PROFESSIONAL LEVEL EXAMINATION

2023
LOTUS
(2.5 HOURS)

BUSINESS STRATEGY AND

TECHNOLOGY
This exam consists of three questions (100 marks).
Marks breakdown
Question 1 40 marks
Question 2 36 marks
Question 3 24 marks
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1 Assume the current date is 30 June 20X1.
Premier Western Electrics Ltd (PWE) is a wholesaler and distributor. It purchases
a wide range of electrical products and sells them to customers located in the UK.
Company information
PWE has two separate divisions, retailer and industrial:
 The retailer division's customers are all retailers. These retailers mainly sell
products to individual consumers, although some also sell to small businesses
(eg, electricians or builders who need to source items locally and quickly).
Retailer division products comprise small electrical fittings and cabling for
lighting, heating, ventilation, cleaning and security uses.
 PWE's industrial division has large industrial customers that purchase
products for use in their business operations. These customers require prompt
and efficient replacement of products when existing items become faulty, plus
an installation service. Industrial division products comprise large items of
industrial electrical equipment.
Each division operates separate warehouses in a number of locations throughout
the UK.
PWE purchases its products from major international manufacturers. 96% of
PWE's purchases are imported from Europe, Asia and the US. PWE's business
model is to buy in bulk to obtain lower prices than either retailer customers or
industrial customers could obtain individually.
In addition to competitive prices, PWE offers its customers:
 A wide range of products from many manufacturers. PWE's product range is
wider than any one manufacturer could provide, giving PWE's customers the
option to obtain products from multiple manufacturers by purchasing from
PWE.
 A wide selection of inventory. The choice from PWE's inventory is wider than
any one customer could effectively store in its own inventory.
 An efficient distribution function, with reliable lead times of less than 24 hours
for items held in inventory.
Budgeted management information
PWE's finance director has provided budgeted management information for the
year ending 31 December 20X1 (Exhibit) together with some working
assumptions on which the information is based.
Trends in the electrical products industry
Traditionally, major international manufacturers sold their small electrical fittings
and cabling only on a business-to-business (B2B) basis to electrical wholesalers
like PWE and to major electrical retailers. Some international manufacturers are
now planning to cut out both wholesalers and retailers by selling small electrical
fittings and cabling online on a business-to-consumer basis (B2C).

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Under this plan, manufacturers will use digital platforms, including their own
websites, to collect data on potential customers, advertise and sell products, and
analyse consumer trends.
Lead times for international manufacturers to deliver to UK consumers will be an
average of four days.
PWE board meeting
A board meeting was called to assess the impact on PWE of the B2C plans of the
international manufacturers.
The marketing director, Sally Bushell, said: ''Altior and Hista are the retailer
division's two largest suppliers and they compete strongly with each other. Each
company announced recently that it will set up a digital platform to make all its
products available online for consumers to buy direct. These activities will
commence on 1 January 20X2, supported by advertising campaigns. I expect that
selling prices charged online by Altior and Hista to consumers will be similar to the
prices that PWE currently charges to its retailer customers. In selling to
consumers, retailers currently add 10% to the price that they pay PWE.
''Altior and Hista have each confirmed that they will continue to supply PWE.
However, if no action is taken, I expect PWE and its retailer customers will incur a
significant fall in demand, as many consumers will switch to buying products more
cheaply online from these two manufacturers. As a result, PWE needs to
determine an alternative pricing policy for retailer division sales in 20X2.
''I do not expect PWE's sales to industrial customers to be affected by the new
plans of Altior and Hista."
Alternative pricing policies for the retailer division
After the board considered Altior's and Hista's plans, Sally identified three
alternative pricing policies for PWE's retailer division in 20X2:
 If PWE reduces prices by 5%, then 20X2 sales volumes will be 20% lower
than in 20X1.
 If PWE reduces prices by 10%, then 20X2 sales volumes will remain the same
as in 20X1.
 If PWE does not change its prices, then sales volumes will be 50% lower in
20X2, compared with 20X1.
Any price change would apply to all retailer division products, not just those
supplied to PWE by Altior and Hista. This is to ensure that all products remain
competitive and to discourage other suppliers from copying Altior and Hista.
Sally has met individually with PWE's retailer customers, who share PWE's
concerns about the consequences of the intended plans of Altior and Hista in an
already competitive market. Retailers have agreed that, if PWE reduces its prices
to them, they will reduce their prices to consumers in 20X2 by the same absolute
amount.

