself to and wants to be perceived by its consumers Accord s brand value is the net present value or the future value of the cash flows that are attributable to its brand name or brand identity Thus the brand is an intangible asset of Accord and helps in differentiating between the business s book value and market value As branding is a way for Accord to differentiate its products from that of its competitors Branding can have a real influence on the marketing of Accord It can create a powerful image or perception in the minds of consumers either negative or positive and it can give Accord s products a unique identity Successful brands can often charge premium prices as consumers are loyal to their products and the image that it generates Attempting to establish a weak brand or rebranding is often expensive Increasing brand awareness and brand loyalty would be primary goals of any promotional activities of the business It can cost millions of dollars to attempt to create an effective brand image and success cannot be guaranteed If a brand image receives bad publicity such as poor product quality and product failures then the image of any products in the corporate brand will be damaged Thus Accord needs to be sure that its suppliers are supplying a quality product Brand value reflects the advantages that accrue to a brand A low brand value reflects lower net present value of the cash flows that are attributable to the brand name and a high brand value reflects higher net present value of the cash flows that are attributable to the brand name Thus by increasing the brand value of Enrich will reflect the following distinct advantages of Accord having a successful brand Price advantages Firms that s sell undifferentiated products that have a variety of substitutes tend to compete on price and find it difficult to charge higher prices than their rivals Recognition and loyalty Having a recognisable brand increases Accord s competitive advantage as there is a greater chance of the product being sold brand loyalty or perceived trustworthiness Supplier trust Having an established brand would enable Accord to secure supply contracts with important healthcare providers such as a large hospital chain this could be an important factor in the company s growth and evolution 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 Page Jump to start 6 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com QUESTION THREE a Distinguish between snowball sampling line 49 and random sampling line 57 4 marks Snowball sampling using existing members of a sample study group to recruit further participants through their acquaintances Random sampling every member of the target population has an equal chance of being selected Accord used snowball sampling and the representativeness of the sample is not guaranteed The researcher has no idea of the true distribution of the population and of the sample Sampling bias is also a fear of researchers when using snowball sampling Initial subjects tend to nominate people that they know well Because of this it is highly possible that the subjects share the same traits and characteristics thus it is possible that the sample that the researcher will obtain is only a small subgroup of the entire population 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 Page Jump to start 7 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com b Explain one advantage and one disadvantage of Aran and Kayla forming Accord as a partnership line 41 6 marks A partnership is a business formed by two i e Kayla and Aran or more people to carry on a business together with shared capital investment and usually shared responsibilities A legal contract would have been drawn up to establish Accord as a partnership This is known as a deed of partnership or a partnership deed partnership agreement This would be likely to include The amount finance contributed per person The roles obligations and responsibilities of each partner How profit or losses will be shared Conditions for new partners Clauses for the withdrawal of a partner Procedures for ending partnership One advantage of establishing Accord as a partnership is that the business benefits from division of labour and specialisation We can see this in the case study as Kayla and Aran take on different responsibilities for different functional areas of Accord e g Marketing Kayla Operations Aran If there is more than one general partner it is possible for multiple people with diverse skill sets to run a business which can enhance its overall performance In general this may mean that there is more expertise within the business However the partnership is an unusual choice of business structure for Accord s business model not only because a partnership structure is going to make it more difficult to attract investors who usually seek an equity stake form their investments More importantly partnerships have joint and several liability for the business s debts At least one partner must have unlimited liability as partnerships are unincorporated business Unlimited liability is where the owners are personally liable for the business departments Normally everyone has a share of the liability jointly and severally liable New businesses have a very high failure rate If Accord goes into bankruptcy then any of the two partners can be pursued by creditors for the entire debt owed by the firm 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 Page Jump to start 8 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION B Answer the compulsory question from this section QUESTION FOUR Aran s mother has become interested in supporting Accord