Marketing Management Paper 2

Question 1

Music Mania (MM)

Music Mania (MM) is an independent store selling new and used music compact discs

(CDs), DVD films and music vinyl records. It is a sole trader business owned by André, who

has 25 years of experience in the retail and music business. MM has loyal customers but

its total revenue is falling. The store currently has a low market share in DVDs and vinyl

records.

André decided to conduct some primary and secondary market research, as the

entertainment industry is changing rapidly. He discovered that:

● the market for DVDs is in rapid decline

● CD sales are declining slowly but new releases still sell well
● MM has had to stock computer games, which are selling out very quickly, and the
sales of new vinyl records are growing slowly.

André is accustomed to variations in sales but the current sales forecasts are, in his

experience, the most worrying. He has decided to create an e-commerce website to

increase his sales of new and used vinyl records and CDs. André is also aware that new

free online music streaming and gaming sites are being launched.

André has only limited internal sources of finance to set up the website. Two new tactics

to ensure future success for MM being considered are:

 ● to stop selling DVDs
● to increase below-the-line promotional spending on vinyl records.

Define the term secondary market research. [2]

Explain one advantage and one disadvantage for MM of using sales forecasting. [4]

Explain one cost and one benefit for MM of setting up an e-commerce website. [4]

Using the Boston Consulting Group (BCG) matrix, discuss the two new tactics André is

considering to ensure MM’s future success. [10]

Question 2

High Plains PLC (HP)

High Plains PLC (HP) owns 600 budget hotels. It operates in a rapidly growing market and

has a 60 % market share of the budget hotel market.

Recent secondary market research on the hotel industry revealed:

● guests of luxury hotels are brand loyal

● 80 % of guests of budget hotels respond positively to a price reduction
● the budget hotel market is growing rapidly
● detailed statistics and information on all hotel chains.

HP’s directors aim to increase occupancy rates in HP’s hotels from the current 65 % to

80 % by the end of 2024. Each of HP’s hotels has 400 rooms. People on business trips

account for only 15 % of the hotels’ bookings.

HP is considering two options.

Option 1: Price discounts on 100 of the rooms in each of HP’s hotels

The discounts would undercut prices charged by its major competitor, Kampfort Inns (KI),

by 10 %. HP would also offer a price match guarantee, which means that it would match

any lower price charged by KI for any room.

Option 2: Upgrade 100 of the standard rooms in each of HP’s hotels

Upgraded rooms, called HP+, would have improved IT facilities, new décor, a coffee

machine and a better shower. HP+ rooms would be $20 per night more expensive than

standard rooms. Estimated upgrade costs are $1500 per room, and the upgrades would

take two years to complete. The HP+ rooms are targeted both at the business traveller

market segment and at customers willing to pay slightly more for an enhanced hotel

experience.

​ Define the term market segment .[2]

​ Construct a Boston Consulting Group (BCG) matrix for HP, identifying the correct

segments for HP’s standard rooms and its HP+ upgraded rooms if Option 2 is

chosen. [4]

​ Explain one advantage and one disadvantage for HP of using secondary market

research. [4]

​ Discuss whether HP should choose Option 1 or Option 2. [10]

Question 3

JVS

JVS is a successful manufacturer of designer clothing. A marketing expert described JVS’s

brand name, Izzys, as one of the business’s major strengths. Because of its market
orientation approach, JVS spends significantly more on market research than its

competitors.

JVS’s products are:

• Izzys, a range of high-quality fashion jeans, which contributes 70 % towards JVS’s

revenue and profit. The market for this range is not growing.

• IzzDen, a range of denim jackets, which is near the end of the product life cycle.

Manufacturing of this product will cease later this year.

Izzys and IzzDen are sold through high-end independent retailers throughout countries in

Europe. JVS uses a price leadership strategy for these two products. Consumers perceive

JVS as fashionable. They also believe that JVS’s products are worth the premium price.

JVS is considering launching a new product, a range of fashionable shorts – Izzless – aimed

at the 15–19 age group. With this product, JVS would reach a different, but highly

competitive, market. Focus groups revealed that many low-income young consumers

want to purchase fashion shorts. JVS would sell the new shorts to mass market discount

retail stores. Consumers would also be able to order online for next-day delivery.

​ State two stages of the product life cycle. [2]

​ Apply the Boston Consulting Group (BCG) matrix to JVS’s current product portfolio.

