Cambridge A Level Business Studies (for final examination in 2015) 9707 — 2015 May/June Paper 3 · Variant 3

This document consists of 6 printed pages and 2 blank pages. DC (ST/FD) 101125/1 © UCLES 2015 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 9 3 9 2 6 5 7 3 2 3 * BUSINESS STUDIES 9707/33 Paper 3 May/June 2015 CASE STUDY 3 hours Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen. You may use an HB pencil for any diagrams or graphs. Do not use staples, paper clips, glue or correction fluid. DO NOT WRITE IN ANY BARCODES. Section A Answer all questions. Section B Answer one question. You are advised to spend 40 minutes on Section B. The businesses described in this question paper are entirely fictitious. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9707/33/M/J/15 © UCLES 2015 Lemonfizz (LF) A passion for chemistry After a long career working in the pharmaceutical industry Tony Brown was made redundant. He used his redundancy pay to develop a refreshing fizzy drink. He experimented with different flavourings and sugars before finally settling on a unique combination. He tested his product on the public through a market stall that he operated. His research revealed that the product appealed to teenagers and young adults, most of whom preferred it to the drinks available from other businesses. Tony named his drink Lemonfizz. Market leadership Now 20 years on he is the CEO and majority shareholder in Lemonfizz (LF). Lemonfizz is the number one brand in country Y, which is a small and relatively wealthy country. Market leadership came as a result of producing a consistently high quality product and innovative marketing. Tony’s marketing team had commissioned innovative television advertising that appealed to its young target audience. However, controversy was never far away; a number of adverts had been banned by country Y’s Organisation for Advertising Standards (OAS). Following complaints from members of the public the OAS had demanded the adverts be withdrawn. The OAS concluded that the adverts might encourage young people to engage in anti-social behaviour. However, Tony felt that the ban had benefited LF as it increased interest in the brand on the Internet. As sales increased Tony developed a brand image that focused on Lemonfizz as being fun and refreshing. To support TV advertising LF supported promotion through school sponsorship, public relations and celebrity endorsement. LF also expanded its product range to three varieties: Original, Diet and Excess. A family firm In 20 years Tony Brown has never made a worker redundant. All workers belong to a trade union and he pays above the industry average. He believes that communication with workers is vital. The company produces a weekly newsletter that is distributed to all workers. There is a company website where employees can check training opportunities, company news, job vacancies and find out how much holiday they have left. This also provides valuable feedback from employees. LF’s HR Director meets frequently with union representatives. Production targets are discussed and set with supervisors and then communicated to workers on the production line. Growing social problems Despite rising incomes in country Y, there is increasing concern about the number of health related problems of its citizens due to their poor diet and lack of exercise. In 2014 a pressure group started a campaign for companies in the soft drinks market to take greater responsibility for the impact of their products. The group also demanded Government action to: • Regulate product labelling to highlight the sugar content of drinks • Limit television advertising of fizzy drinks aimed at consumers under the age of 21 • Prohibit ingredients of fizzy drinks that are thought to increase the risk of developing health problems. Working near capacity Lemonfizz sells its products in aluminium cans, glass or plastic bottles distributed to retailers and wholesalers in country Y. The production process is highly automated and, although the factory operates 24 hours a day, there are fewer than 200 workers operating the five production lines. Current capacity is 300 million litres per annum. The process is water intensive. The factory uses 1.4 litres of water for every litre of drink produced, although there is a target to reduce that ratio to 1.2 litres by 2018. 5 10 15 20 25 30 35 40 45