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Chief executive's queries
At the board meeting the chief executive, Tim Grice, had the following specific
queries for Sally relating to the retailer division:
 By how much could sales volumes fall in 20X2 from 240,000 items for the
retailer division to still break even in 20X2? Assume PWE's average price per
item remains constant at £50.
 By how much could the average price per item be reduced in 20X2, from £50,
for the retailer division to break even? Assume PWE's sales volume remains
at 240,000 items.
Two alternative strategies
In addition to any change in prices, PWE's directors identified the following
alternative strategies:
(1) PWE should form closer partnerships with some larger retailers, so the
retailers can deliver an even better service to consumers by engaging in non-
price competition with the new plans of Altior and Hista. To implement this
strategy, PWE would introduce a new digital platform using artificial
intelligence to manage its downstream supply chain system with retailer
customers. The platform would fully integrate PWE's inventory and
procurement systems with those of retailer customers with whom it has
partnerships. This means PWE could monitor the sales patterns and inventory
levels of its retailer customers. This would enable PWE to make deliveries
automatically when retailers' inventories run low, so retailers would not need to
make specific orders.
(2) PWE should close the retailer division and focus on the industrial division only.
Ethical issue
Until last year a PWE employee, Jamal Hassim, worked in the sales department of
one of PWE's larger retailer customers, Lexo Ltd (Lexo). Lexo sells to small
business customers as well as individual consumers. Lexo is not typical of PWE's
retailer customers, as it supplies very few products manufactured by Altior or
Hista.
Jamal made deliveries to many customers as part of the service Lexo provides
and he is still friendly with some of them. Jamal suggested to Sally that PWE
should sell directly to these Lexo customers, cutting out Lexo from the supply
chain.
Sally wants the PWE board's approval to take advantage of Jamal's knowledge of
Lexo's customers and increase PWE's margins by selling B2C to them at prices
which undercut those of Lexo.

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Requirements
1.1 Using Porter's Five Forces model, explain the changes in competitiveness in
the electrical products industry that arise from manufacturers starting to sell
directly to consumers.
Address the following two forces only:
 threat of new entrants
 power of suppliers. (8 marks)
1.2 (a) Prepare the budget for the retailer division for the year ending
31 December 20X2 under each of the three alternative pricing policies. For
each policy:
 show the budgeted operating profit for 20X2; and
 explain the reasons for the change in operating profit compared with
20X1.
(b) Prepare calculations to answer each of the two specific queries raised by
the chief executive.
(c) Evaluate the benefits and risks for PWE of each of the two alternative
strategies for the retailer division that were identified by the directors.
Ignore the matters with respect to Lexo. (24 marks)
1.3 Explain the ethical and business issues for the PWE board arising from the
marketing director's proposed use of the Lexo information from Jamal. Set
out the actions that the PWE board should take. (8 marks)
Total: 40 marks

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Exhibit: Budgeted management information for the year ending
31 December 20X1
Retailer division Industrial division
Average selling price per item £50 £2,400
Average variable cost per item £44 £2,100
Sales volume per annum (items) 240,000 6,000
Annual fixed operating costs £300,000 £720,000
Working assumptions for 20X2
 Fixed operating costs are directly attributable to each division and will change
only if a division is closed completely, at which time they will reduce to zero.
 Variable cost per item is constant, irrespective of the volume of sales, and
includes installation costs for the industrial division.
 The industrial division's sales volumes and revenues are expected to grow by
10% in 20X2, compared with 20X1. Thereafter they will remain at that level
indefinitely, unless there is further substantial investment.