[4]

​ Explain one advantage and one disadvantage for JVS of using focus groups for its

market research. [4]

​ Recommend whether JVS should launch the new product, Izzless. [10]

Question 4
Davenport Electronics (DE)

Davenport Electronics (DE) is a small company that manufactures remote control electronic

devices that open garage doors. The devices are kept in owners’ cars. For years, DE

devices operated in a fashion similar to those of its three competitors. When an owner

activated the remote control, a unique password was transmitted and the garage door

opened.

Unit sales and revenue had not grown for several years until, four years ago, some

computer hackers discovered how to steal passwords when remote controls are

activated. With the passwords, hackers could later open garage doors and steal their

contents. For DE and its competitors (whose products operated in a similar manner), sales

began to decline.

DE responded by developing a way to change the unique password every time a remote

control is activated. Thus, by the time a hacker successfully steals a password, the

password no longer works. DE’s innovation significantly enhanced the security of a DE

remote control.

The three competitors are all larger than DE.

Price of remote control Quality perception

Company A High Medium

Company B Medium Medium

Company C Low Medium

�� Medium High
DE

As a result of this innovation, DE’s market share and scale of operation have increased.

However, DE is now experiencing diseconomies of scale. Some managers also worry that,

with the pressure to meet increased orders, the company will lose its focus on quality.

Other managers believe that future success in the industry will depend on frequent

innovation.

​ Define the term diseconomy of scale. [2]

​ Using the table, construct a product position map/perception map for all four

companies. [4]

​ Using the table, construct a product position map/perception map for all four

companies. [2]

​ Explain how DE’s innovation is an extension strategy. [2]

​ With reference to DE, discuss the merits of small organizations compared to large

organizations. [10]

Question 5

With reference to an organization of your choice, examine the impact of innovation on

promotional strategy. [20]

Question 6

Secco Vineyards (SV)

Secco Vineyards (SV) is a family-owned business producing wine in Sonoma, California.In

1947, S_V_ opened using cost-plus (mark-up) pricing. For SV’s customers, the wines

weremedium priced and available in local grocery stores.

In 1977, Joe Secco, grandson of the founder, created a new strategy. He re-branded SV’s

wine fora niche premium market.

• SV began to sell directly to customers at its winery instead of in local grocery stores.

• SV stopped using cost-plus (mark-up) pricing and began to sells its wines at much higher

pricesthan before.

• Regular wine tastings and promotional events were held at its winery. At these events,

wineexperts would promote SV’s wines by creating an elegant experience based on a

luxuriousculture of wine consumption: stylish wine glasses, classical music and food that

complementsthe wine.

However, SV has recently faced intense competition and sales have fallen. Local wine

producersand overseas competitors have entered the market with similar market

positioning. In order tomaintain its brand image, SV has not changed its pricing strategies.

SV conducted secondary market research about other possible markets in the US for its

premiumwines. The research suggested that other possible markets for high-quality

wines, such as thoseof SV, exist. As a result, SV is considering two options to increase

sales in addition to its currentdistribution channel:

• Option 1: open a business-to-consumer (B2C) e-commerce store

• Option 2: sell SV wines to wholesalers serving the whole of the US market for premium

wines.

​ Describe one characteristic of a niche market. [2]

 ​ With reference to SV, explain one advantage and one disadvantage of using

secondary market research. [4]

​ Given the intense competition, explain two pricing strategies SV might consider. [4]

​ Recommend which of Option 1 and Option 2 SV should consider in order to

increasesales. [10]

Question 7

Adventures for All (A4A)

Tama Toki founded Adventures for All (A4A), which owns four adventure parks employing

342 people. The parks offer adventure activities such as high wire and mountain biking.

A4A_’_s target market is teenagers and adults. A4A’s mission statement is “safety and

affordability at A4A are the most important reasons for a great time for all”.

A4A uses predatory pricing. Its competitors are theme parks and adventure centres.

However, social trends are

changing. Many teenagers prefer social networking rather than adventure activities. A4A’s

sales revenue and profits are falling.

Tama discussed with senior managers two possible growth strategies:

Option 1. Through extensive promotion, attract children and adults with disabilities and

access requirements to the parks. This approach would require specialized training for

existing staff. No modifications to the parks would be required.

Option 2. Offer corporate team-building activities. A4A would develop specially designed

programmes for senior leadership teams to spend three days in newly built conference

centres located at the parks. Corporate teams would engage in adventure activities

together and then discuss strategic options for their organizations.

Option 2 could be highly profitable. A4A could charge high prices for these programmes.