3 9707/33/M/J/15 © UCLES 2015 [Turn over The factory is currently working at 90% capacity utilisation. The Operations Director is considering improving one of the production lines to increase efficiency. The change to the production line will increase its capacity by 10% from the current level of 60 million litres. He would like to start work in July 2015 and complete the work within 20 weeks. He has prepared a critical path analysis (CPA) for the project (see Appendix A). Market growth opportunity The Marketing Director has been in negotiations with 3D, a large chain of cinemas that currently stocks a rival drinks brand. 3D is interested in adding Lemonfizz to its offering on a trial basis. Lemonfizz charges retailers $0.60 per can but 3D is only offering $0.50. Further details of the proposed contract are contained in Appendix B. An increasingly competitive market Market conditions in country Y have been challenging. Competition from two global brands has been intense. They have launched multi-million dollar national advertising campaigns. So far, LF sales have not decreased. However Tony thinks that his company should increase its marketing effort and consider extending its promotional campaigns. He has asked his marketing department to produce estimates of promotional elasticity and price elasticity of demand for Lemonfizz. Further details are in Appendix C. The future After 20 years of hard work and leading the business Tony is considering his future as CEO and is currently updating the business plan. In recent months there have been detailed meetings with other directors to discuss the long term objectives of the business. Tony believes that LF should consider foreign markets for future growth. He is considering country Z – a market in which no individual brand has a market share of more than 10%. Tony favours franchising production abroad but would consider raising finance through converting to a public limited company and then building capacity abroad. Economic forecasts for countries Y and Z are contained in Appendix D. When Tony decides to retire he would like his successor to come from within the company. Continuity is vital in his opinion. 50 55 60 65 70

4 9707/33/M/J/15 © UCLES 2015 Appendix A: Project activities Activity Description A Run all lines at full capacity to build inventory for changeover B Order new production machinery C Remove old machinery D Prepare factory floor E Install new machinery F Update computer software G Train production line workers H Test production line CPA diagram  $  &  '  (  *  +  %  )               Appendix B: Details of the proposed contract with 3D Two month trial period Order volume per month 100 000 units (330ml cans) Price $0.50 Variable costs of production including delivery $0.35 Appendix C: Marketing data for Lemonfizz Price Elasticity of Demand Promotional Elasticity of Demand Action Reduce price to retailers from $0.60 to $0.58 Action Increase promotional spending by $1m to $11m Outcome Sales increase by 5% Outcome Sales increase by 5%

5 9707/33/M/J/15 © UCLES 2015 [Turn over Appendix D: Forecast economic data to be used in business planning Country Y Country Z 2016 2017 2018 2016 2017 2018 Annual GDP growth % 3 2.5 2.5 3 5 5 Market sales (by volume) index for fizzy drinks (2015 = 100) 105 109 113 106 111 117 Exchange rate index against other currencies (2015 = 100) 96 94 90 101 102 102 Interest rates % 4 4 3 3 3 4

6 9707/33/M/J/15 © UCLES 2015 Section A Answer all questions in this section. 1 Analyse the possible benefits to LF of effective internal communication. [10] 2 (a) Refer to Appendix A. Calculate the total float for activity F. [4] (b) Evaluate the usefulness to LF of critical path analysis when managing the change in the production line. [12] 3 (a) Refer to Appendix B. Calculate the total contribution of the proposed 3D contract. [4] (b) Recommend whether LF should accept the proposed 3D contract. Justify your answer using your results from (a) and any other relevant information. [14] 4 (a) Using the data in Appendix C, calculate: (i) promotional elasticity of demand for Lemonfizz [3] (ii) price elasticity of demand for Lemonfizz. [3] (b) Discuss whether LF should reduce price or increase promotional expenditure in order to increase sales of Lemonfizz. Refer to your results from (a) and any other relevant information. [14] 5 Discuss the extent to which LF should consider corporate social responsibility in its decision making. [16] Section B Answer one question in this section. 6 Evaluate whether the data in Appendix D is sufficient to enable LF to develop an effective strategic plan for the business. [20] 7 Evaluate the importance of the effective management of change for the future success of LF. [20]

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® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International Advanced Level MARK SCHEME for the May/June 2015 series 9707 BUSINESS STUDIES 9707/33 Paper 3 (Case Study), maximum raw mark 100 This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the May/June 2015 series for most Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level components.