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2 Assume the current date is 30 June 20X4
Kizzion Ltd (Kizzion) is a manufacturer of luxury handbags and accessories such
as laptop cases, wallets and purses. It has a factory in the south of England and a
network of 30 shops throughout the UK.
Kizzion handbags and accessories are very expensive. Many customers buy them
to signal that they can afford luxury items. All Kizzion products are made from
excellent quality leather. They have a distinctive multi-colour pattern with a
recognition rate of 83% among higher socio-economic groups in the UK.
Each Kizzion product is available in a range of standard sizes and designs, but
these can be customised with, for example, monograms, extra compartments, and
longer or shorter straps. Customisation takes place at the factory following
consultation with a sales assistant at a shop.
All sales are made in the UK through Kizzion's shops. There is currently no facility
for making online sales. The company's online platform is basic and is used only
for gaining information about potential customers and for advertising.
Kizzion makes sales only through its shops, rather than online, because the board
believes that shops add to both reputation and service levels. Shops also give the
opportunity for sales assistants to 'upsell'. For example, once a customer agrees
to buy a standard handbag then the sales assistant aims to persuade the
customer to pay for customisation and/or to buy accessories. Some customers buy
accessories only. Some customers buy four or more items a year.
Sales data for the year ended 31 December 20X0 are as follows:
Volume Average selling price per item
Product (items) £
Standard handbag 2,500 1,500
Handbag with customisation 2,800 1,800
Accessories 1,600 750
Online customer survey
Kizzion's marketing function conducted an online survey of existing customers
using a database of all customers making purchases in the past three years.
There were 1,940 responses from 15,660 survey requests.
Market segmentation information was obtained. Of the total respondents, 220
were under the age of 50. There were 90 respondents from lower socio-economic
groups. Identification of the socio-economic groups was based on each
respondent's postal district, using databases showing the average value of
properties in each district.
Summary of online survey results
Respondents score from:
1 = disagree strongly with statement in survey; to
5 = agree strongly with statement in survey.

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The average scores from the online survey were as follows:
Average scores of responses to statements
Age group Socio-economic group
Statement in online Under 50 Over 50 Lower Higher
survey
''The upmarket Kizzion
brand name and distinctive
pattern make me more likely
to buy Kizzion products." 3.1 4.2 1.5 4.2
''If Kizzion introduced new
products made of fabric at a
lower price, I would be likely
to buy these." 4.1 2.7 4.0 2.8
Appointment of a new CEO
Kizzion's performance has remained constant for the last four years, with no signs
of growth.
A new CEO, Lee Land, was recently appointed and identified these problems:
 The product range is too narrow and focuses on a market that is small and
declining.
 Customers are concentrated in higher socio-economic and older age groups.
 Customers and other stakeholders are raising concerns about Kizzion's
corporate responsibility, especially its environmental and sustainability
impacts, mainly because it uses leather, which is an animal product.
The board agrees that, to increase profit, there should be expansion based on
making greater use of the Kizzion brand. Three proposals for expansion have
been put forward:
Proposal 1 – Non-UK online sales
Invest in UK-based facilities to market and sell Kizzion products online, in non-UK
markets only, without a customisation service. Third party distribution will be used
to courier items to customers. Prices will be the same as in the UK.
Proposal 2 – Launch a diffusion brand: 'Young Kizzion'
Launch a new range of handbags made of cheaper, non-leather fabric, at 50% of
the price to consumers of existing standard handbags. Annual sales volumes are
expected to be 800 bags per year over the next few years. The fabric is recyclable
and the handbags will be made using spare capacity at the factory. The new range
will have a new diffusion brand name, 'Young Kizzion'. (A diffusion brand is a
secondary brand sold at a lower price than the main brand, with a different market
identity and positioning). It has not yet been decided whether 'Young Kizzion'
handbags will replicate the distinctive, multi-colour pattern of the main brand
leather handbags.

