Case Study Analysis
Afghan Sun: May 2018
Derek Burton
IB Business Management
www.BusinessManagementIB.com
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
IB Business Management: www.BusinessManagementIB.com
IB BUSINESS MANAGEMENT PRE-RELEASED CASE STUDY MAY 2018: CRITICAL
THINKING
Below is a list of all key terms as they appear in the IB Business Management May 2018
pre-released case study for SL and HL Paper 1 examinations.
The terms and concepts are defined
They are then considered in the context of the case study.
Term
Line
Critical thinking
Business
1
AS is a start-up company, and as such it
will have many challenges to become
operational, to survive and to grow.
Most new businesses fail.
Input
4
Making strategic decisions regarding
and then managing those inputs in
operations management is relatively
complex in large manufacturing
companies.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Cell production methods are likely to be
more labour intensive than mass
automated production, which will be
more capital intensive.
Strategic
decision
making
4
The strategic decision making at AS will
be centred on strategies to achieve
one of the following objectives:
Survival AS is a new
business and new businesses
have a very high failure rate in
the first one-three years of
operation. This objective aligns
with the three-year cashflow
forecasts that have been
prepared.
Growth While AS is a for-
profit business it has at its heart a
mission to improve the lives of
Afghanis by bringing them
electricity. The larger it grows,
the more solar system sales it will
make, and the more lives in
Afghanistan it will help improve.
Project
7
Su (Suchenlin) is looking for a project
that allows her to give back to society.
Of all the possible new and existing
projects that she could initiate or
collaborate with, is this the best one for
allowing Su to maximise returns to
society?
For-profit
8
For some microfinance providers, like
AS, the way to keep down the interest
rate is to take deposits from clients to
fund loans. That is all well and good for
AS but financial regulations in many
countries stop microfinance providers
taking deposits and the capital must
come from somewhere else. And, given
the limited supply of the sort of
philanthropic donations that may help
AS get started, the only plentiful supply
of capital is for-profit investors.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Microfinance
9
Microfinance is a key part of PRICE in
AS’s marketing mix. If AS cannot
successfully provide and manage its
microfinance systems, poor and rural
Afghanis could not hope to purchase
the solar power systems.
Microfinance
provider
9
AS aims to allow poor Afghani
households in remote areas to purchase
solar power systems. These power
systems could then be used to operate
small businesses (e.g., to run a
computer, charge a cell phone,
operate a sewing machine) and
generally improve the lives of families
purchasing such a system (e.g., light to
read by and do homework at night).
Finance
10
AS aims to provide small amounts of
finance to individuals or households to
purchase the solar power systems.
Without this finance poor rural Afghanis
would never be able to afford the
upfront price.
Commissioned
11
In this context, and with the specific use
of the word “commissioned” it is unlikely
that AK Bank has established its own
production facilities and operations to
manufacture and supply solar power
systems. AK Bank is “very successful”. If
this is the case, why would Su decide to
manufacture the solar power systems
with her own company?
The least cost option to providing solar
cells is to commission them from a low-
cost provider, i.e., a company that has
significant economies of scale such as a
global manufacturer.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
It is hard to reconcile Su’s goal of
allowing her to give back to society
with selling a more expensive product,
which in turn with its higher price, makes
it more difficult for poor households to
afford.
Manufacture
16
Again, this is a surprising strategic
decision to take based on the available
information. Purchasing the solar
systems from a low-cost manufacturer
would enable the company to use the
finance it has set aside for capital
expenditure for other uses including
warehousing and distribution.
Additionally, where tariffs (a tax on
imports) could make the import of solar
cells, etc. from a low-cost supplier such
as China prohibitively expensive. No
such tariffs exist according to the latest
Afghanistan Customs Tariff (2014)
schedule. The closest match in the tariff
schedule is a 2.5% tariff on electrical
generating sets.
Social
enterprise
18
Despite being a for-profit business. AS is
a true social enterprise as it aims to
maximise the social well-being of rural
Afghan households. If it did not have a
social objective AS could embark on a
much less daunting business venture.
Private limited
company
19
This business structure makes sense. It
provides the most flexibility. Private
limited companies are by no means
compelled to operate with the goal of
maximising profits.
Other business structures that Su could
have considered are:
Non-governmental organisations
(NGOs): a legally constituted
body with no participation or
representation of any
government.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Charities: An organisation set up
to provide help and raise money
for those in need.
Be prepared to evaluate the
advantages and disadvantages of
each type of organisation with the
context of the organisation’s goal.
Volunteers
20
Volunteers are likely to be intrinsically
motivated as they are not rewarded
with pay or benefits.
Employees
20
Unlike volunteers, employees engage in
their job tasks for remuneration. Here,
some of HH employees are also AS
volunteers working on the project. There
is unlikely to be a conflict of interest in
the two roles, but volunteers are usually
unable to commit fulltime to a project
due to the need to earn an income.
Market
research
21
Limited market research is presented,
and the conclusions drawn have little
justification. How extensive and reliable
are the conclusions?
One real strength to the initiative that
has been identified is the strategic
partner Arif Koomar who runs AK Bank
and is successful and experienced in this
business model, albeit in Bangladesh.
The two most interesting conclusions are
firstly, to differentiate themselves in
terms of price: “Enable a very low price
to be charged for the units”. And
second, the means to achieve this:
cellular manufacturing.
To achieve the lowest unit price for the
solar systems economies of scale must
be achieved. Solar systems are
produced at the lowest cost by mass
production methods, which is producing
large quantities of a standardised
product often using specialised,
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
automated and capital-intensive
production lines.
There are global solar energy
companies that produce for a mass
global market and would achieve unit
output costs significantly lower than AS
could hope to achieve.
Product
22
In the marketing mix, PRODUCT provides
a solution to a customer problem. The
same product could be a solution to
different problems identified.