However, some of Tama’s senior managers argued that A4A should continue to provide

“adventures for all” and not just to a group of highly paid senior leadership teams.

The two options created major disagreements. Two senior managers, working with Tama

since the creation of A4A, threatened to resign if Option 2 was implemented. Two other

senior managers argued that without Option 2 many jobs at A4A were under threat.

​ Define the term target market. [2]

​ Explain two roles of A4A’s mission statement. [4]

​ Explain one advantage and one disadvantage for A4A of using a predatory pricing

strategy. [4]

​ Using the Ansoff matrix, evaluate the two possible growth strategies for A4A. [10]

Question 8

Valley Gardens (VG)

Valley Gardens (VG) is a large garden retailer that sells flowers, plants, trees and other

garden supplies. In 2016, in an attempt to gain market share and increase sales, VG
introduced a loss leader pricing strategy for several varieties of trees. The strategy had an

impact on both sales and profitability.

Selected financial information for VG, all figures in $000s:

2015 2016
2015 2016

�
Cost of goods sold 2800
V

Expenses 1200 1300

�
Gross profit 1600
W

� �
Net profit before interest and tax
X Y

Sales revenue 4300 5100

​ Define the term loss leader pricing strategy. [2]

​ Using information from the table, calculate the missing figures V, W, X and Y (no

working required). [4]

​ Using information from the table, calculate the gross profit margin for 2015 and

2016 (no working required). [2]

​ Using the quantitative information in the table and your answers to part (b),

comment on the impact of a loss leader pricing strategy on VG. [2]

Question 9

Smith’s Foods Ltd (SF)

Charles Smith and seven friends started a private limited company, Smith’s Foods Ltd (SF),

to produce ready-made healthy meals for people with diabetes*. Using a cost-plus

(mark‑up) pricing strategy, SF’s mission is to make inexpensive, widely available meals

that help diabetics manage their carbohydrate intake accurately.

Despite reliance on inexpensive social media marketing, SF grew rapidly. Due to this rapid

growth, however, the quality of its products deteriorated, and a number of its meals were

found to contain different quantities of carbohydrate than those stated on the packaging.

Negative comments appeared on SF’s Instagram page. Charles responded quickly to

reassure customers and offered refunds. SF’s response led to the company receiving an

industry award for ethical behaviour.

Charles introduced flow production to reduce the cost of SF’s meals, which changed SF’s

scale of operations and increased its gearing ratio. However, Charles had little business

experience of using flow production and problems emerged.

External stakeholders began to look into SF’s operations. One supermarket chain, Good

Foods (GF), contacted Charles and offered to take over SF, keeping Charles on the board of

directors. This takeover would allow SF’s meals to be produced at a lower cost and reach a

wider target market. GF would also finance research and development into new meals

with more carefully controlled carbohydrate levels.

However, SF would close. Negative publicity would be considerable. The remaining

shareholders have threatened to launch a new business, creating their own brand of

meals for people with diabetes in direct competition with GF.

* diabetes: a medical condition that causes a person’s blood sugar level to become too

high. People with diabetes need to be mindful of the amount of carbohydrates (which

includes sugar) they include in their diet.

​ Define the term cost-plus (mark-up) pricing strategy. [2]

​ Explain two benefits for SF of using social media marketing. [4]

​ Explain one benefit and one cost to SF of using a flow production method. [4]

​ Discuss whether Charles should accept GF’s offer of a takeover. [10]

Question 10

Bandit & Max

Bandit & Max (BM) is a partnership between Dr. Jones and Dr. Morris that produces

specialist food for dogs with health problems. BM’s unique selling point/proposition (USP)

is food for dogs with diabetes and digestive or kidney problems. BM’s mission statement

is, “To help strengthen the bond between people and their dogs.”

BM uses a cost-plus (mark-up) pricing strategy; however, the costs of raw materials are

rising. BM has an excellent brand image and sells its products only through veterinarians

and large pet shops that provide advice to customers. Veterinarians recommend BM’s dog

food because of its high quality and nutritional value. However, potential customers in

some areas lack access to BM’s food. BM’s sales are not growing.

Dr. Morris wants to diversify into specialist cat food, as more people are buying or

adopting cats. BM has experience in developing new products. In the past, BM outsourced

its research and development. Now, Dr. Morris wants BM to build its own research
facilities, but building costs are high. BM’s warehouse will need refurbishing to stock more

food. BM could become a private limited company to raise the necessary finance.

