IB Paper Case Study: Utopia

SECTION A
1. (a) Two external stakeholders of Utopia are customers and suppliers. The customers are extremely
important as Utopia is a service-oriented business and they rely on the word-of-mouth promotion strategy.
Thus, the customers need to be satisfied with the service provided to recommend it to other potential
customers. The local suppliers of coffee are critical as the business is dependent on the quality of goods
provided by them to further supply in the business.

(b) Promotion is a key element in putting across the benefits of Utopia’s service to the customers.
Well-designed marketing and promotional strategies ensure long-term success, bring in more customers
and ensure profitability for Utopia’s business.The most important purpose that a promotion serves is that it
sets Utopia’s business apart from its competitors. According to the case study, Utopia heavily relies on word
of mouth for promotion. Word of mouth is a strategy that occurs when consumers talk about the company’s
product or service to their friends, family, and to others with whom they have a close relationship.

2. (a) Internal growth refers to JAC using its own resources to further expand its operations and increase
sales revenue. Two advantages of internal growth include full control of business and its operations and
relatively inexpensive. As JAC is a sole trader business, finances may be limited to carry out extensive
external growth strategies such as mergers and acquisitions, thus internal growth such as changing price or
increasing promotion will be relatively affordable for the business. Moreover, the owner will not lose any
control over the business in the process of internal growth as he is using his own resources to develop and
expand.

3. (a) As the cost of buying the printer is minimal in comparison to the size of Utopia two suitable sources of
finance would include reductions in working capital and leasing the 3D printing machine from the
manufacturer or supplier. Reductions in working capital is feasible for Utopia as they are currently running
operations after the crisis of 2016 and by doing appropriate budgeting they will be able to make reductions
in some areas to collate funds to purchase a 3D printer. However, given the economic scenario of the
company, John can lease the machine and pay monthly installments to the supplier.

(b) Ethics are the moral principles that guide decision-making and strategy. Ethical objectives are difficult to
define and vary from culture to culture, however John’s business engages in several practices that are
ethically beneficial and morally responsible. Some of these practices are using local craftsmen as labor for
building the villas that are sustainable and environmentally friendly. They are boosting the local economy by
creating employment opportunities and using local materials. They are using ethically produced fair trade
coffee and paying above market prices. Being ethical helps the company build a good reputation in the
community and increases loyalty. It will make them sustainable and profitable in the long term and lastly it
will maintain their goodwill amongst customers, suppliers, and employees.

SECTION B
4. (b) Brand is a differentiator of the business from other similar businesses. It refers to Utopia having a
unique name and image in the industry. Utopia provides a unique experience to customers and they need
to market that to build their brand. John believes that the beautiful location, the local craftsmen and
materials, and the local food and coffee, together form the basis for the Utopia brand. Benefits of having a
brand include creating a strong image and influence on customers and providing a competitive edge for the
company. The unique facilities of boat rides, local food and coffee, and over water villas provides a once in
a lifetime experience for the customer, this creates a memorable experience for them and enhances the
brand image of Utopia. Moreover, these unique aspects also contribute as a unique selling proposition for
the company, providing a competitive edge from similar businesses and resorts.

(c) NPV = Sum of present values of return - original cost

NPV = 12510 - 10000 = $2510
 Year Net Cash Flow Discount Factor Present Value

0 -10000 1 -10000

1 2000 0.91 1820

2 3000 0.83 2490

3 4000 0.75 3000

4 4000 0.68 2720

5 4000 0.62 2480

(d) Paul is considering developing the brand of Utopia by selling customized souvenirs produced by a
three-dimensional printer. The investment for buying the 10 three dimensional printers will be approximately
$10000, although this amount is not very big for a business of the scale and size of Utopia, it may be a
burden given the current financial situation of the company. They would need to hire specialized individuals
to run the 3D printers and this may add to the costs. On the contrary, based on the case study the gross
profit margin of this project will be high and it also has a positive net present value which indicates positive
returns in the next five years of operation. The investment in the 3D printer may also open up various other
business opportunities for Utopia in the future.

Furthermore, this idea was proposed by Paul as a way to develop the brand, however Liza dislikes the idea
and this may create an internal conflict between two major stakeholders of the company. Liza thinks that
the souvenirs may be an unnecessary addition to the product portfolio and will be inauthentic and cheap.
This may devalue the brand image of the company. On the other hand, the souvenirs will be made from
materials that would be from recycled plastics obtained from waste at the resort which fits well with Utopia’s
image and ethos. This will be an act of ethical and corporate social responsibility and is likely to increase
the brand image. Moreover, the souvenirs produced could be of a unique design and personalized which
will attract a larger customer base and this will make them aware of other businesses under the Utopia
brand. According to the Ansoff Matrix, this is an example of diversification as they are launching a new
product in a new market. Utopia is taking a large risk in doing so.

In conclusion, John will make the eventual decision of which developmental project to undertake to rebuild
Utopia and its brand. As per the financial information and calculations, the installation of 3D printers is
feasible for the businesses, however other qualitative factors may impact it.