Thus, microfinance is designed to
specifically allow impoverished groups
and individuals the opportunity to
become self-sufficient. However,
households (customers) wishing to
purchase the product may be doing it
for entirely different reasons such as
being able to watch the television at
night or surf the internet.
Produced
22
As previously outlined above, this is an
interesting strategic decision regarding
operations management.
Cellular
manufacturing
23
Cells are responsible for the quality of
their own complete units of work. This
has implications for total quality
management, job enrichment and
teamworking all of which should be
able to be discussed.
The cell production method has led to:
Increased worker commitment
and motivation
Job rotation within the cell
Increased productivity
However, this production method would
not result in the lowest average unit
cost. Solar power systems are a
relatively undifferentiated product. Price
is all important with an undifferentiated
product. Su must consider outsourcing
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
the solar power system in total and not
just certain components even though
Salima does not want to, without
justification in the case study.
Students must be able to evaluate
outsourcing and insourcing.
Team
23
Teamworking is an important non-
financial method of motivation.
Teamworking: production is organised
so that groups of workers undertake
complete units of work.
Purchase
23
The purchase of raw materials is a
critical operations management
decision. Considerations include:
How reliable is the supplier?
At what price and quantities can
components be supplied?
What quality are the
components? Higher quality
components will likely cost more,
lower quality components will
cost less but have higher failure
rates.
Raw materials
23
A few considerations in the decision of
where to source raw materials would
include:
How reliable is the supplier?
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
At what price and quantities can
the raw materials be supplied?
What quality are the raw
materials? Higher quality raw
materials will likely cost more,
lower quality raw materials will
cost less but do not perform as
well and/or result in higher failure
rates and/or need added
processing in production.
Resources
23
Cell production methods are likely to be
more labour intensive than mass
automated production, which will be
more capital intensive.
Efficiently
24
Achieving economies of scale would
allow AS to produce the most efficient
solar power systems. However, the most
efficient and lowest cost producer
would likely be an existing global
manufacturer.
Very low price
24
Price is a vital component of the
marketing mix as it impacts on the
consumer demand for a product.
The pricing level will also:
Determine the degree of value
added by the business to bought-in
components
Influence the revenue and profit
made by the business due to its
impact on demand
Reflect the marketing objectives of
the business and identity of a
product.
Get the pricing decision wrong and
much hard work in market research and
product development can be put at
risk.
The very low price is essential for low
income Afghan households to become
AS customers.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
The payment plans and credit terms
associated with the microfinancing the
solar power systems are associated with
PRICE in the marketing mix.
Units
24
The unit of output for sale at AS will be
the solar power systems. The decision to
manufacture them rather than
purchase them from a massive, low cost
global manufacturer is likely to result in
higher unit costs.
Suppliers
25
The decision to manufacture the solar
power systems means that AS will be
heavily reliant on its key suppliers of
components and raw materials.
Operations management will need to
carefully select each of these key
external stakeholders by considering
such things as reliability, quality,
quantities that can be produced, and
how quickly materials and components
can be delivered to meet production
needs.
Strategic
partner
26
One real strength to the initiative that
has been identified is the strategic
partner Arif Koomar who runs AK Bank
and is successful and experienced in this
business model, albeit in Bangladesh.
Arif will be key to how successful the
project will be, especially as the business
seeks to set up operations and then
become an established seller of solar
power systems and microfinance
provider.
Leadership
28
Su is an established leader as she was a
successful CEO with High-end Holidays,
before delegating day-to-day control to
the current management team.
She has input into the strategic decision
making at High-end Holidays and she
provides the inspiration for the business.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Her leadership style would be classified
as ‘democratic’ which means that:
Participation is encouraged
Two-way communication used,
which allows feedback from staff
Workers given information about
the business to allow full staff
involvement
We know this because she empowers
her managers at HH to make day-to-
day decisions.” (line 29)
It is well suited to the new business
venture for the following reasons:
Most likely to be used in
businesses that expect workers to
contribute fully to the production
and decision-making processes,
thereby satisfying their higher-
order needs.
An experienced and flexible
workforce will be likely to benefit
most from this style.
In situations that demand a new
way of thinking or a new solution,
the staff input can be very
valuable.
The only issue is that this is a completely
new venture and the two business
models are vastly different. The
management at High-end Holidays who
will transfer to AS will have a steep
learning curve. Therefore, at least in the
initial stages, a more decisive, top-down
leadership role may be better suited.
Hopefully, Su can adapt and employ a
more ‘situational leadership’ style.
Leadership
role
28
Su will need to decide how actively she
will be engaged as a leader at AS. Will
she assume a more inspirational role
again to motivate her team to achieve
their objectives as she currently does at
HH and empower her team? Or will she
take a more active, hands-on
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
leadership role as AS seeks to establish
operations and find the most suitable
marketing mix? It could easily be
argued that a more hands-on and
active leadership role may be more
suitable in the early stages of the start-
up. Subordinate managers are likely to
be less experienced and confident
about their new roles.
Empowers
29
Empowerment is a non-financial
motivator which involves a line
manager giving her subordinates some
autonomy in their job and the authority
to make various decisions.
Empowerment is an intrinsic motivator, a
motivation that is especially powerful
because it is driven by an interest or
enjoyment in the task itself and exists
within the individual rather than relying
on external pressures or a desire for
consideration.
Therefore, empowerment leads to an
engaged and productive workforce.
Managers
29
As has, in addition to Su, the need for
four senior managers, two of which
have been identified already.
The first of these managers is David who
has experience in marketing in
Afghanistan. The advantage of this is
that he knows the country and the
people. The disadvantage is that
marketing luxury high-end holidays to
affluent Afghani customers is going to
be exceptionally different to marketing
solar powered systems to poor, rural
villagers. The market segments could
hardly be any more different!
Salima has management experience in
industry more aligned to that of AS
manufacturing., and because she is an
Afghani it is assumed that this
experience was gained in Afghanistan.