Dr. Jones disagrees. He believes BM should not diversify. BM’s current distribution costs

are high. He has suggested introducing a new distribution channel for the dog food that

includes a large supermarket chain, a wholesaler, and many small pet shops.

​ Describe one feature of a mission statement. [2]

​ Explain two advantages of BM’s unique selling point/proposition (USP). [4]

​ Explain one advantage and one disadvantage for BM of using a cost-plus (mark-up)

pricing strategy. [4]

​ Discuss whether BM should diversify into specialist cat food or introduce a new

distribution channel for dog food. [10]

Question 11

Cool Meals (CM)

Cool Meals (CM) produces frozen organic ready-made meals that are sold to food retailers

throughout the country.

CM buys large quantities of organic ingredients from local farmers for its just-in-case (JIC)

stock control management. It uses a cost-plus (mark-up) pricing strategy.

CM is known for its:

● good-quality organic frozen meals, which are perceived as good value for money
● flexibility with retailers in terms of quantity of meals supplied, credit given and
efficient delivery at pre-arranged dates
 ● corporate social responsibility (CSR) based on a long-term commitment made to
farmers to purchase large quantities of organic ingredients every four months and
pay a fair price promptly
● CM has an excellent working relationship with farmers, who always prioritize CM’s
requests in terms of quantity and delivery.

Recently, an economic downturn and increased competition, especially from non-organic

frozen meal suppliers, has decreased demand for frozen organic meals.

The finance manager of CM, Kayleigh, provided the following financial information.

Table 1: Selected financial information for CM

2017 2018
2017 2018

Total revenue $6000000 $3500000

16% 14%
Gross profit margin
16% 14%

6% 3%
Net profit margin
6% 3%

Creditor days 10 5

Debtor days 50 70

Stock turnover days 20 40

Current ratio 2.1 2.4

Acid test (quick) ratio 0.8 0.6

Kayleigh is worried about the cash flow of CM and suggested the company changes the

stock control method from just-in-case (JIC) to just-in-time (JIT). She is also looking at

other strategies to improve CM’s financial position.

​ Define the term corporate social responsibility (CSR). [2]

​ Explain one advantage and one disadvantage for CM of using a cost-plus (mark-up)

pricing strategy. [4]

​ Explain one advantage and one disadvantage for CM of changing its stock control

method from just-in-case (JIC) to just-in-time (JIT). [4]

​ Using the financial information in Table 1, evaluate two strategies that CM could

use to improve its financial position other than changing to a just-in-time (JIT) stock

control method. [10]

Question 12

The Pie Store (TPS)

The Pie Store (TPS) bakes pies and sells them in its three retail stores. When developing its

brand, TPS used the mathematical symbol pi (π). In 2020, each store made a profit.

Table 1: Financial information for TPS’ three retail stores for 2020 (all figures in $)

Store 1 Store 2 Store 3

Sales 180000 223000 170000

Cost of goods sold 90000 120000 85000

Gross profit 90000 103000 85000

Expenses 66000 76000 67000

 � � �
Net profit before interest and tax
X Y Z

At the end of 2020, the balance sheet for TPS (the three stores combined) showed

200 000�����������

200 000inassetsand120 000 in liabilities. $50 000 of the liabilities was long-term debt.

​ Describe one step in the development of a brand. [2]

​ Calculate which store made the highest net profit before interest and tax (no

working required). [1]

​ Calculatewhich store had the highest profitability (show all your working). [2]

​ Calculate TPS’ equity. [1]

​ Calculate TPS’ return on capital employed (ROCE) (show all your working). [2]

​ Explain one effect that the $50 000 long-term debt may have on TPS’ profit and loss

account. [2]

Question 13

Pelican Pies (PP)

Pelican Pies (PP) produces high-quality pies that have limited brand loyalty outside of their

local market. The prices of the pies are higher than those of PP’s competitors.

Table 1: Selected financial information for PP for the year ending 30 April 2017.

Number of pies sold 8000 Price of each pie sold $4.00 Cost of goods sold
per pie $1.75 Expenses - Electricity per month $200 - Rent of premises
per quarter $1000 - Promotional expenses per year $10008% interest per
year paid on a loan of $40 p00 Tax 25% of profits
 8000

For 2018, PP’s owner, Austin, is looking to increase sales beyond the local market by

lowering prices and spending a greater proportion of PP’s promotional budget on

above-the-line methods such as regional newspaper advertisements. To finance this type

of promotion, Austin will have to increase his loan amount by $10 000.