SECTION C
5. Y= 0.3*5 + 0.5*3+ 0.2*1 = $3.2 million
X = Predicted outcome - cost = 3.2 - 1.5 = $1.7 million

Fiji Samoa
Positives: Positives:
• Larger population so theoretically larger market • Only two islands
• Many more tourists who are likely to use the • High proportion of tourists
coffee shops • Coffee drinkers
• Better predicted value than Samoa ($2.9m • Politically stable
compared with $1.7m) • Stronger growth • Ideal workforce
• Higher chance of success, lower chance of failure • Good for overseas investment • No loss if it fails
Negatives: • Higher GDP
• Locals are tea drinkers Negatives:
• Lower GDP • Higher chance of failure
• Spread out – 330 islands • Lower growth
Case Study Pack - May 2017 - Question Paper

SECTION A

1. (a) A private limited company cannot be listed in the stock exchange, rather the shares are sold to
private friends and family. Utopia is a private limited company and is owned by John Ariki. It is a separate
legal entity from the entrepreneur. Moreover, the shareholders have limited liability and they cannot lose
more than the value of their investment. John will only be liable for the amount that he has invested into the
business incase of any losses or unforeseen circumstances.

(b) Internal growth refers to JAC using its own resources to further expand its operations and increase
sales revenue. Two advantages of internal growth include full control of business and its operations and
relatively inexpensive. As JAC is a sole trader business, finances may be limited to carry out extensive
external growth strategies such as mergers and acquisitions, thus internal growth such as changing price or
increasing promotion will be relatively affordable for the business. Moreover, the owner will not lose any
control over the business in the process of internal growth as he is using his own resources to develop and
expand.

3. (a) i. An entrepreneur is someone who bears the financial risks of starting and managing a business or a
commercial venture. The entrepreneur can develop new ideas or find a new way of offering an existing
product. John Ariki is the entrepreneur behind Utopia and JAC. He assumes the financial risks and rewards
of running these businesses.

(b) A SWOT analysis provides a framework for decision makers to consider factors in both the internal and
the external business environment that affect business operations. The internal factors can be classified as
either strengths or weaknesses within the organization. The external factors can be classified into
opportunities or threats.
Strengths:
- As John Ariki holds all the shares in Utopia, he has total autonomy so decision markets can be
quick.
- Utopia is a private limited company, so the owner benefits from limited liability.
 - Utopia relies on word of mouth promotion, which is literally free of charge.
Weaknesses:
- Utopia’s cost of buying coffee is well above market prices determined on commodity markets.
- JAC is not reaching its full potential.
- Utopia has recorded its first ever financial loss.
Opportunities:
- There are greater marketing opportunities to use, like the growth of social media rather than relying
on Word of mouth promotion.
- There are opportunities to expand JAC.
- Business opportunities exist beyond the local level.
Threats:
- The possibility of another natural disaster on the Island of Ratu.
- High fixed costs of 3D printing equipment.
- Risk of some customers perceiving the 3D printed souvenirs as inauthentic and cheap, thereby
reducing Utopia’s brand value.

SECTION B

(a) Economies of scale refers to the decreasing average costs of production as the output increases. ​For
example, large coffee retailers such as Starbucks can reduce their unit costs by buying their coffee beans in
bulk, by using the latest technologies to raise productivity, and gaining easier access to low- cost finance.
(b) Qualitative research involves the collection of primary and/or secondary market research data and
information based on the attitudes, beliefs and opinions of Utopia’s and JAC’s customers. It is about finding
out what they think and why they think it. The research is subjective, so open to a high degree of
interpretation. Such research often involves the use of face-to-face interviews and focus groups. It is often
used to test reactions and get feedback in order to refine Utopia’s strategy.

Quantitative research involves the collection of primary and/or secondary market research data and
information that are numerical and measurable. It is used to quantify the attitudes, opinions and beliefs of
customers of Utopia and JAC, and to generate statistically valid market research findings. Examples
include the use of closed questions (such as ‘true or false’ or ‘yes or no’ questions), and multiple choice
options. It is objective, so is less prone to varying interpretations.

(c) Brand loyalty measures the extent to which the customers of Utopia and JAC make repurchases over
time, rather than buy from rival firms. Strong brand loyalty exists when customers are committed to a
certain brand and make repeat purchases time and time again. Higher prices can be charged, due to the
perceived greater value for money. This ensures Utopia and JAC have higher profit margins. Moreover,
brand loyalty gives Utopia and JAC competitive advantages over their local and global rivals due to devoted
customers who make repurchases, e.g. frequent visitors to Utopia are film stars (line 3).

(d)
A decision tree is a quantitative decision making tool that helps present all of the options for Utopia to
expand and for the stakeholders to make a rational decision based on the numerical outcomes of each of
the possible options.

The decision tree that calculates the possible outcomes for three options including: Fiji, New Zealand, and
Samoa. Based on the results of the decision tree, all three markets present opportunities to earn more profit
for the organization (Samoa @ $7,700, Fiji @ $17,400 and New Zealand @ $60,200). The decision tree
clearly confirms Liza’s market research that considerable profits could be earned by expanding to New
Zealand. In addition, economic conditions in New Zealand have a higher probability of improving (60%)
compared with the likelihood in Fiji (50%) and Samoa (40%). However, the validity of the outcomes is only
as good as the quality of the quantitative data collected to calculate the probable outcomes; after all, these
are only estimated figures.

Also, New Zealand already has a large number of well-established coffee chains, so JAC might struggle to
compete with multinational giants such as Starbucks and McCafé. This is particularly the case as the MNCs
benefit from brand awareness and economies of scale. In addition, qualitative factors are ignored, e.g. the
different corporate laws, regulations and cultures that exist in these three markets have not been
considered.

SECTION C