Cambridge A Level Business (for first examination in 2016) 9609 — 2023 May/June Paper 4 · Variant 1

1 Evaluate whether LH made the correct strategic decision to take over PS. [20]

Mark scheme: 1 Evaluate whether LH made the correct strategic decision to take over PS. Level AO1 Knowledge and understanding 3 marks AO2 Application 2 marks AO3 Analysis 8 marks AO4 Evaluation 7 marks Description Description Description Description 3 7–8 marks Developed analysis of the overall strategy that identifies connections between causes, impacts and/or consequences. 6–7 marks Effective evaluation A developed judgement/conclusion is made in the business context that draws together developed evaluative comments which balance some key arguments in the business context. 2 2–3 marks Developed knowledge of relevant key term(s) and/or factor(s) is used to answer the question. 2 marks Developed application of relevant point(s) to the business context. 4–6 marks Developed analysis of individual strategic element(s) that identifies connections between causes, impacts and/or consequences. 3–5 marks Developed evaluation  A developed judgement/conclusion is made.  Developed evaluative comments which balance some key arguments. 1 1 mark Limited knowledge of relevant key term(s) and/or factor(s) is used to answer the question. 1 mark Limited application of relevant point(s) to the business context. 1–3 marks Limited analysis that identifies connections between causes, impacts and/or consequences. 1–2 marks Limited evaluation  A judgement/conclusion is made with limited supporting comment/evidence.  An attempt is made to balance the arguments. 0 0 marks No creditable response. 0 marks No creditable response. 0 marks No creditable response. 0 marks No creditable response. 20 Question Answer Marks 1 Indicative content Responses may include: AO1 Knowledge and understanding Knowledge of business concepts (max 3 s), including:  Strategy – a plan of action to achieve a long-term aim  Developing business strategies – SWOT analysis  Business growth – external growth – takeover and mergers  Ratios – liquidity, profitability and financial efficiency  Quality management – meeting customer expectations and quality control  Any understanding of other terms, ratios or concepts in the case or appendices. AO2 Application Indicated by as 1 mark (max 2 s):  Purchase of international luxury gift supplier  Brand name of PS used to retain international brand awareness  Elements from SWOT analysis  Elements from financial data  Use of online review extracts  Any use of the case that is in context of the answer. AO3 Analysis Limited analysis – candidate shows one link in the chain of analysis. (max 3) Developed analysis of individual strategic element - candidate shows two or more links in the chain of analysis. Developed analysis of overall strategy – candidate shows a counter answer to the chain of analysis (2-sided answer).  OPM increasing by about 10% 2016 to 2017 which signifies Loretta’s short term profit maximisation plan was working and therefore may have produced sufficient profits for investment opportunities.  Gearing reduced by 33% which allowed for borrowing for investment in the international growth markets which would satisfy Loretta’s 5 year rapid expansion target to be met.  Acid test ratio of 0.7 (low for a stock intensive operation) signified that stock management systems were effective which would neutralise PS’s inefficient inventory control and improve the low DPS if it was a result of poor operating margins. Question Answer Marks 1  Increasing dividends may have left less available for expansion.  Trade receivables increased by over 7x, showing that corporate buyers want longer/better payment terms which decreases cashflow/increases financial risk.  The business was bought for international brand awareness in 2018 however by 2021 the name was dropped which indicates that the investment into the brand may have failed.  PS wide range of national suppliers would have negated LH weakness of a limited number of regional suppliers therefore increasing choice, however an acid test ratio drop of 0.5 between 2017 and 2019 implies that too much stock was held which could have affected the cashflow and may have been a reason for lack of investment into cyber security.  The rapid development of international corporate clients in 2019–20 increased gearing by 8x over 2 years and increased further by 5% indicating that cashflow was poor and debts were high, which may have negatively impacted the dividend per share and caused shareholder unrest which may be a reason Loretta had to present figures and may have contributed to her replacement in 2023. AO4 Evaluation Limited evaluation - unsupported judgement and/or a weak attempt at evaluative comment Developed evaluation – supported judgement and/or reasonable evaluative comment Developed evaluation in context – supported judgement in context and/or reasonable evaluative comment in context. Evaluation will largely depend on the points raised in the analysis of the data of LH.  The efficiencies of LH didn’t lead to synergies with PH who lacked economies of scale and meant that the original objective of profit maximisation was ignored, however this may have been expected with the rapid expansion that was planned.  To what extent did the high gearing and reducing profit margins and falling DPS in 2019–20 lead to the cyber-attack? Was there a lack of investment into online security?  The takeover of PS has had a significant negative impact on the financial position of LH, which may be an issue for a rapidly expanding, relatively new company.  Overall judgement required about the balance between the accounting and qualitative elements of LH’s strategic decision making. Accept all valid responses. Question Answer Marks 1 Exemplar and annotations The decision was an example of external growth, a way of growing a business by a merger of takeover to improve efficiency , Loretta’s identification of PS as an international luxury gift supplier , LH would benefit from existing customers , increasing profitability , this is evident in the financial data by LH as revenue increased from 30 million in 2017 to 56 million in 2019 and 61 million in 2020 after the takeover . It can be argued that PS’ luxurious brand image negatively affected LH as their standards may have been difficult to control. Strategic analysis is the analysis of the current business situation and researching the best method of business strategy to achieve long term objectives . The business strategic implementation would be the process by which the business’ chosen strategy is introduced in the setting of their long-term objectives . LH’s gearing ratio has increased, meaning that LH may not be as profitable as they could ,due to the immense amount of borrowing to finance takeover and extra expenses . But in the long term it seems that if LH can keep up their profitability, they would be able to pay back their loans . To conclude, LH’s short-term objective of profit maximisation appears to not be met due to the external growth of LH’s takeover of PS . LH may not have been able to keep up with the demand which could hurt their reputation . The consumers of LH would have been negatively affected by the takeover as they would be expecting luxurious high- quality food and gift baskets. LH would have taken a loss if the product did not meet customer expectations . LH should consider the external environment when completing the take-over . For example, if the government implement economic policies, LH could face higher interest rates and it would be difficult to lower their gearing ratio which is increasing . AO1 – 3/3 AO2 – 2/2 AO3 – 8/8 AO4 – 7/7 Total 20 marks Judgement is a yes or no. Comment is anything weighing up the other side of the argument.

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