Table 2: Selected financial information for the year ending 30 April 2018.

Number of pies sold 20% increase on 2017 figure Price of each pie sold
30% decrease on 2017 figure Cost of goods sold per pie $1.75 Expenses
- Electricity per month $200 - Rent of premises per quarter $1000 -
Promotional expenses per year 200% increase on 2017 figure 8% interest
per year paid on a loan of $50000 Tax 25% of profits

20%

​ Describe one reason why brand loyalty would be important to PP. [2]

​ Construct a profit and loss account for PP for the year ending 30 April 2017 based

on the figures in Table 1 (show all your working). [4]

​ Construct a forecasted profit and loss account for PP for the year ending 30 April

2018 based on the figures in Table 2 (show all your working). [4]

Question 14

La Bonita (LB)

La Bonita (LB) is a beach hotel owned by Felix and Rose Sanchez. Its current target market

is families seeking beach holidays. LB offers high-quality service. Customers do not pay in

advance and pay in full on departure. LB is located near a capital city.

As there are no hotel training schools locally, Felix provides on the job training to all new

recruits. A recent survey by LB to assess brand loyalty found that existing customers

remain loyal because:

● they appreciate not having to pay in advance, as required at other local hotels
● employees are polite and helpful and particularly good with children
● the services provided are perceived as very good value for money.

However, many customers have commented that the hotel needs to upgrade its facilities.

In winter, LB has a very low capacity utilization and monthly cash flows are negative. LB

gets through these months using bank overdrafts while continuing to pay its suppliers in

cash to get generous discounts. Felix is concerned that the cash-flow situation is

unsustainable and could get worse because the hotel facilities need upgrading. He

proposes that LB raises additional finance and finds ways of reducing cash outflows in the

winter (proposal 1).

Rose believes that the cash-flow problem is mainly due to low capacity utilization in the

winter months. She wants to diversify and attract a new segment for the winter: business

customers. However, this would involve significant expenditure, including upgrading and

adding new facilities to the hotel (proposal 2).

​ Define the term brand loyalty. [2]

​ Explain two advantages for LB of using on the job training. [4]

​ Explain the importance to LB of two elements of the extended marketing mix. [4]

​ Discuss whether LB should implement proposal 1 or proposal 2. 10]

Question 15

Jacob Strutz (JS)

Jacob Strutz (JS) is an American multinational company that produces jeans. Founded in

1860, for 100 years JS enjoyed steady growth in sales, mostly in the United States and

then in Canada and Mexico. In the 1960s and 1970s, when teenagers worldwide began

wearing jeans, JS’s sales increased significantly. JS’s premier product is Strutz’s No.5 jeans,

one of the best-known brands in the world.

In the late 1970s, JS operated 71 factories in the United States. In 1994, its sales peaked at

$7.6 billion worldwide, but then began to decline. In 2002, JS made the decision to close

its last remaining factories and outsource manufacturing to foreign manufacturers,

whose quality was more difficult to control. By 2017, annual sales were only $4.5 billion.

Even sales of Strutz’s No.5 jeans declined, and JS faced intense competition, including

foreign competition.

JS briefly experimented with fast fashion, an industry practice developed in the United

States in response to cheap, foreign imports. In fast fashion, new design concepts are

quickly manufactured once they have been tested at fashion shows. Unfortunately, fast

fashion worked against JS’s brand identity. Surveys indicated that JS’s brand has value and

inspires loyalty, though focus groups of young consumers did not perceive JS as cool.

JS has been a leader in corporate social responsibility (CSR). Since the 1890s, it has

pursued profits through values. More recently, JS introduced Strutz’s chemical-free jeans.

Because many of JS’s suppliers operate in areas with few pollution regulations, to remain

consistent with its image of CSR, JS is insisting that suppliers follow innovative but

expensive chemical-free processes.

​ Define the term multinational company (MNC). [2]

​ Explain the importance to JS ofbrand value. [2]

​ Explain the importance to JS of brand loyalty. [2]

 ​ Draw and label a product life cycle for Strutz’s No.5 jeans. [2]

​ Explain the position of Strutz’s No.5 jeans on the product life cycle. [2]

​ Discuss the role and impact of globalization on the growth and evolution of JS. [10]

Question 16

Dana’s Handbags (DH)

Dana’s Handbags (DH ) is a small manufacturer of women’s handbags. DH sells directly to

large retail chains in Europe. The company is privately owned and has fifteen

shareholders.