and has offered to guarantee a bank loan This support is conditional on her business advisor being happy with certain aspects of the business The objective of securing external finance would be to increase productive capacity line 108 Both an operations management plan and a marketing plan would be needed to support an increase in production Aran s mother had one reservation She knew both her son and Kayla very well and had spent time helping in the business She believed that the difference in leadership styles of the two owners could be a real source of conflict especially if the business continued to grow Aran s leadership style would best be described as autocratic and Kayla s democratic The investment advisor was particularly interested in the break even level of production and capacity utilisation of the processing plant The business advisor strongly suggested that job customised production was unsuitable to increasing the production volumes of Enrich She said that Accord should change to a method of batch production If finance was secured Accord would take over the entire lease of the small factory they currently share with other small food and beverage manufacturers Aran and Kayla forecasted the following Maximum production capacity would increase from 60 000 to 280 000 bottles per month Fixed costs would increase from 20 000 to 260 000 per month Unit variable costs including direct labour and raw materials would decrease from 2 10 to 1 10 per bottle Delivery costs would decrease from 0 50 to 0 30 per bottle The price received by Accord for each bottle of Enrich sold would decrease from 3 00 to 2 45 per bottle The current level of demand for Enrich averages 40 000 bottles per month Several major supermarket and convenience store chains have expressed interest in taking large orders of Enrich if Accord s promotional campaigns are successful in increasing the level of demand Aran and Kayla know that they must make changes to the current marketing mix to support a better defined and agreed upon unique selling point Page Jump to start 9 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com a Calculate Accord s current capacity utilisation 2 marks Capacity utilisation is the proportion of maximum output capacity currently being achieved Maximum production capacity 60 000 bottles and the level of demand 40 000 bottles Actual output x 100 40 000 x 100 66 67 Productive capacity 60 000 Award 2 marks if the student s answer meets the following criteria b The calculation is correct Explain how conflicting leadership styles could affect Accord if it proceeds with its expansion 4 marks Kayla has a democratic leadership style and her business partner Aran has an authoritarian leadership style An authoritarian autocratic leader is one that takes all decisions gives little information to staff and supervises workers closely Only one way communication is used and workers are only given limited information about the business Democratic leadership on the other hand is different in that two way communication is used which allows direct feedback from staff to the leader and other members in the team Here Kayla would provide workers with information about the business to allow full staff involvement and engagement in the wider organisation and not just necessarily their task at hand She would also like to discuss and come to an agreement with Aran on the strategic direction and objectives of Accord If Aran is unwilling to communicate and negotiate with Kayla in day to day operations and about objectives then Kayla will likely become resentful less motivated and less productive Conversely if Kayla doesn t let Aran take charge and insists on equal input and influence in the firm then Aran may struggle to be an effective leader If the power dynamics between Aran and Kayla can be worked out and an effective working relationship is established then the two leadership styles can be complimentary Aran s leadership may prove effective in times of crisis when decisive action might be needed to limit damage to the business or danger to others While Kayla s leadership style may be more effective in day to day worker interactions Democratic leadership is most likely to be used in businesses that expect workers Page Jump to start 10 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com to contribute fully to the production and decision making processes thereby satisfying their higher order needs 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 c Explain why Accord needs to make changes to its marketing mix if its objective is to increase sales of Enrich 4 marks The marketing mix is the key decisions around product price place and promotion that must be taken in the effective marketing of a product All aspects of the marketing mix must be coordinated so that the key marketing decisions complement each other and work together to give customers a consistent message about the product If just one part of the marketing is inconsistent or does not integrate with the rest it may lead to the failure of even the best marketing plan The most appropriate marketing mix decisions will therefore be Based on marketing objectives that are affordable within the marketing budget Coordinated and consistent with each other Targeted at the appropriate consumers Unless a business 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 Enrich and its products from its competitors Enrich has a perception problem It is difficult to see how the firm can market Enrich as an energy drink An energy drink that is based on 100 percent natural ingredients will not provide a similar energy boost i e stimulant that other