PRACTICE EXAM PAPER MARK SCHEME

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1 PRACTICE EXAM PAPER MARK SCHEME Pearson Edexcel Business Advanced Level Practice Paper 3 Investigating business in a competitive environment Page 1

2 QUESTION 1 Question Indicative content 1 (a) Knowledge 2, Application 2, Analysis 2, Evaluation 2 Sales of chocolate is highly seasonal and 35% of Thorntons sales are in the seven-week period before Christmas Using temporary staff allows Thortons to increase staff quickly during this period to meet the increase in demand Temporary staff may be cheaper to employ than permanent staff which will reduce costs After the peak sales period, the temporary staff will no longer be employed by Thorntons which reduces the risk of the business being left with too many employees at a time when demand will fall Possible counter-balance Thorntons need to launch a large recruitment campaign every July. This, combined with the need to train temporary staff each year, could increase costs Temporary staff may be less motivated and loyal to the business. This could result in higher absenteeism during this period or temporary staff leaving, impacting on productivity (8) Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Level Accurate knowledge and understanding. Applied accurately to the business and its context. Chains of reasoning are presented, showing cause(s) and/or effect(s) but may be assertions or incomplete. An attempt at an assessment is presented that is unbalanced, and unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by Logical chains of reasoning, showing cause(s) and/or effect(s). Assessment is balanced, well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Page 2

3 Question Indicative content (b) Knowledge 2, Application 2, Analysis 3, Evaluation 3 New entrants can survive by operating on a small scale to keep their set up costs low, compared to large firms such as Cadbury who produce chocolate in bulk For example, Cocoa + is a new business selling luxurious slabs of chocolate enriched with protein at They claim to be healthier than mass market bars and avoid using vegetable fat, palm oil and artificial ingredients or sweeteners The internet enables small firms like Cocoa + and Hotel Chocolat to target an audience without the need for mass distribution through supermarkets and traditional channels By targeting a niche, they sidestep the competition and can charge higher prices. For example, Hotel Chocolat compete in the premium sector, therefore they do not have to compete with the larger firms on price because they add value with luxurious chocolates Potential counter-balance Large firms can benefit from economies of scale in areas like purchasing buying cocoa in large quantities from Africa, or technical using the latest technology to mass produce bars like Dairy Milk. This makes it very difficult for small firms to compete on price Merger and takeover activity has led to a consolidation of the market. For example, Mondelez own the Cadbury and Green and Blacks brand following the Kraft takeover. This gives them cost synergies that can be exploited in lower prices Global brands like Dairy Milk and Snickers have a huge loyal following making it hard for new entrants to become established. These are supported by massive advertising budgets. Lack of finance to support new entrants in mass media advertising may be a barrier to entry Global firms like Mondelez and Mars have well established distribution networks and sales forces making it difficult for new firms to gain distribution in outlets like newsagents and supermarkets Possible judgement Despite the power of global brands like Snickers and Mars Bar, there are niche markets that firms like Cocoa + can exploit, such as high protein chocolate so survival is possible The overall chance of survival might depend on the finance available to spend on promoting the brand. This is often a barrier to entry for smaller rivals when compared to the huge global players like Mars (10) Page 3

4 Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Level Elements of knowledge and understanding, which are applied to the business example. Chains of reasoning are presented, but may be assertions or incomplete. A generic or superficial assessment is presented. Level Accurate and thorough knowledge and understanding, supported throughout by Analytical perspectives are presented, with developed chains of reasoning, showing cause(s) and/or effect(s). An attempt at an assessment is presented, using quantitative and/or qualitative information, though unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by A coherent and logical chain of reasoning, showing cause(s) and/or effect(s). Assessment is balanced, wide ranging and well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Question Indicative content (c) Knowledge 2, Application 2, Analysis 4, Evaluation 4 A weak pound means that exports are cheaper to foreign buyers, but imports are more expensive Chocolate producers in the UK buy their main cocoa ingredient largely from African countries like Ghana and Ivory Coast A weak pound would push up costs for suppliers leading to a reluctance to supply chocolate in the UK and moving the supply curve left. This would increase the market price for Chocolate bars. Commodity prices of cocoa have recently been the highest for forty years Potential counter-balance A bumper crop of cocoa beans produced in Africa during 2017 will lower the cost of cocoa beans for UK suppliers. This will lead to more potential profit and shift the supply curve to the right. This will lower the market price of chocolate bars Concerns over obesity and sugar content of chocolate are likely to shift a demand curve left which can compensate for the lowering of supply thus not having a major effect on the market price Page 4