Having a senior manager who is
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
experienced in Afghani manufacturing
should prove to be a key strength of AS.
The only possible issue that could limit
Salima’s effectiveness would be gender
discrimination. According to World Bank
data, less than five percent of Afghani
firms have top female managers.
Organizing
29
A manager that is effective in this role
will increase the productivity of AS a
better output to input ratio; i.e., more
output can be achieved with the same
inputs, or the same output can be
achieved with less inputs. Either way,
management at AS that excels at
organising will lead to a more efficient
business with lower average unit costs.
Directing staff
30
Management who provide effective
direction to subordinates will ensure that
staff are on task and more likely to
achieve goals and targets.
Coordinating
30
Managers who effectively coordinate
resources will increase the efficiency
and productivity of AS. There will be less
wastage of resources. For example,
effective coordination between key
suppliers and the production process
could lead to more timely deliveries of
components and raw materials as and
when needed. This would reduce
storage costs and wastage, ultimately
decreasing the costs of production and
increasing the profitability of AS.
Tactical
decisions
30
As a start-up firm, AS will have clear
strategic objectives. It is important to
have clear, well thought through and
well researched tactical decisions to
meet these strategic objectives.
For example, if a strategic objective is to
become a low-cost provider of solar
power systems, then what tactical
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
decisions could AS use to facilitate the
achievement of such an objective?
Teamwork
31
Teamworking is an important non-
financial method of motivation.
Teamworking: production is organised
so that groups of workers undertake
complete units of work.
Teamworking is an intrinsic motivator, a
motivation that is especially powerful
because it is driven by an interest or
enjoyment in the task itself and exists
within the individual rather than relying
on external pressures or a desire for
consideration.
Therefore, teamworking leads to an
engaged and productive workforce.
Working
practice
32
A commonly used definition of
organisational culture is 'the way we do
things around here', so working
practices can provide important insight
into the organisational culture at AS. This
means how people within the
organisation view the world and
respond to it in trying to achieve certain
goals.
It is widely understood that different
organisations have distinctive cultures.
For example, the culture of a steel
company will be very different to that of
a leading independent IB girls' school.
The culture of an organisation gives it a
sense of identity and is based on the
values, attitudes and beliefs of the
people who work in it, especially senior
management.
Values, attitudes and beliefs have a
very powerful influence on the way staff
in a business will act, take decisions and
relate to others in the organisation. They
define what is 'normal' in an
organisation, so it is possible for the
same person to act in different ways in
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
different organisations. What we do and
what how we behave - in society in
general and business in particular - are
largely determined by our culture.
Quality issues
32
Quality is about making organisations
perform for their stakeholders from
improving products, services, systems
and processes, to making sure that the
whole organisation is fit and effective.
Managing quality means constantly
pursuing excellence: making sure that
what your organisation does is fit for
purpose, and not only stays that way,
but keeps improving.
There's a lot more to quality than just
manufacturing solar power systems
without any defects or getting these to
customers on time although those
things are certainly part of the picture.
What quality means for your
organisation is ultimately a question for
your stakeholders. And by stakeholders
it is meant anyone who has an interest
in the success of what AS does.
Customers will be the most important
group of stakeholders for AS, but
investors, employees, suppliers and
members of our wider society are
stakeholders too. Delivering quality in AS
means knowing who its stakeholders
are, understanding what their needs are
and meeting those needs (or even
better, exceeding expectations), both
now and in the future.
It is believed that this comes down to
three things: strong governance to
define AS’s aims and translate them into
action, robust systems of assurance to
make sure things stay on track and a
culture of improvement to keep getting
better.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Responsibility
34
The main difference between
responsibility and accountability is that
responsibility can be shared while
accountability cannot. Being
accountable not only means being
responsible for something but also
ultimately being answerable for your
actions.
Motivated
34
Well-motivated workers will help AS
achieve its objectives as cost effectively
as possible. Motivated workers will also
be trying to reach their own personal
goals by satisfying their own needs. AS,
as an employer needs to be aware of
extrinsic needs, such as pay, which can
provide motivation even if the job itself
does not. Intrinsic motivation stems from
the nature of the job itself.
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 AS. Highly motivated
workers have high productivity and this
reduces unit costs. Motivated staff will
be keen to stay with AS, reducing costs
of 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.
Conflict
35
Unresolved conflict in the workplace has
been linked to miscommunication
resulting from confusion or refusal to
cooperate, quality problems, missed
deadlines or delays, increased stress
among employees, reduced creative
collaboration and team problem
solving, disruption to work flow,
decreased customer satisfaction,
distrust, split camps, and gossip.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Conflict is not always destructive. When
it is destructive, however, managers
need to understand and do something
about it. A rational process for dealing
with the conflict should be
programmed. Such a process should
include a planned action response on
the part of the manager or the
organisation, rather than relying on a
simple reaction or a change that occurs
without specific action by
management.
Mission
37
Managers at AS and HH say that they
have a clear understanding of Su’s
mission. However, more subordinate
employees may not, and Su should
consider crafting a mission statement for
the company.
Mission statement: A statement of the
business's core aims, phrased in a way
to motivate employees and to stimulate
interest by outside groups.
Fundraising
39
Although fundraising typically refers to
efforts to gather money for non-profit
organisations, it is sometimes used to
refer to the identification and solicitation
of investors or other sources of capital
for for-profit enterprises, as would be the
case with AS.
Government
organizations
39
Afghani government organisations are
likely to be external stakeholders in AS.
There would be government
organisations interested in assisting
and/or overseeing AS where their
objectives were aligned. For example:
Better national electricity supply
Improving the lives of rural
Afghanis
The provision of microfinance
Non-
governmental
40
One characteristic these diverse
organisations share is that their non-
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
organizations
(NGOs)
profit status means they are not
hindered by short-term financial
objectives. Accordingly, they can
devote themselves to issues which
occur across longer time horizons, such
as alleviating poverty, improving health
outcomes, education access,
empowering women, etc.