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Proposal 3 – License the Kizzion brand
Sell licences to other companies, giving them the rights to manufacture and sell
other types of luxury products (eg, perfumes, shoes and clothing) with the Kizzion
brand name using the distinctive Kizzion multi-colour pattern. Kizzion will receive
an average licence fee of £60 per item sold by licensees, and it is expected that
3,600 items will be sold each year. Licensees will be responsible for product
design, development, manufacture and marketing.
An additional customer survey
Lee is unhappy that the online customer survey did not contain a statement to
determine customers' views on the environmental impact of Kizzion products. He
therefore asked Kizzion's marketing function to conduct a small additional
customer survey face-to-face with customers in Kizzion shops, immediately after
they made a purchase.
A total of 168 customers were asked to take part in the additional survey and, of
these, 42 were willing to participate. The 42 respondents indicated whether they
were older and younger than 50 years old. They also provided their address,
including their postal district so their socio-economic group could be identified.
There was only one statement in the additional survey which customers were
asked to score from 1 to 5 (where: 1 is disagree strongly and 5 is agree strongly):

"If Kizzion products were more environmentally friendly, I would be more likely to
buy them."

The results of the survey are recorded in the pre-populated spreadsheet, but no
analysis of the data has been carried out beyond identifying the socio-economic
group and age group for each response.
Requirements
2.1 Assimilate and analyse data from the additional, face-to-face customer survey
in the pre-populated spreadsheet to provide useful information for
management. Include an analysis by socio-economic group and age group.
Explain how your analysed data might help managerial decision making.
(10 marks)
2.2 Evaluate and explain the extent to which the data collected in the online
survey is sufficiently reliable and unbiased to inform decision making about
Kizzion's future strategic direction. (8 marks)
2.3 Write a report to the board evaluating the three proposals for expansion,
referring to relevant strategic models. Consider environmental and
sustainability issues. Show supporting calculations and provide a reasoned
recommendation. (18 marks)
Total: 36 marks

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Pre-populated spreadsheet data
Additional face-to-face customer survey about environmental impact of Kizzion
products

A B C D

3 Age group

4 Group 1 Under 50

5 Group 2 Over 50

7 Socio-economic group

8 Group A Lower

9 Group B Higher

10

11 Respondents score
from:

12 1 = disagree strongly with statement in

survey

13 5 = agree strongly with statement in

survey.

14

15

16 Response Age group Socio- Score

economic
group

17

18 1 2 B 2

19 2 2 B 2

20 3 2 B 3

21 4 2 B 2

22 5 2 A 1

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 A B C D

23 6 2 B 3

24 7 1 B 5

25 8 1 B 5

26 9 2 A 1

27 10 2 B 2

28 11 2 A 1

29 12 1 B 5

30 13 2 B 2

31 14 2 B 2

32 15 2 B 3

33 16 1 A 4

34 17 2 B 3

35 18 2 B 2

36 19 2 B 3

37 20 2 A 5

38 21 2 B 3

39 22 2 A 1

40 23 2 B 2

41 24 1 B 5

42 25 2 B 2

43 26 2 B 3

44 27 2 B 2

45 28 2 B 2

46 29 2 B 2

47 30 1 B 4

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 A B C D

48 31 2 A 1

49 32 2 B 2

50 33 2 B 3

51 34 2 A 1

52 35 2 B 3

53 36 1 A 4

54 37 2 B 2

55 38 2 B 2

56 39 2 B 2

57 40 2 B 2

58 41 1 B 5

59 42 2 A 1

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3 Assume the current date is 30 June 20X4