Page 2 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 1 Analyse the possible benefits to LF of effective internal communication. [10] Knowledge 3 marks Application 3 marks Analysis 4 marks Level 2 3 marks Good knowledge shown of internal communication e.g. definition and two or more benefits identified 3 marks Issues well applied to LF 3–4 marks Good use of reasoned argument or theory to consider benefits of internal communication Level 1 1–2 marks Knowledge shown of internal communication e.g. definition and benefit identified 1–2 marks Some attempt to apply concept to LF 1–2 marks Some use of reasoned argument or theory to consider benefits of internal communication Definition of internal communication: Relevant case material: • Communication with unions – may help prevent disputes. • Weekly newsletter. • Use of intranet. • Communication with supervisors about targets – helps ensure that targets are realistic and work place issues can be flagged. Lines of analysis: • Impact of effective communication on employee morale and therefore productivity, absenteeism and labour turnover. • The number and quality of ideas generated by staff. • Speed of response to market changes. • Reduces risk of errors. • Effective coordination between departments. • Importance of two-way communication. 2 (a) Refer to Appendix A. Calculate the total float for activity F. [4] Total Float = LST – EST (1 mark) LST = 14 (1 mark) EST = 12 (1 mark) Float = 14 – 12 = 2 weeks (4 marks) 12 – 12 = 0 3 marks if working shown, 0 marks if no working No units required or Total Float = LFT – (EST + Duration) (1 mark) LFT = 16 (1 mark) EST + Duration = 12 + 2 = 14 (1 mark) Float = 16 – (2 + 12) = 2 weeks (4 marks)

Page 3 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 (b) Evaluate the usefulness to LF of critical path analysis when managing the change in the production line. [12] Knowledge 2 marks Application 2 marks Analysis 4 marks Evaluation 4 marks Level 2 2 marks Good knowledge shown 2 marks Points made are well applied 3–4 marks Good use of reasoned argument or theory to explain uses/limitations 3–4 marks Good judgement shown in answer and conclusion Level 1 1 mark Some knowledge shown 1 mark Some attempt to apply 1–2 marks Some use of reasoned argument or theory to explain uses/limitations 1–2 marks Some judgement shown in answer and/or conclusion Definition of CPA: Answers could include: • CPA helps to plan projects, times needed for activities and the timing of resource requirements. • Length of CP suggests that the 20-week deadline could be met. Identification of the critical path/critical activities: • Does the operations director have relevant experience of organising this type of change? • How realistic are the durations? • Reference made to CP network – chances of some of the critical activities being delayed? Are they all in correct sequence? Evaluation: • How accurate are the estimated durations? • Have all activities been included? • Is this the only planning technique used? • Are operations managers experienced in using this technique? 3 (a) Refer to Appendix B. Calculate the total contribution of the proposed 3D contract. [4] Contribution = Revenue less Variable costs (1) Revenue = 200 000 × 0.5 = $ 100 000 (1) Variable costs = 200 000 ×0.35 = $ 70 000 (1) Contribution = $ 30 000 (4) $15 000 3 marks if working shown, 0 marks if no working No units required