5 Chocolate manufacturers have compensated for rising costs of cocoa by making the chocolate bars smaller e.g. putting more gaps between the pieces of chocolate in a Toblerone. As a result, price can be kept the same while still maintaining the same profit margin Possible judgement Given that cocoa is at its highest prices for forty years there is likely to be further rises in price as the rising cost is passed on to the consumer By taking action such as shrinking the size of chocolate bars, there may not be an overall increase in the market price of chocolate bars (12) Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Level Elements of knowledge and understanding, which are applied to the business example. Chains of reasoning are presented, but may be assertions or incomplete. A generic or superficial assessment is presented. Level Accurate and thorough knowledge and understanding, supported throughout by Analytical perspectives are presented, with developed chains of reasoning, showing cause(s) and/or effect(s). An attempt at an assessment is presented, using quantitative and/or qualitative information, though unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by A coherent and logical chain of reasoning, showing cause(s) and/or effect(s). Assessment is balanced, wide ranging and well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Question Indicative content (d) Knowledge 4, Application 4, Analysis 6, Evaluation 6 Open more concept stores The new store format has so far been successful. If this success is mirrored in other shopping centres across the UK, then this could lead to further increased sales which in turn may increase profit Page 5

6 The concept stores give Thorntons a USP in so much that there is a chocolatier on the premises. This could lead to customers choosing to visit Thorntons instead of buying chocolate from other retail outlets, leading to increased sales and profit The stores allow Thorntons to communicate the history, tradition and craft of Thorntons which could lead to increased customer loyalty and repeat purchases, boosting profit Online sales Online sales have increased by around 11%. Increasing the amount and range of products sold online could lead to further sales growth and increased profit Increasing the amount and range of products sold online could be cheaper compared to the cost of opening and running a physical outlet, especially in a large shopping centre where rents may be higher. This could boost profits The concept store was opened in November, just before the peak trading period for Thorntons. This therefore may not be an accurate reflection of the stores longer term performance, especially when high-street store sales have declined Possible recommendation Thorntons should increase the number of concept stores in order to increase distribution and profit. The new format has proved successful compared to its other high-street stores where sales have declined. The new store format gives them a USP and allows them to physically promote the tradition and history of the brand Thorntons should increase the amount and range of products it sells online. Social trends mean that more customers are choosing to shop online, and this is reflected in the 11% online sales growth. It also represents less of risk compared to the cost of setting up and running a physical store (20) Level Descriptor Level Isolated elements of knowledge and understanding. Weak or no relevant application of business examples. An argument may be attempted, but will be generic and fail to connect causes and consequences. Level Elements of knowledge and understanding, which are applied to the business example. Arguments and chains of reasoning are presented, but connections between causes and/or consequences are incomplete. Attempts to address the question. A comparison or judgement may be attempted, but it will not successfully show an awareness of the key features of business behaviour or business situation. Page 6

7 Level Accurate and thorough knowledge and understanding, supported throughout by Uses developed chains of reasoning, so that cause(s) and/or consequence(s) are complete, showing an understanding of the question. Arguments are well developed. Quantitative and/or qualitative information is introduced in an attempt to support judgements, a partial awareness of the validity and/or significance of competing arguments and may lead to a conclusion. Level Accurate and thorough knowledge and understanding, supported throughout by Uses well-developed and logical, coherent chains of reasoning, showing a range of cause and/or effect(s). Arguments are fully developed. Quantitative and/or qualitative information is used well to support judgements. A full awareness of the validity and significance of competing arguments/factors, leading to balanced comparisons, judgements and an effective conclusion that proposes a solution and/or recommendations. Page 7