There would be numerous NGOs at work
in Afghanistan, at least in areas where it
is safe for them to operate. These
organisations would provide valuable
local knowledge and be an important
source of advice for AS as they role out
their business plan.
Public surveys reveal that NGOs often
enjoy a high degree of public trust,
which can make them a useful but not
always sufficient proxy for the
concerns of society and stakeholders;
i.e., an NGO may have established a
degree of trust in certain villagers which
AS, newly arrived, would not necessarily
have.
Marketing
43
Marketing exists to address people's
needs and wants. It is all about making
customers want to buy the products of
a business rather than those of rival
businesses. It therefore looks at the
reasons behind people's decisions,
because ultimately marketing must
serve to meet the needs and wants of a
customer essential if AS is aiming at
both making a profit and providing
maximum benefit to poor rural
households.
Marketing
department
43
David is the senior manager in charge
of marketing at AS.
David who has experience in marketing
in Afghanistan. The advantage of this is
that he knows the country and the
people. The disadvantage is that
marketing luxury high-end holidays to
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
affluent Afghani customers is going to
be exceptionally different to marketing
solar powered systems to poor, rural
villagers. The market segments could
hardly be any more different!
As such, David must have members on
his team that help negate such
inexperience.
Manufacturing
45
Again, this is a surprising strategic
decision to take based on the available
information.
Students should verse themselves in
evaluating the strength and weaknesses
of outsourcing and insourcing, in the
context of the case study.
Purchasing the solar powered units from
a low-cost supplier would be
outsourcing the manufacturing function.
Manufacturing the solar power systems
itself is insourcing.
Production
director
45
Operations management is concerned
with supervising, designing and
controlling the procedures of the
production process. It is closely involved
in all aspects of the production process
which is why the term operations
management is used interchangeably
with that of 'production'. In addition,
operations management is involved in
the redesign of the business operations
that have as their centre of focus, the
production of goods and/or the
provision of services. Operations
management is concerned with the
responsibility of guaranteeing that
business operations are efficient in that
the processes are using as few resources
as needed and are effective in terms of
meeting customer requirements. Finally,
operations management is concerned
with managing the process that
converts inputs (in the forms of materials,
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
labour, and energy) into outputs (in the
forms of goods and/or services).
The production or operations director is
the senior operations management at
AS. This role is seen as being pivotal in
the success of AS. AS is a manufacturing
company where the product is
technologically sophisticated, and
distribution and supply chain
management could be very
challenging in Afghanistan, particularly
rural Afghanistan.
Senior
managers
45
Senior management is both a strength
and a weakness. The strength is that Su
is an experienced and successful
business leader.
However, at its inception, AS has a
senior management team that is
relatively inexperienced in terms of the
peculiar characteristics of its business
model. This could cause significant
problems until experience and
knowledge is gained.
For example, very few of the senior
management team, has any
experience in solar power systems,
manufacturing, microfinance,
Afghanistan, and with the particular
market segment AS is targeting.
Selecting
46
Recruitment is the process of searching
the candidates for employment and
stimulating them to apply for jobs in the
organisation, whereas selection involves
the series of steps by which the
candidates are screened for choosing
the most suitable persons for vacant
posts.
Junior
employees
46
Very few of the current management
team has any experience in solar power
systems, manufacturing, microfinance,
Afghanistan, and with the particular
market segment AS is targeting. The
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
recruitment and selection of additional
staff would ideally identify employees
who bring skills and expertise specific to
the peculiar characteristics of the
business.
Outsource
48
Solar power systems are a product that
is relatively undifferentiated, especially
when it comes to the low-end
technology that is required to bring
power to a rural house in a country that
basks in sunshine.
AS has as one of its objectives, to supply
these systems to its poor, rural Afghani
customers at a “very low price’.
The lower the price it can bring the solar
power systems to market, the more
demand there is going to be for its
product. And the more demand there is
for it, the better AS is going to be at
fulfilling Su’s intention – “giving back to
society”.
AS cannot possibly manufacture these
solar power systems at the lowest price.
This product is suited to mass, flow
production lines that are highly
automated and produce vast quantities
of the product in order to achieve
economies of scale.
By choosing to manufacture the systems
itself, AS will increase the price to
consumers, reducing the uptake of the
product and limiting the benefits such a
product brings to its consumers.
Outsourcing the production of the solar
systems must be a very viable
proposition.
Production
facility
48
The capital expenditure needed to
build a production facility capable of
producing solar power systems at scale
is prohibitive.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
We can see that in the first year of
operations, only $200,000 is allocated for
purchasing, renovating or building such
a facility. This implies that the production
facility is small in scale which, in turn,
makes it unlikely that economies of
scale can be achieved. Thus, the solar
power systems will not be “very low
cost” when compared to outsourced
alternatives.
Location
51
Deciding on the best location for a new
business - or relocating an existing one
is often crucial to its success. Location
decisions choosing new sites for
expansion or relocation of the business
are some of the most important
decisions made by management
teams. Selecting the best site will have a
significant effect on many departments
of the business and, ultimately, on the
profitability and chances of success of
the whole firm.
There are three key characteristics of
AS’s location decision:
1. This decision will be undertaken
by the highest levels of
management (Su will not
delegate this decision).
2. Due to the costs of relocating,
the location will be difficult to
reverse.
3. It is a decision that is strategic in
nature it will have a long-term
impact on the whole business.