Page 4 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 (b) Recommend whether LF should accept the proposed 3D contract. Justify your answer using your results from (a) and any other relevant information. [14] Knowledge 2 marks Application 2 marks Analysis 5 marks Evaluation 5 marks Level 2 2 marks Good knowledge shown of contribution and/or relevant factors 2 marks Points well applied 3–5 marks Good use of reasoned argument or theory to explain factors influencing the decision 3–5 marks Good judgement shown in answer and conclusion Level 1 1 mark Knowledge shown of contribution and/or relevant factors 1 mark Some attempt to apply 1–2 marks Some use of reasoned argument or theory to explain the factors influencing the decision 1–2 marks Some judgement shown in answer and/or conclusion If only results from (a) or other information used – max. Level 1 for Analysis and Evaluation. Application and Analysis: • A contribution of $ 30 000 makes the order worth considering. • This contribution will add to the profits of the business. • The firm is already operating near full capacity. Will this order cause delays to orders for other customers? It appears that there is sufficient capacity as the firm is operating at 90% capacity. Thus, other things being equal, there is spare capacity of 2.5 m litres per month and this order is only for 33 000 litres per month. • However, the trial period is during the months when the firm may be changing its production line. Is this a problem? The case suggests that they need to work at full capacity for 12 weeks to build up stocks. Thus, if also going ahead with change to production this could result in difficulty in meeting all customer orders. • Will other retailers find out that 3D only pay $ 0.5? If they do, they may seek to renegotiate terms with LF resulting in a loss of revenue and profit. • How important is it to win the order to LF? Currently the cinema only stocks a competitor brand. If the trial is successful this could lead to much larger orders and further increase LF’s market share. Evaluation: • Which is the most important consideration? • Final judgement should be weighed carefully and be based on preceding analysis.

Page 5 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 4 (a) Using the data in Appendix C, calculate: (i) promotional elasticity of demand for Lemonfizz [3] AED = % change quantity demanded / % change advertising expenditure (1) % change advertising exp = 10% (1) AED = 5/10 = 0.5 (3) If equation inverted 0 marks, but using OFR if correct calculation 2 marks Sign not essential for marks (ii) price elasticity of demand for Lemonfizz. [3] PED = % change quantity demanded / % change price (1) % change price = –3.33% (1) PED = 5/-3.33 = –1.5 (3) (b) Discuss whether LF should reduce price or increase promotional expenditure in order to increase sales of Lemonfizz. Refer to your results from (a) and any other relevant information. [14] Knowledge 2 marks Application 2 marks Analysis 5 marks Evaluation 5 marks Level 2 2 marks Good knowledge shown 2 marks Points made are well applied 3–5 marks Good use of reasoned argument or theory to explain uses/limitations 3–5 marks Good judgement shown in answer and conclusion Level 1 1 mark Knowledge shown of relevant issues 1 mark Some attempt to apply 1–2 marks Some use of reasoned argument or theory to explain uses/limitations 1–2 marks Some judgement shown in answer and/or conclusion If only results from (a) or other information used – max. Level 1 for Analysis and Evaluation. Although AED is less than 1 (+0.5) this does not mean that advertising is a waste of money. An increase in sales of 5% if maintained over the course of a year would be 13.5 million litres extra – potentially $ 8.1 m. [90% of 300 m = 270 m litres. 5% of this = 13.5 m × $ 0.60 = $ 8.1 m] However, production costs of $ 4.745 m ($ 0.35 × 13.5 m) must be taken into account. PED may be elastic (5 / – 3.33 = – 1.5) and there would be an increase in revenue [270 m × $ 0.60 = $ 162 m but 283.5 m × $ 0.58 = $ 164.43]. However, that does not necessarily mean an increase in profits. Again, production costs must be accounted for. [270 m × $ 0.35 = $ 94.5 m but 283.5 m × $ 0.35 = $ 99.25 m so profit will actually fall.]

Page 6 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 Other considerations: • How does a change in price or advertising fit in with other elements of the marketing mix? • The actions of competitors may be important. If they are increasing advertising can LF afford not to respond? What sort of advertising would be most effective? LF has made good use of new forms of communication in the past. Is it necessary to increase advertising spending? • How were the PED and AED estimates arrived at? • Are they reliable? Much depends on the reaction of competitors to either decision – and these reactions could change the elasticity estimates. Evaluation: • Does LF want to enter into a price war with competitors – this could be damaging? Is competing on price the most effective approach for the market leader? Could social media be used more extensively – to the young consumers of LF – and would this achieve an increase in sales without a substantial increase in promotion spending? 5 Discuss the extent to which LF should consider corporate social responsibility in its decision making. [16] Knowledge 3 marks Application 3 marks Analysis 5 marks Evaluation 5 marks Level 2 3 marks Good knowledge shown of CSR consideration 3 marks Points well applied 3–5 marks Good use of reasoned argument or theory to explain the importance of CSR considerations 3–5 marks Good judgement shown in answer and conclusion Level 1 1–2 marks Knowledge shown of CSR considerations 1–2 marks Some attempt to apply 1–2 marks Some use of reasoned argument or theory to explain the importance of CSR considerations 1–2 marks Some judgement shown in answer and/or conclusion Definition of corporate social responsibility: Application: • Pressure group activity. • Growing problems related to poor health. • Lemonfizz is a high sugar drink. • Advertising aimed at young target audience. • Need to reduce water footprint and carbon footprint.