8 QUESTION 2 Question Indicative content 2 (a) Knowledge 2, Application 2, Analysis 2, Evaluation 2 Social responsibility involves looking after stakeholders such as employees, suppliers and the environment Mondelez International have set up their own Fairtrade scheme Cocoa Life which aims to give the farmers of cocoa beans a fair price for their beans This could lead to a better reputation for Mondelez attracting consumers who believe in ethical business behaviour, leading to higher sales It could increase costs for Mondelez due to paying more for their cocoa beans. The initial cost is estimated at 321m and this may have to be passed onto consumers in higher prices causing lower sales Possible counter-balance The higher costs may apply to all other chocolate producers too as most others use the Fairtrade logo The better reputation may not be as strong as rivals like Divine Chocolate who take ethics more seriously by giving the cocoa farmers shares and dividends Higher sales depend on many more factors such as the amount of distribution in supermarkets and amount of mass media advertising (8) Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Level Accurate knowledge and understanding. Applied accurately to the business and its context. Chains of reasoning are presented, showing cause(s) and/or effect(s) but may be assertions or incomplete. An attempt at an assessment is presented that is unbalanced, and unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by Logical chains of reasoning, showing cause(s) and/or effect(s). Assessment is balanced, well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Page 8

9 Question Indicative content (b) Knowledge 2, Application 2, Analysis 3, Evaluation 3 Advertising and promotion involves communicating with consumers to draw attention to brands or products The dancing eyebrow kids and the drumming gorilla advert were used in mass TV advertising campaigns drawing attention to the Cadbury brand. This may enable the brand to differentiate from rivals. The campaign was shared virally using social media leading to widespread awareness of the brand. This could lead to higher sales A stronger brand image could enable higher prices to be charged than cheap rivals such as supermarket own brand chocolate by adding value Potential counter-balance Other marketing actions such as new product launches are also important to increase sales. New products like the Dairy Milk Peanut Butter Oreo bar generate new sales and act like an extension strategy in the product life cycle, encouraging consumers to keep trying the Dairy Milk brand. et research is an important marketing activity for success. For example, Cadbury found a gap for 35+ year old s in Australia who wanted a product that combined the attributes of dark and milk chocolate Distribution is a key marketing activity for success. TV adverts can only create demand, but the products must be available in newsagents and supermarkets if consumers want to buy products from Cadbury. A strong sales force may be the key here Pricing is critical for success in a market with many global rivals like Mars and Hershey s. Dairy Milk bars for example will have to be priced at a similar level to Mars Galaxy bars if they are a comparable size as competition makes demand more price elastic Possible judgement Advertising and promotions can create awareness of Cadbury brands and reinforce the brand in the minds of consumers leading to high sales Many other marketing activities are just as important or more important such as pricing and distribution along with the taste of the actual product (10) Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Page 9

10 Level Elements of knowledge and understanding, which are applied to the business example. Chains of reasoning are presented, but may be assertions or incomplete. A generic or superficial assessment is presented. Level Accurate and thorough knowledge and understanding, supported throughout by Analytical perspectives are presented, with developed chains of reasoning, showing cause(s) and/or effect(s). An attempt at an assessment is presented, using quantitative and/or qualitative information, though unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by A coherent and logical chain of reasoning, showing cause and/or effect. Assessment is balanced, wide ranging and well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Question Indicative content (c) Knowledge 2, Application 2, Analysis 4, Evaluation 4 s for application and analysis include up to 4 marks for quantitative skills Quantitative skills assessed: QS 1: Calculate, use and understand ratios, averages and fractions QS 2: Calculate, use and understand percentages and percentage changes Change in revenue = -$4608m % change = % 2015 OPM = 8,897/29,636 x 100 = 30.02% 2014 OPM = 3,242/34,244 x 100 = 9.47% 2015 ROCE = 8,897/42,657 x 100 = 20.86% 2014 ROCE = 3,242/41,674 x 100 = 7.78% 2015 acid test = ( )/ = 0.58: acid test = (11,750-3,480) / 14,007 = 0.59: current ratio = 8,958/10,922 = 0.82: current ratio = 11,750/14,007 = 0.84:1 Operating profit margin has risen significantly meaning potentially higher dividends for investors. Operating profit itself rose from $3242m to $8897m Return on capital has risen from 7.78% to 20.8%. This is well above bank interest and offers a high return on the capital invested Page 10