Developed
economy
Table 1
In terms of locating the production
facility to a developed country, the
main advantages to AS identified in the
case study:
Generally high skills level in the
labour force
Stable currency
Good infrastructure for supply
chain management and export
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Stable political and regulatory
environment
Low levels of corruption
Ease of doing business will be
relatively high
Part of large free trade
agreement
The main disadvantages to AS would
include:
Labour more expensive
Further from its market which
complicates distribution and
adds to distribution expense
Reduces the social benefit of the
company; e.g., bringing
employment and improving
human capital to an
impoverished country
High rent for production facilities
Developing
economy
Table 1
In terms of locating the production
facility to a developing country, the
main advantages to AS identified in the
case study:
Labour is inexpensive
Closer to its market which
facilitates distribution and
reduces distribution expense
Increases the social benefit of the
company; e.g., bringing
employment and improving
human capital to an
impoverished country
Low rent for production facilities
The main disadvantages to AS would
include:
Generally low skills level in the
labour force
Unstable currency
Poor infrastructure for supply
chain management
Unstable political and regulatory
environment
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
High levels of entrenched
corruption
Ease of doing business will be
relatively low
Not part of any significant free
trade agreement
Skills level
Table 1
High skill levels will increase productivity
and reduce costs of production;
however, wages will be relatively high.
Low skill levels will reduce productivity
and increase costs of production;
however, wages will be relatively low.
Solar power systems will be technically
sophisticated, and it is likely that AS will
need staff with relative high skill levels.
Further, the relatively small scale of the
production facility indicates that the
production process will not be
especially capital intensive. The
technical aspects of manufacturing are
unlikely to be automated.
Government
assistance
Table 1
Favours production facilities to be
located in the developing economy
where grants are made available for
investment from overseas. This will go
some way to mitigating the
disadvantages associated with AS
locating in the eloping country.
Government assistance could also
provide valuable advice, knowhow and
connections if the developing country
was to be identified as being
Afghanistan.
Free market
economy
Table 1
It will be much easier for AS to do
business in a free market economy. Red
tape and compliance costs will be
relatively low. All things being equal,
businesses are more productive the less
government control and regulations
there are.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
However, businesses that are successful
in rent-seeking activities can be highly
profitable and it can be a source of
competitive advantage to be favoured
by a government.
Investment
Table 1
In purely financial terms, the investment
that is required to establish and
maintain operations at AS carries much
risk.
It is highly unlikely that the venture
would be pursued on commercial terms
alone. Large scale manufacturing is a
difficult proposition, the target market
has low disposable income, and the
vagaries of doing business in
Afghanistan would require a highly
experienced team on the ground.
Afghanistan ranks an extremely poor
183 out of 190 countries in the global
‘ease of doing business’ rankings.
Therefore, the social good that the
business aims to achieve must be
credited a qualitative factor in the
investment decision.
Grants
Table 1
The possibility of receiving a
government grant favours AS
establishing production facilities in the
developing country. Grants and tax
breaks can be very influential in the
location decisions. However, this usually
applies to multinational corporations,
and it is uncertain at how much
influencel AS would have when it comes
to such rent-seeking.
Rent-seeking: Engaging in or involving
the manipulation of public policy or
economic conditions as a strategy for
increasing profits.
Wage costs
Table 1
Often the single biggest cost to firms. AS
is not opting to purchase the entire solar
power systems from a supplier, and they
are too small to achieve the economies
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
of scale necessary for an automated,
mass flow production line. Therefore,
compared to other low cost solar
providers, AS will likely be relative labour
intensive. This could favour Country B,
where wage costs are low.
Stable
currency
Table 1
A stable currency will reduce the risk
associated with international marketing.
Risk needs to be factored into
investment decisions. All things being
equal, the greater the risk, the greater
the return is needed to justify an
investment decision. It is easier to plan
operations, in particular supply chain
management. Imported components
and raw materials will cost AS more if
the currency of their current location
depreciates.
Falling
currency
Table 1
A depreciating currency has
advantages and disadvantages.
Advantages:
It will be less expensive to set up
operation facilities, as the US
dollar will be able to purchase
more of the local currency as it
depreciates.
It can enable AS to reduce its
prices and maintain profitability
(at least in the local currency).
Low price solar systems are a key
feature of their proposed
marketing mix.
Disadvantages:
Imported raw materials and
components become
increasingly expensive as the
local currency depreciates. This
will push up the costs of
production to AS significantly.
Higher prices may need to be
charged to maintain profit
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
margins in the face of rising
average unit costs.
Facilities
Table 1
The capital expenditure needed to
build a production facility capable of
producing solar power systems at scale
is prohibitive.
We can see that in the first year of
operations, only $200,000 is allocated for
purchasing, renovating or building such
a facility. This implies that the production
facility that has been favoured in the
later cashflow analysis is that of the
developing country. $200,000 could
never be enough to finance new
production facilities.
High rent
Table 1
High rent payments will increase the
average fixed cost associated with
each unit. If cost-plus pricing is used,
then high rents will increase the final
price of the solar power systems to the
consumer. One of AS’s objectives is to
achieve a very low price for their
customers.
Low rent
Table 1
Low rent payments will decrease the
average fixed cost associated with
each unit. If cost-plus pricing is used,
then low rents will decrease the final
price of the solar power systems to the
consumer. One of AS’s objectives is to
achieve a very low price for their
customers.
Transport links
Table 1
Transport links will be factored into the
location decision because it will be
important in terms of costs (and
opportunity costs) and reliability in the
management of AS’s supply chain.
Complex
transport links
Table 1
If transport links are relatively complex,
then this will increase the variable costs
associated with transport of raw
materials and components as well as
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
the delivery of the final product to
customers.
This will increase the final price of the
solar power systems to the consumer.
One of AS’s objectives is to achieve a
very low price for their customers.
The supply chain will become less
reliable with increasing complexity of
transport. For example, delivery of the
solar systems may be delayed in
Afghani customs.
Straightforward
transport links
Table 1
If transport links are relatively
straightforward, then this will decrease
the variable costs associated with
transport of raw materials and
components as well as the delivery of
the final product to customers.
This will decrease the final price of the
solar power systems to the consumer.
One of AS’s objectives is to achieve a
very low price for their customers.