energy drinks such as Red Bull or Monster do The only common stimulant that is naturally sourced and legal is caffeine found in such plants as coffee and tea Enrich is caffeine free From what we know of Enrich there is no unique ingredient nor patented formula that gives Enrich an advantage in terms of a natural formulation that provides an energy boost This confusion negatively effects the USP that Accord s marketing is centred The firm needs to rework its integrated marketing mix for the following reasons Product Is it an energy drink or a natural plant based drink Page Jump to start 11 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Price Can price be made more competitive or can consumers be convinced that the premium is justified Place Distribution is expensive at small scale and low brand recognition limits retail takeup of the product Promotion How can low brand recognition be improved Award 3 4 marks if the student s answer meets the following criteria d The student demonstrates knowledge and understanding Appropriate terminology is used and explained The response is applied to the stimulus material Using information from the case study additional information from page 3 and appropriate business tools discuss the value of Accord using break even analysis in deciding whether to expand production 10 marks Let us consider a break even analysis at Accord s current level of production Break even point Fixed costs unit contribution Current break even point 20 000 3 00 2 00 0 50 40 000 bottles per month Current profitability Break even point of 40 000 bottles level of demand of 40 000 bottles thus profit 0 Possible current profit at full capacity contribution per unit x full capacity break even point 3 00 2 00 0 50 x 60 000 bottles 40 000 bottles 10 000 per month Break even analysis shows that Accord is currently breaking even total costs total revenues and making neither a profit nor a loss This is likely to be unsatisfactory for two reasons Firstly unless Aran and Kayla are paying themselves a salary and are happy with their compensation then there is a large opportunity cost to the time and effort they expend in the business that must be factored in Secondly there are no retained profits that could be used to invest and expand the business We can now consider a break even analysis if Accord increases its productive capacity New break even point 260 000 2 45 1 10 0 30 247 619 bottles per month Possible profit at full capacity contribution per unit x full capacity break even point 2 45 1 10 0 30 x 280 000 bottles 247 619 bottles 34 000 05 per month Page Jump to start 12 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Capacity utilisation at break even point 247 619 280 000 x 100 88 44 Break even analysis shows that if Accord expanded its productive capacity it would need to generate enough demand to sell at least 247 619 bottles of Enrich Thus break even analysis may be used for sales objectives for Accord which in turn would be used to determine tactics to achieve targets such as how much the firm is prepared to invest in promotion of the product and brand building This BEA also shows that at the break even level of production the firm would be operating at a very high capacity utilisation rate and two things must be considered Firstly if Accord could generate a high level of demand for Enrich it doesn t have much excess capacity from which to generate profits for the firm The firm would have to achieve full capacity a capacity utilisation rate of 100 to generate profits of 34 000 05 per month with no further possibility of increasing profitability by selling higher volumes of Enrich unless price was increased and or costs decreased Secondly there are potential drawbacks to operating at full capacity for a long period of time Staff may feel under pressure due to the workload and this could raise stress levels Operations managers cannot afford to make any production scheduling mistakes as there is no slack time to make up for lost output Regular customers who wish to increase their orders will have to be turned away or kept waiting for long periods This could encourage them to use other suppliers with the danger that they might be lost as long term clients Machinery will be working flat out and there may be insufficient time for maintenance and preventative repairs and this could lead to increased unreliability in the future So if Accord did invest in expanded productive capacity it may be forced to attempt to maintain a very high level of capacity utilisation but to keep some spare capacity for unforeseen eventualities i e it is unlikely that the firm could generate monthly profits of 34 000per month even if its sales targets for Enrich could be achieved As we can see BEA can prove valuable in deciding whether Accord should invest in expanded productive capacity Clearly it points to the fact that Accord cannot really maintain its current productive capacity if its objectives are to increase sales and add value to the partnership Profits would be less than that which could be achieved at maximum capacity 10 000 because Accord cannot operate at maximum capacity for extended periods Further BEA shows that there is likely to be a reasonably high level of risk associated with expanding productive capacity There is a reasonable chance that Accord can increase its current low profitability if sales forecasts are accurate but to do so would mean operating at levels nearing maximum capacity this is unlikely to be sustainable Thus the BEA indicates that Accord should expand production but not to the level of production the investment would produce Another investment