11 Potential counter-balance: Liquidity has fallen slightly and has ratios below the recommended figures. The acid test ratio shows that the businesses current assets minus it s inventory is not enough to meet its current liabilities The current ratio is only 0.82:1. This may show that the firm could struggle to meet its immediate payments Revenue has fallen by 13.46%. This may be due to the market changing towards healthier foods away from chocolate products as the market has fallen by 1% Potential judgement Given that liquidity ratios have been relatively stable then this may be no cause for concern. The ratios would need to be compared with similar firms to be more meaningful The significant increase in profitability and return on capital would be very impressive to the owners of Mondelez, especially given that revenue has been falling (12) Level Descriptor Level Isolated elements of knowledge and understanding recall based. Weak or no relevant application to business examples. Generic assertions may be presented. Level Elements of knowledge and understanding, which are applied to the business example. Chains of reasoning are presented, but may be assertions or incomplete. A generic or superficial assessment is presented. Level Accurate and thorough knowledge and understanding, supported throughout by Analytical perspectives are presented, with developed chains of reasoning, showing cause(s) and/or effect(s). An attempt at an assessment is presented, using quantitative and/or qualitative information, though unlikely to show the significance of competing arguments. Level Accurate and thorough knowledge and understanding, supported throughout by A coherent and logical chain of reasoning, showing cause(s) and/or effect(s). Assessment is balanced, wide ranging and well contextualised, using quantitative and/or qualitative information, and shows an awareness of competing arguments/factors leading to a supported judgement. Page 11

12 Question Indicative content (d) Knowledge 4, Application 4, Analysis 6, Evaluation 6 Produce development in the UK (20) Product development is where new products are launched into existing markets Mondelez managed to outperform the market in the UK and gain market share in 2017 despite a contraction in market size They have proven experience and understand the UK culture with successful TV promotions like the drumming gorilla and successful launches like the new Dairy Milk peanut butter Oreo bar UK GDP per capita is much higher than China at $40049 compared to $8582 in China. This means there is more demand for non-essential luxurious goods like Chocolate which tends to have a positive income elasticity of demand Chocolate consumption per capita is higher perhaps due to the higher incomes and the culture. Chocolate is more popular in Europe whereas the Chinese prefer to snack on savoury products Ansoff stated there was risk involved with a market development strategy due to different tastes and cultures in new markets The Chinese market is already dominated by Mars and Ferrero who will have first mover advantage and built up strong distribution networks making it hard to penetrate the market New markets like China et development involves selling existing products to new markets, such as Mondelez selling their Milka bar in China The UK market is highly saturated with many brands and companies all competing for market share Ansoff states there is medium risk with product development due to brand loyalty to the vast range of other UK brands like Mars Galaxy China s GDP growth is much higher at 6.8% compared to 0.4% in the UK. As chocolate has a positive income elasticity the rising incomes in China are likely to fuel higher demand for non-essential items like Chocolate bars China s population is much higher than the UK so given the high market growth of 59.3% there is much higher future potential to gain sales in China. As the Chinese aspire to Western tastes through globalisation Chocolate is likely to be a product in high demand Page 12

13 Because the UK is a more advanced and mature market it is slowing down especially due to health concerns. This does not seem to be the case in China Possible recommendation China will be an important future market with a huge population and very high growth. Mondelez need to gain a foothold now to stop further domination by Mars and Ferrero Given low per capita consumption in China and domination by established firms like Mars it may be better for Mondelez to continue their UK product development strategy as they understand the market so well already and have had previous success Level Descriptor Level Isolated elements of knowledge and understanding. Weak or no relevant application of business examples. An argument may be attempted, but will be generic and fail to connect causes and consequences. Level Elements of knowledge and understanding, which are applied to the business example. Arguments and chains of reasoning are presented, but connections between causes and/or consequences are incomplete. Attempts to address the question. A comparison or judgement may be attempted, but it will not successfully show an awareness of the key features of business behaviour or business situation. Level Accurate and thorough knowledge and understanding, supported throughout by Uses developed chains of reasoning, so that cause(s) and/or consequence(s) are complete, showing an understanding of the question. Arguments are well developed. Quantitative and/or qualitative information is introduced in an attempt to support judgements, a partial awareness of the validity and/or significance of competing arguments and may lead to a conclusion. Level Accurate and thorough knowledge and understanding, supported throughout by Uses well-developed and logical, coherent chains of reasoning, showing a range of cause and/or effect(s). Arguments are fully developed. Quantitative and/or qualitative information is used well to support judgements. A full awareness of the validity and significance of competing arguments/factors, leading to balanced comparisons, judgements and an effective conclusion that proposes a solution and/or recommendations. Page 13