The supply chain will become more
reliable the more straightforward
transport is in the supply chain. For
example, suppliers will be readily able to
deliver components and raw materials
when they are needed in the
production process. This, in turn, would
reduce the need for the warehousing of
stock as a contingency.
Political
environment
Table 1
In A PEST or STEEPLE analysis, political
factors are basically how the
government intervenes in the economy.
Specifically, political factors have areas
including tax policy, labour law,
environmental law, trade restrictions,
tariffs, and political stability. Political
factors may also include goods and
services which the government aims to
provide or be provided (merit goods)
and those that the government does
not want to be provided (demerit
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
goods). Furthermore, governments have
a high impact on the health, education,
and infrastructure of a nation.
Stable political
environment
Table 1
A stable political environment will
reduce the risk associated with
operations and investment decisions.
Risk needs to be factored into
investment decisions. All things being
equal, the greater the risk, the greater
the return is needed to justify an
investment decision.
Property rights and contracts will be
enforceable. This means, firstly, that
investment is safeguarded (i.e., the
company and its production facilities
cannot suddenly be nationalised as has
happened recently to many foreign
firms operating in Venezuela.
Secondly, suppliers and contractors can
be held to account for contractual
arrangements made between them
and AS. This will reduce the cost and
increase the reliability of supply.
One party
state
Table 1
This is less likely to be a stable political
environment and will increase the risk
associated with operations and
investment decisions. Risk needs to be
factored into investment decisions. All
things being equal, the greater the risk,
the greater the return is needed to
justify an investment decision.
Property rights and contracts will not be
easily enforceable. This means, firstly,
that investment is not safeguarded (i.e.,
the company and its production
facilities could suddenly be nationalised
as has happened recently to many
foreign firms operating in Venezuela.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Secondly, suppliers and contractors
cannot be held to account for
contractual arrangements made
between them and AS. This will increase
the cost and decrease the reliability of
supply.
International
trade
Table 1
International marketing refers to the
marketing of a firm's products in foreign
countries. International marketing is
more difficult for AS because they need
to deal with external factors and
constraints such as tariffs, quotas and
non-tariff barriers (such as red tape and
bureaucracy).
Trading
agreement
Table 1
Usually a key advantage in terms of
international marketing. However, this
may not be as significant or important
to AS because Afghani tariffs on
imported solar systems are low.
Additionally, where tariffs (a tax on
imports) could make the import of solar
cells, etc. from a low-cost supplier such
as China prohibitively expensive. No
such tariffs exist according to the latest
Afghanistan Customs Tariff (2014)
schedule. The closest match in the tariff
schedule is a 2.5% tariff on electrical
generating sets.
However, being part of a free trade
agreement can enable goods, people
and capital to move quickly between
the respective countries, making supply
chain management relatively less
difficult.
Commercial
marketing
53
The commercial marketing of solar
power systems by AS to its target market
does not seem a good fit.
Commercial marketing aims to
maximise sales and profitability to the
company. There are several issues with
this:
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
The target market is poor, rural
Afghan households this will not
be a lucrative market for AS.
It can be argued that the
product is market orientated
because there has been a clear
need in this target market that
has been identified and product
and price (especially the
microfinance aspect of the
business plan) have been
specifically adapted to meet this
need.
Su has a vision to give back to
society, and the solar systems are
her way of doing this bettering
the lives of poor, rural Afghanis.
This clearly suits a social
marketing approach.
Social
marketing
53
In purely financial terms, the investment
that is required to establish and
maintain operations at AS carries much
risk. It is highly unlikely that the venture
would be pursued on commercial terms
alone.
Therefore, the social good that the
business aims to achieve must be
credited a very important qualitative
factor in the investment decision.
The USP of the solar power systems is
their ability to bring social change by
bringing affordable electricity to poor,
rural households. Family incomes can be
elevated as new businesses can be
established with electricity.
Communication with people outside of
villages becomes possible. Reading and
homework is no longer confined to
daylight hours. In other words, AS would
be looking to influence behaviours that
benefit individuals and communities for
the greater social good social
marketing
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Product
orientated
54
AS is more likely to be market
orientated. From the outset it has
organised its activities, products and
services around the wants and needs of
its customers poor, rural Afghanis in
desperate need of affordable
electricity.
The activities of AS are focussed on this
need this is its mission.
The product is tailored to meet this
need. Sunny Afghanistan makes solar
systems effective and efficient.
The product is being produced at a
“very low price” to make it affordable to
the target market.
Microfinance is an essential service
provided by AS to meet the needs of its
customers affordable electricity. An
upfront payment would make the solar
systems prohibitively expensive to poor
Afghanis.
Market
orientated
54
Customers
55
The customers AS is targeting are poor,
rural Afghanis. These customers have
comparatively low financial value to the
company, even though AS will be run as
a for-profit company. However, the
‘heart’ of AS is to be able to influence
behaviours that benefit individuals and
communities for the greater social
good. And this, in many respects, makes
AS’s customers ideal.
Customer
finance
56
Microfinance is a key part of PRICE in
AS’s marketing mix. If AS cannot
successfully provide and manage its
microfinance systems, poor and rural
Afghanis could not hope to purchase
the solar power systems.
Pricing
57
AS has an objective of making its
product affordable to its target market.
It is looking at a “very low price” for its
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
product AND microfinancing its
purchase.
The very low price is essential for low
income Afghan households to become
AS customers.
The payment plans and credit terms
associated with the microfinancing the
solar power systems are associated with
PRICE in the marketing mix.
Promotion
methods
57
Considering AS’s target market – poor,
rural Afghanis without electricity the
company will have to rely heavily on
direct selling. At least initially,
salespeople and agents will have to
promote the product directly to
households in small, isolated villages.
It is then essential that the company
and its product receives good word-of-
mouth promotion from satisfied
customers, because direct selling is one
of the most expensive forms of
promotion and AS has a low-priced
product.