option may need to be considered In addition to obtaining break even levels of production margins of safety and profit targets break even techniques can also be used to assist the managers in making key decisions The charts can be redrawn showing a potential new situation and this can then be compared with the existing position of Accord Here are three examples Page Jump to start 13 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com A marketing decision the impact of a price increase This raises the total revenue line at each quantity sold The assumption made in this example is that maximum sales will still be made With a higher price level this may well be unlikely An operations management decision the purchase of new equipment with lower variable costs This will lower the total cost line at each level of quantity and fixed costs remain unchanged Choosing between two locations for a new factory with different fixed and variable costs The limitations of BEA should also be factored into the investment decision The assumption that all costs and revenues are represented by straight lines in unrealistic Not all costs can be conveniently classified into fixed and variable costs The introduction of semi variable costs will make the technique more complicated There is no allowance made for stock levels on the break even chart It is assumed that all units produced are sold This is unlikely to always be the case in practice It is also unlikely that fixed costs will remain unchanged at different output levels up to a maximum capacity In sum the BEA has provided valuable insight into this particular investment decision for Accord 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 Page Jump to start 14 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com SECTION C Answer the compulsory question from this section QUESTION FIVE 5 Accord proceeded with the investment in expanding capacity at the existing processing plant The partnership complimented this by investing more financial resources into its marketing especially promotion and distribution The new marketing plan and a more coherent and integrated marketing mix resulted in Accord being able to meet its production and sales targets at least usually The processing plant and stock storage capacity meant that Accord was using a justin case JIC stock management system Their supply chain could be unreliable and this would sometimes result in either the ingredients or bottling supplies needed to produce Enrich being delayed Stock outs caused problems Figure 1 below shows stocks of Enrich for the last five months of operation Otherwise the firm operated at full capacity and often faced capacity shortage in production Figure 1 Stock levels of Enrich at Accord Research and development had identified three new drinks that had tested well in focus group research Together Enrich and the three new drinks could be marketed under a new healthy lifestyle brand Accord s retail partners were willing to enter distribution agreements to sell the new drinks However Accord has no chance of increasing production at the current production facilities without further investment in processing equipment Kayla and Aran were Page Jump to start 15 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com unsure that even if they made this investment Accord would be unable to meet the anticipated level of demand for all four of its drinks Further if they were to decide to invest in increased production it had become quite clear that banks were unwilling to provide further debt finance Accord s current balance sheet is shown in Table 1 below Table 1 Accord balance sheet Accord Balance Sheet as of 30 October 2019 000 000 Fixed assets Fixed assets 500 Accumulated depreciation 26 Net fixed assets 474 Current assets Cash 10 Debtors 12 Stock 35 Total current assets 57 Current liabilities Overdraft 30 Creditors 45 Short term loans 12 Total current liabilities 87 Net current assets Working capital 30 Total assets less current liabilities 444 Long term liabilities debt 500 Net assets 56 Financed by Paid in capital 20 Retained profit 76 1 Equity 56 1 Accumulated deficit Page Jump to start 16 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Accord still has options to expand The early success of sales of Enrich had attracted potential investors Option 1 The potential angel investor line 109 impressed that Kayla and Aran had managed to grow Accord on their own was still willing to make a substantial investment in Accord This time the business angel was willing to leave the day to day management of Accord to the two cofounders In return for providing enough finance the angel investor would receive a 30 percent equity stake in Accord and the firm would become a private limited company with three owners Kayla and Aran would each have control of 35 percent of the company This option would allow for the expansion of the current production facility to increase the production of Enrich and to start producing the three new drinks in quantities that would probably meet short to medium term sales targets Stock storage facilities would also be expanded Option 2 Multinational corporation XYZ is interested in acquiring a majority stake in Accord to take on ABC company line 95 who had entered the same niche market Accord competes in A new production facility dedicated to producing Accord s new healthy lifestyle brand would be purpose built The new production facility would be largely automated to enable flow production to occur and just in time stock management would be used Productive capacity would be hugely increased Export markets would immediately open and in