Daya Abiko is a university graduate, aged 23, who wants to establish a start-up
business in the country of Monranto. Daya is applying for a business start-up grant
and needs to present a business plan to the Monranto Business Development
Agency (MBDA).
Daya
After graduating in aeronautical engineering, Daya passed a training course and
obtained a licence to fly commercial drones. Daya also has an interest in
photography so decided to combine these skills and start a business providing
drone services in Monranto. The services comprise drone hire, photography and
Daya's time to operate and fly drones.
Monranto
Monranto is a developed, wealthy nation. It comprises a mainland plus a number
of small, inhabited islands. The mainland is 1,500km north to south, and 300km
west to east. The entire west coast borders the ocean, with the islands located
between 2km and 6km from the coast. The population of Monranto is 20 million
people, spread evenly over the country, with 2 million people living on the islands.
The currency in Monranto is the M$. The current exchange rate is £1 = M$1.
Industry background
The commercial drone industry employs a wide range of drone models.
Commercial drones with photography capability cost from M$5,000, going up to
M$15,000 and above for a good quality commercial drone.
The three largest drone service companies in Monranto each operate about 20
drones, costing M$15,000 per drone. These companies replace their drones every
two years as technology improves. Small drone service companies typically
operate one drone, costing M$5,000 to M$6,000, with replacement every four
years.
Drone technology is rapidly changing. New drone models appear regularly,
offering ever-increasing speed, range and capability. Currently, the average
commercial drone has a range of 4km to 8km and a flight time of 30 to 40 minutes.
The more expensive drones have greater ranges, longer flight times and faster
speeds.
To be classified as 'commercial' in Monranto, a drone must be used for
commercial gain and exceed certain size, weight and speed criteria. There are
regulations restricting the way commercial drones are used and operated,
including privacy laws, safety rules and geographical limits. Commercial drones
must be operated by a drone licence holder, such as Daya. The Monranto
government has recently increased the restrictions on who can obtain a new
licence. Existing licence holders are unaffected.
Market background
Both the number of commercial drones purchased and the number of drone
service companies in Monranto have increased in recent years by 6% pa.

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There has been increasing commercial demand for hiring drones, estimated to be
growing at 7% pa in terms of hours of hiring needed.
Initial funding
To obtain initial funding, Daya intends to apply to the MBDA for a grant to finance:
the purchase of a good quality commercial drone; buying high-grade photography
equipment; the costs of establishing and marketing the start-up business.
Daya plans to buy one drone for M$10,000 with a range of 8km and a flight time of
35 minutes. Daya intends to set aside enough cash from operations to replace the
drone every three years.
Business model
Daya, as a one-person business with one drone, believes it is not possible to
market successfully to a wide range of businesses or individuals in Monranto, so
has targeted the following two markets in the first year:
 Offshore wind turbine industry: This industry in Monranto is growing rapidly.
Aerial drone photographs are needed as part of maintenance inspections of
turbines located in the ocean around the Monranto islands, because an
undetected fault may cause closure of a turbine with resulting downtime.
Inspections were traditionally carried out infrequently by a person climbing the
turbine using ropes. However, most inspections can now be carried out by a
drone taking photographs for 10 minutes per turbine. Inspections may be
either routine and planned for a number of neighbouring turbines, or an urgent
response when a problem has been identified with a particular turbine.
Typically, turbine businesses use various different drone companies during
each year.
 Real estate industry: Aerial photographs of houses on building sites are
useful for monitoring progress on each site and for advertising. One of
Monranto's biggest housebuilding companies, Blanfort, operates throughout
Monranto and its CEO is a friend of Daya's father. Blanfort has not previously
used aerial photography, but the CEO has offered Daya a six-month contract
to take photographs. The contract may be renewed after six months,
depending on Daya's performance and the usefulness of the photographs to
Blanfort.
Requirement
Prepare the following sections of a business plan for Daya:
3.1 Product and service – assessing whether Daya's approach will meet customer
needs.
3.2 Establishing viability – assessing whether Daya's business is likely to establish
initial viability and be able to compete in the selected markets.
3.3 Growth prospects and barriers to growth for Daya.
Note: Each section of the business plan should be balanced in considering both
positive aspects and risks.
Total: 24 marks

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All rights reserved.
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