Opportunity
cost
59
“[customers] may have other priorities.”
Poor, rural Afghanis do not have much
in the way of disposable income. Low
income households are very conscious
of every Afghani (the unit of currency in
Afghanistan) they have and how it is
spent. The purchase of a solar power
system will mean that other goods and
services will have to be given up. Other
important priorities could include
transport, farm equipment, food and
education, for example.
AS will need to persuade potential
customers that its product is an
important priority for them.
Distribution
60
AS has identified distribution to be a
problem, specifically, getting the
product to likely customers. The market
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
AS is targeting are in remote, rural
locations with poor infrastructure. Rail,
air and sea links would be inadequate in
these locations. Poor quality roads
would be the only possible method of
distributing the product to customers.
In 2018, the BBC estimates that the
Taliban is active in 70 per cent of
Afghanistan. In remote, rural villages this
number would be even higher. Security
would be a key issue, and therefore it
would be essential to use local agents
and transport operators.
Remote
locations
60
In a SWOT analysis, the location of its
target market is probably the single
biggest threat to AS.
Remote Afghani locations complicate
the marketing and distribution of the
solar power systems enormously.
It would be relatively expensive to rely
on local agents and transport operators
for distribution, but there would be little
viable alternative. Agents would take a
significant percentage and transport
operator would demand fat fees to
deliver limited product over a long and
difficult route to traverse. This would
invariably inflate the variable cost
component associated with each unit
of output.
If a cost-price pricing system is used by
AS, would this then put the price of
product out of reach of its target
market? More market research is
essential before investment is made.
Infrastructure
61
Construction of regional and provincial
roads is ongoing throughout
Afghanistan. Roads are of varying
quality, but for most Afghans, aside from
the Kabul Ring Road, roads are
unpaved. Afghan officials and business
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Poor
infrastructure
60
leaders note that the lack of paved
roads and poor quality of existing roads
contribute to highway security
problems, increase transport times, and
hamper commercial activity in general.
Provincial roads are a priority of the
local population and their leaders and
in generally dismal shape. The poor
state of roads makes travel time
consuming and punishing for both
vehicles and passengers. The 100-mile
drive from Kabul to Bamyan took about
eight hours. The main routes to Kabul
and Herat through the central provinces
were single lane, dirt tracks that are in
extreme states of disrepair. Global
Security
Local agents
61
Probably an essential and expensive
part of AS’s distribution channel.
In 2018, the BBC estimates that the
Taliban is active in 70 per cent of
Afghanistan. In remote, rural villages this
number would be even higher. Security
would be a key issue, and therefore it
would be essential to use local agents.
Local
distribution
61
The real difficulty here for AS is that they
cannot ship large quantities of their
product to the same place, and that
transport of the product will take a long
time and bribes will likely have to be
paid to ‘local security forces’.
“protection payments for safe passage
are a significant potential source of
funding for the Taliban.”
How can AS have a sustainable business
model where, in all probability, single
power systems need to be transported
securely, across long distances
characterised by roading that is “in
extreme states of disrepair”, AND where
the price of its product must be kept
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
very low due to the peculiar
characteristics of its target market?
Share capital
64
$200,000 of share capital will come from
Su. This is 80% of the start-up capital for
the company which is $250,000 in total
(the rest coming from an HH loan).
In all reality, $250,000 seems rather
inadequate when it comes to financing
manufacturing facilities of a product
that is technologically sophisticated.
Further, this limited capital is going to
provide limiting manufacturing
capabilities for AS. The firm will not be
able to achieve the economies of scale
other solar system providers can. Higher
average unit prices will inflate the price
for some of the poorest customers
imaginable.
AS must determine the cost to buy (CTB)
and cost to make (CTM) for the product
before such an investment is made.
Loans
64
The commercial terms of the $50,000
loan from Su’s company HH are not
stated. It is likely that this loan will be
made to AS on favourable interest and
repayments terms. This is not ‘free’
money from Su. If the loan cannot be
repaid, then the value of Su’s other
company will be reduced by the
amount of the bad debt. Further, the
$50,000 could be used by HH to pursue
other investment options to grow and
expand the company, and ultimately,
Su’s wealth.
Stakeholders
65
Stakeholders here, both internal and
external, are mentioned in terms of
whether they “might want to support
the project through some kind of
financial assistance.
Internal
stakeholders
65
It is unlikely that any internal
stakeholders other than Su herself would
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
be able to contribute financially to the
project. Su is the only shareholder, and
the managers and directors seem
unlikely to be able to contribute
significantly. In fact, it is likely that in this
social enterprise that mangers and
directors are taking below-market
remuneration for their services.
External
stakeholders
65
There would be limited external
stakeholders who would be able to
contribute financially to the project.
Governments and special interest
groups may provide sources of finance.
The Afghani government received some
$2.6 billion in overseas development aid
in 2017. Some of this money could be
used to target electricity distribution in
rural areas. It is unlikely that the
government would disburse such funds
to an organisation like AS which is
unproven in delivering such a service.
Similarly, NGOs operating in Afghanistan
are unlikely to have surplus cash to
invest in an unproven, for-profit
company.
AS has a ‘chicken and egg’ problem
with being able to source financial
assistance from external stakeholders.
Yes, it may be able to find government
and NGO financial assistance if the
company had proven credentials to
effectively bring electricity to remote
villages, yet without the financial
support of such entities, will AS have
enough finance to make this a reality?
Cash-flow
Table 2
Cash is often referred to as the
'lifeblood' of a business. AS needs
finance to pay for everyday expenses
such as wages and the purchase of
stock.
Cash-flow
forecast
Table 2
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
According to the prepared cash-flow
forecast AS will be insolvent within its first
year of operation.
Without sufficient cash flow or working
capital AS will be illiquid unable to pay
its immediate or short-term debts. Either
the AS raises finance quickly, such as a
bank loan, or it may be forced into
liquidation by its creditors, the firms it
owes money to.