time further new drinks could be produced A new private limited company would be created with Kayla and Aran each owning 15 percent of its shares and company XYZ owning 70 percent Each partner would have a seat on the board The long term aim of Company XYZ would be to take the new company public by listing shares of Accord on the share market Option 3 Kayla and Aran can maintain full control of Accord and use retained profits to pay down debt and increase productive capacity incrementally _____________________________________________________________________ Using the case study and the additional information on pages 5 7 recommend what you believe to be the best option for Accord to achieve its strategic objectives You will find it useful to consider information contained in Figure 1 and Table 1 and the concepts highlighted on pages 5 7 20 marks Page Jump to start 17 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Corporate or strategic objectives are important broadly defined targets that Accord must reach to achieve its overall aim Then following the hierarchy of objectives see diagram below tactical or operational objectives are those short or medium term goals or targets which must be achieved for an organisation to attain its corporate objectives Tactical or operational objectives are short to medium term goals or targets which must be achieved for an organisation to attain its corporate objectives Divisional operational objectives are set by senior managers to ensure Co ordination between all divisions at Accord if they do not work together the focus of the organisation will appear confused to outsiders and there will be disagreements between departments Consistency with strategic corporate objectives Adequate resources are provided to allow for the successful achievement of the objectives Aim Maximise profits Objective Maximise sales in the target market Target Sales of 10 million in each quarter of 2020 Tactic Open new production facility Objectives strategies and tactics are all related Strategic objectives relate to the whole organisation What is it that Accord wants to achieve at its core Essentially the firm exists to make its owners profit in a socially responsible manner Thus Accord will have the strategic objective of maximising sales in its target market This is because there are two routes to maximising profitability for Accord increasing sales revenues and minimising costs The strategic objective of maximising sales aligns itself more closely to the company s ethical objectives Cutting costs often negatively affects key stakeholder groups such as employees as redundancies downward pressure on wages and less favourable working conditions e g more temporary contracts may result Likewise if it chooses to expand production Accord could use the power it wields over supply contracts associated with supplying the firm and exerting pressure on its suppliers to supply Accord with raw materials and bottling and packaging supplies cheaply However this would result in supply contracts being awarded to Page Jump to start 18 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com suppliers that produce raw materials and component parts at least cost which may in turn have deleterious effects for the environment workers and families that the suppliers employ and the communities that they operate in This is because it is usually cheaper to produce In ways that pollute the environment such as pumping dirty factory emissions into the atmosphere rather than investing in expensive capital equipment to enable clean production processes When wages are low and working conditions poor When taxes paid are minimised e g using suppliers from countries with ineffective and corrupt taxation officials Thus increasing profitability by increasing sales revenue is an objective more aligned with Accord s aim to maximise profits and produce its drinks in a socially responsible way its ethical approach This conclusion leads us to the next question regarding Accord s growth and evolution Is investing in a new production facility the best way Accord can maximise profits The answer to this is straightforward The BEA showed that Accord must expand to be able to increase profitability The balance sheet shows that Accord has limited time to borrow funds or take on investment partners to expand production The weakness of the firm s balance sheet would exclude all but the highest rate lenders of corporate debt e g finance companies rather than banks The firm s current working capital is negative meaning that it does not have sufficient current assets to pay its current liabilities the partnership faces a liquidity crisis and new funds must be raised soon or the firm will become insolvent Further if the partnership was forced into insolvency followed by bankruptcy procedures each partner becomes jointly and severely liable for Accords debts Accord s balance sheet shows that the partnership has net liabilities total assets are less than the firm s total liabilities Accord does not have the option of doing nothing it needs funds and it needs funds now The only funds on offer are in relation to the expansion of its production capacity The level of expansion is dictated by each option Option 3 provides the smallest increase in productive capacity and does not allow scope for Accord to diversify its product range Option 2 results in a massive increase in productive capacity large economies of scale to be reaped and large scope for Accord to diversify both its product range and the markets it can target e g exporting Option 1 lies somewhere in between options 2 and 3 an expansion large enough