Page 7 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 Analysis: • Shareholder vs stakeholder perspective. • How might CSR behaviour benefit LF through building its brand and therefore sales? • Potential benefit of CSR behaviour in terms of workforce commitment. • How does LF compare with its multinational competitors? Evaluation: • To what extent does LF have a responsibility to society as opposed to shareholders? • How powerful is the pressure group activity? Can it be safely ignored? • Is the government likely to legislate if businesses do not change their behaviour? • Is CSR just a ‘cover’ for un-CSR business activities? Section B Questions 6 & 7 use this mark grid: Knowledge 3 marks Application 3 marks Analysis 4 marks Evaluation 10 marks Level 3 7–10 marks Good judgement shown in answer and conclusion Level 2 3 marks Good knowledge of issues shown 3 marks Issues well applied to case 3–4 marks Good use of reasoned argument or theory to explain answer 4–6 marks Good judgement shown in answer or conclusion Level 1 1–2 marks Some knowledge of issues shown 1–2 marks Some attempt to apply issue 1–2 marks Some use of reasoned argument or theory to explain answer 1–3 marks Some judgement shown in answer and/or conclusion

Page 8 Mark Scheme Syllabus Paper Cambridge International A Level – May/June 2015 9707 33 © Cambridge International Examinations 2015 6 Evaluate whether the data in Appendix D is sufficient to enable LF to develop an effective strategic plan for the business. [20] Answers could include: • Rate of GDP growth is declining in Country Y. Link to incomes and sales of carbonated drinks. • Market growth of carbonated drinks is lower than Country Z. Is the market more saturated? • No significant market share of competitors in Country Z. Does this mean it will be easier to break into the market? • Therefore is this a good time to consider expansion abroad? • Depreciation of currency in Country Y. Should LF move quickly to expand to take advantage of higher exchange rate currently? Will depreciation affect the cost of production in Country Y? • Change in interest rates. Could this affect the strategic financial decisions taken by LF? • Increasing competition in Y. This is already forcing LF to consider reducing prices. Evaluation: • Forecasted data – may be unreliable. Source of data? • Other factors will affect corporate strategy too: available finance; LF’s objectives; timing of Tony’s decision to stand down as CEO; competitors’ actions. • Other external data might be important too, e.g. population changes; tax changes (disposable incomes). 7 Evaluate the importance of the effective management of change for the future success of LF. [20] Answers could include: Definition of change management – the process of managing and leading strategic change to achieve desired objectives. • LF’s management appears to have a good record of growing the business and communicates effectively with employees. This could be vital in managing change in the future. • The business has a good relationship with unions. This could also help management of change in the future. • Tony Brown has a central role in the business. It will be important that in due course a successor is found who can continue to develop the business. Have any arrangements been made to prepare for transition? • Steps to be taken in effective change management include: vision for the business; ‘selling’ change to staff; communication of reasons for change and consequences; involvement in change process. Evaluation: • How important is strategic change in this context and the management of such change? Will effective change management make any difference to the future success of LF? • Can management culture towards change management and the role of staff be adapted to meet future challenges? • Examination of factors other than effective management of change that could affect the future success of this business.