This cash flow forecast does not provide
us with much information as to the
timings of inflows and outflows, nor a
specific breakdown on the business’s
costs. It is unusual to see a biannual
cashflow forecast and not a month-by-
month account. However, AS is a start-
up without any established pattern of
expenditure and sales.
While profit is very different to cashflow,
this cashflow forecast does give us
information on AS’s estimated
profitability. This is because we have
sales, cost of sales, and other costs (=
overheads?).
If this is indeed the case, then AS is
forecasted to profitable in 2019, its first
full year of operation.
Sales turnover = $100,000
less Costs of goods sold = $55,000
Gross profit = $45,000
less Overheads = $20,000
Net profit = $25,000
Capital
expenditure
Table 2
Whereas, revenue expenses are shorter-
term expenses required to meet the
ongoing operational costs of running a
business.
According to the cashflow forecast, AS
quickly becomes insolvent. Its revenues
are projected be greater than its sales
costs and other costs combined, so
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
capital expenditures in each half of
each year is a significant drain on the
company’s finances.
Additional finance is required to meet
the capital expenditure planned by AS.
Capital expenditure is too low to
finance the development of production
facilities in country A.
Sales costs
Table 2
The cost of goods sold presented in the
cashflow analysis have been estimated
before product distribution has been
decided on.
It is anticipated that significant agent
fees and transport costs will be incurred
in the distribution of the product to
customers. Will this increase the cost of
goods sold to AS and reduce its
profitability and place a further drain on
its already precarious cashflow?
Other costs
Table 2
With just $20,000 in other costs in the first
year growing to $50,000 in the second
year we can tell that salaries at AS are
going to be very low.
In addition to these salaries, other
significant overhead expenses must be
accounted for in these figures. Expenses
such as:
Accounting and legal expenses.
Administrative salaries.
Depreciation.
Insurance.
Licenses and government fees.
Property taxes.
Rent.
Utilities.
There are four senior managers to be
employed as well as their subordinates
and their salaries will need to be set at a
very low rate to make sense of the
forecasted figures.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Pay is a hygiene factor in Herzberg’s
theory, and should be analysed as such.
Risks
69
In finance, risk is the probability that an
actual return on an investment will be
lower than the expected return.
The greater the degree of risk the lower
the discounted flows will be, and the
higher the rate of return must be to
account for the elevated risk.
In purely financial terms, the investment
that is required to establish and
maintain operations at AS carries much
risk.
It is highly unlikely that the venture
would be pursued on commercial terms
alone. Large scale manufacturing is a
difficult proposition, the target market
has low disposable income, and the
vagaries of doing business in
Afghanistan would require a highly
experienced team on the ground.
Afghanistan ranks an extremely poor
183 out of 190 countries in the global
‘ease of doing business’ rankings.
Therefore, the social good that the
business aims to achieve must be
credited a qualitative factor in the
investment decision.
Contingency
plan
74
Contingency planning helps with crisis
management being prepared with a
series of procedures to put into effect if
an emergency occurs, the organisation
will be better able to manage most crisis
situations.
Effective contingency planning allows a
business to take steps to minimise the
potential impact of a disaster - and
ideally prevent it from happening in the
first place.
Students should be able to evaluate the
advantages and disadvantages of
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
contingency planning within the
context of running a business in
Afghanistan and supplying customers in
remote, rural Afghanistan.
External
environment
75
The student would be very remiss to
have not prepared a PESTLE analysis for
AS with the external environment being
explicitly mentioned!
Marketing
planning
76
The current marketing mix of AS as it
now stands is:
PRODUCT: A solar power system
to provide power to a single
household in sunny Afghanistan.
PRICE: A “very low price”
combined with microcredit to
make the product affordable for
low income Afghanis.
PLACE: Remote, rural Afghan
villages. It is unlikely that the
target market travels much.
PROMOTION: Undecided.
We know that solar power systems
would bring social benefits to its
intended consumers, yet commercial
marketing is being pushed by David,
rather than social marketing which
seems to be a better fit.
Further, we have no indication of just
how important a priority electricity is in
the target market.
A very low price seems to be
inconsistent with AS’s plans for
manufacturing the product themselves.
The lowest price would be achieved by
purchasing the systems off a large, low
cost global manufacturer that had
economies of scale. This would result in
the lowest unit cost to AS, the lowest
price to its customers, a greater uptake
of the product, and the greatest social
good being achieved.
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
Effective marketing in remote, rural
Afghan villages seems almost
impossible. First, distribution costs are
going to be very high, and in a cost-plus
pricing system, such high variable costs
inflate the price of the product and
appears incongruent with PRICE.
Second, promotion of the product is
something that needs to be carefully
considered. Local agents and personal
selling will be expensive, again
conflicting with PRICE. However, it would
seriously need to be considered as
above the line promotion would be all
but impossible in rural villages without
electricity, and literacy rates are
astonishingly low.
Human
resource
planning
76
Human resource planning is a process
that identifies current and future human
resources needs for an organisation to
achieve its objectives. Human resource
planning should serve as a link between
human resource management and the
overall strategic plan of AS.
Two senior managers have been
identified. Concerns could be raised
about both.
David the marketing director/manager.
This manager seems to be confused
about commercial and social
marketing, and whether the business is
product or market orientated.
Salima the operations director/manager
appears insistent that AS should be a
manufacturing business. This seems at
odds with the social objectives of AS,
where the lowest priced solar power
systems will bring about the maximum
social good.
Su is either selecting current managers
or promoting juniors from HH to take
leadership roles at AS. HH is a
completely different company to AS. It is
IB Business Management Pre-Released Case Study May 2018
Critical Thinking
highly unlikely that the recruitment and
selection of staff for AS from HH would
result in the most desirable skill sets and
experience needed for a startup
manufacturing venture in Afghanistan
being selected for.
Source: BusinessManagementIB.com