to drive some economies of scale and some further product diversification with the addition of the three new drinks to Accord s product range Accord needs to be further diversified and this must be an important strategic objective now The third option does not allow for any diversification as the factory is operating near full capacity It does not make sense to cut back on the production of Enrich to produce another product as revenues and profitability would decrease Having four products means that the firm will have reduced risk in the external environment it operates in Reduced risk lowers the discount rate the firm will use in investment appraisal e g Page Jump to start 19 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com net present value and increases the likelihood such an investment meets expected rates of return e g average rate of return An example of such diversified risk would be the new teabased drink If the government regulated against the sale and marketing of all energy drinks to under 18 year olds then sales of Enrich would decrease Sales of the tea based drink would become another revenue stream Another example of diversification would be selling Accord s different products in different countries If the firm becomes an exporter cf option 2 then it would have sales in different geographic regions If the domestic economy was to go into recession then sales in overseas markets would compensate for the loss of sales in the domestic market Perhaps the most basic reason for Accord to diversify is survival By definition a company that focuses on a narrow range of products will only have access to a finite number of customers This is fine if the market as it stands is big enough to support several competing businesses but if the pool of potential customers remains small the cost of running Accord may outstrip the potential for revenue In these circumstances diversification into new product lines may be essential to the long term viability of this firm But diversification is not just about survival It is a tried and trusted growth strategy New products or business lines will enable Accord to make more sales to existing and new customers and depending on how it diversifies expand into markets that would otherwise have been closed to it There are many ways in which to diversify The most straightforward of these is to provide a natural extension of the product that Accord already offers to customers and this is exactly what having a strategy aimed at increasing the product range and distribution reach aims to achieve for Accord These strategies are borne out in the Ansoff s matrix see figure directly below The Ansoff s matrix is a model used to show the degree of risk associated with the four strategies of market penetration market development product development and diversification Market penetration The objective of achieving higher market shares in existing markets with existing products Product development The development and sale of new products or new developments of existing products in existing markets Market development The strategy of selling existing products in new markets Diversification The process of selling different unrelated goods or services in new markets There is increased risk in shifting into new markets and new products It is important to highlight that risk is a cost in business so it should be factored into any strategy Page Jump to start 20 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com Therefore it is suggested that the management of Accord exclude the third option market penetration as it still leaves Accord overly reliant on Enrich and without much further capacity to increase sales in its existing market Option 1 allows for the expansion of the firm s storage facilities This should reduce pressure on stock management leading to further stock outs as increased buffer stocks can be maintained an effective hedge against further supply chain disruptions However there are costs associated with holding extra stock This places upward pressure on average cost cost per unit which in turn places upward pressure on the firm s pricing points to maintain profit margins Higher prices may force changes to the marketing mix for the firm s products and likely effect demand if customers are sensitive to price changes and the firm s products are not significantly differentiated from the competition Option 2 allows for industry standard mass flow production methods typically used by large beverage manufacturers such as corporation ABC This method is used when individual products move from stage to stage of the production process as soon as they are ready without having to wait for any other products Flow production systems are capable of producing large quantities of output in a relatively short time and so it suits industries where demand for a product is high and consistent It also suits the production of large numbers of a standardised item that only requires minimal alterations Flow production usually takes place on a production line Flow production has a number of advantages over other types of production Labour costs tend to be relatively low because much of the process is mechanised and there is little physical handling of products The constant output should make the planning of inputs relatively simple and this can lead to the minimisation of input stocks through the use of just intime JIT stock control Quality tends to be consistent and high and it is easy to check the quality of products at various points throughout the process The main disadvantage is the high initial set up cost By definition capital intensive high technology production lines are going to cost a great deal of money In addition the work involved tends to be boring demotivating and repetitive JIT is an inventory management strategy that aligns raw material orders from suppliers directly with production schedules Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process which reduces inventory costs This method requires producers to forecast demand accurately The JIT inventory system contrasts with just in case strategies wherein producers hold sufficient inventories to have enough product to absorb maximum market demand If this option were to be pursued Accord would need to consider the impact on its supply chain Presently the firm s supply chain is unreliable as evidenced by the stock out occurring at the beginning of May New suppliers would need to be found to cater for the large increase in ingredients and packaging needed for the very large volumes associated with option 2 Accord s management should carefully consider the impact on its current suppliers and their employees loss of revenues and possible job losses There is no guarantee that Accord s current suppliers would be able supply the increased volumes and it is likely that new suppliers Page Jump to start 21 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com would have to be found anyway The MNC would have efficient and effective supply chains that Accord would utilise The impact of each option affects another key stakeholder group Accord s employees Option 1 would have the least impact perhaps additional training and new hires would be needed to increase production volumes Option 2 is heavily capital intensive and less labour per unit is required However considering the sheer volumes associated with this scale of production it is unlikely that Accord would have to make employees redundant and it may simply be a case of retraining some of its existing workforce However there is no guarantee that the new production facilities would be located in the same city Mass production and exporting requires excellent infrastructure As a drink is a product that is relatively heavy to transport seaports and rail become the most efficient and cost effect forms of distribution to different geographic regions If Accord s current location does not meet the needed infrastructure requirements the location decision would involve redundancies if employees were unwilling to move with the company There are advantages and disadvantages to Accord becoming a public limited company The main advantages of a being public limited company are Better access to capital i e raising share capital from existing and new investors Liquidity shareholders can buy and sell their shares if they are quoted on a stock exchange This means that Kayla and Aran have another exit strategy available to them Value of shares the value of the firm is shown by the market capitalisation based on the share price The opportunity to more easily make acquisitions e g by offering shares to the shareholders of the target firm To give a company a more prestigious profile As always there are some disadvantages to being a PLC as opposed to remaining as a private company The main downsides are Once listed on a stock exchange the company is likely to have a much larger number of external shareholders to whom company directors will be accountable Financial markets will govern the value of the company through the trading of the company s shares and will represent the market s view of the company s performance over time Greater public scrutiny of the company s financial performance and actions However in this case Aran and Kayla need to weigh the costs and benefits associated with giving up control of Accord in order to expand the firm by an order of magnitude In effect would they be happy with having a smaller percentage of a much larger cake Considering the above points my recommendation is for Kayla and Aran to accept the offer from multinational corporation XYZ if it would likely result in a more valuable shareholder s stake for each founder option 2 A 15 stake in a 20 000 000 public company is better than a 35 stake in a 2 000 000 private company Further Accord will be better placed in the beverage industry as a larger more diversified company with efficient production methods and supply Page Jump to start 22 23

IB Business Management Higher Level Paper 1 Examination IB Business Management www BusinessManagementIB com chains better able to reap the advantages of economies of scale Having better access to capital increases the firm s strategic options going forward Exam tip You can duplicate information from answer to answer Different answers are assigned to different examiners for marking If you provide some good knowledge in your answer to say Q3a and some great critical thinking in your answer to Q4d and IF it s applicable feel free to reuse this in answering Q5 Section C Marking Rubric Marking criterion Marking judgement A Knowledge and understanding Award up to 4 marks if good knowledge and of tools techniques and theories understanding of relevant tools techniques or theories is demonstrated B Application Award up to 4 marks if 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 C Reasoned arguments Award up to 4 marks if relevant balanced arguments are made and these are well justified D Structure Award up to 4 marks if all of the structural elements are present and ideas are clearly organised E Individual and societies An introduction A body A conclusion Fit for purpose paragraphs Award up to 4 marks if balanced consideration is given to relevant individual and group perspectives Page Jump to start 23 23