Table 1: Selected financial data for DH for 2016 and 2017 (figures in $000s)

2016 2017

Sales revenue 28000 29000

Cost of goods sold 14000 15000

Gross profit 14000 14000

Net profit after interest and tax 1370 1300

Total current assets (at year end) 5000 5200

Total current liabilities (at year end) 3000 3500

Stock (inventory) 3000 3200

Cash 1000 900

Beginning in 2017, DH adopted a programme of corporate social responsibility (CSR) by:

 ● donating money to charities
● encouraging employees to do three paid hours per week of community service
during work hours
● using only biodegradable materials in its handbags.

This programme was expensive.

DH’s management thought that a programme of corporate social responsibility (CSR)

would strengthen DH’s brand. During the first year of the corporate social responsibility

(CSR) programme, employee morale improved and DH received favourable media

attention.

However, at the annual general meeting in January 2018, financial results from 2017

revealed that sales growth had not improved. Several influential shareholders

complained about the high cost of the corporate social responsibility (CSR) programme.

Other shareholders suggested that DH should develop consumer awareness that it is a

socially responsible company.

​ Identify two features of a private limited company. [2]

​ Calculate the net profit margins for DH for 2016 and 2017. [2]

​ Calculate net current assets (working capital) for DH for 2016 and 2017. [2]

​ Explain one method of above-the-line promotion and one method of

below-the-line promotion that DH could use to raise consumer awareness that it is

a socially responsible company. [4]

​ Discuss DH’s decision to develop a policy of corporate social responsibility (CSR).

[10]

Question 17

Imperial Falls (IF)

Imperial Falls (IF) is a luxury hotel in a city centre. The hotel is an old palace, elegantly

furnished and overlooking the harbour. Of the highest quality, for decades IF has been

the preferred hotel for business travellers to the city. Relying on reputation and word of

mouth, IF does little promotion. Its facilities include a swimming pool and a high-quality

restaurant. Table 1 shows information about the principal hotels located in this city

centre in 2018.

Table 1: Selected information about the principal hotels in the city centre in 2018

Average room price per

night
Average Service rating
room price Service
Hotel per night rating
​ ​

A. Imperial Falls $245 5 stars

B. Bellevue $179 3 stars

C. Welcome Rest $215 4 stars

D. Excalibur $155 3 stars

In 2019, bookings at IF have begun to decline because of a new hotel, Guest Rooms (GR),

which is part of a global chain. Many businesses have employees who travel to major

cities, where most business meetings occur. Hotels in city centres are usually luxurious

and expensive. GR is different. It offers clean, small rooms with Wi-Fi, a small desk and a

double bed. Room prices at GR are significantly lower than most city-centre hotels. The

new GR is located near the airport, 6 kilometres (3.72 miles) from the city centre.
GR uses a fee-based membership model and member companies require employees to

stay at a GR hotel when on business. Employees may also stay there when on personal

travel. Guests use self-service check-in machines (similar to those used at airport

check-ins), which issue electronic keys. GR electronically bills the company directly.

Service is minimal. GR relies heavily on social media marketing. It also uses above-the-line

promotion.

​ State two types of above-the-line promotion. [2]

​ Using Table 1, construct a product position map/perception map for all four hotels

prior to the opening of GR. [4]

​ Explain two ways in which GR is able to offer rooms at a lower price than IF. [4]

​ Discuss possible changes to IF’s marketing mix to reduce the loss of customers to

GR. [10]

Question 18

JP

JP produces electric guitars. It is a cooperative owned by a committed workforce who

share in the management and success (or failure) of the company and its profits. Workers

enjoy having control over the workplace and are productive. However, JP’s continued

success is threatened by insufficient finance, which prevents them from spending more

on traditional promotional methods.

JP’s guitars are expensive relative to the competition but are known for their quality. Its

customers are very brand loyal. The use of social media marketing by many famous

musicians influences JP’s brand loyalty and awareness. Unfortunately for JP, one
especially famous musician using a _JP_guitar on social media recently received negative

publicity about his private life.

JP follows strict quality procedures that include quality circles. JP’s management believe

that teams of workers employed on the production line know the production process

best and are in the best position to make any necessary improvements. Staff turnover at

JP is very low.

XYZ, a large company known for its kitchen appliances, is considering moving into the

musical instrument market as part of a growth strategy – they want the high gross profit

margins on guitars (compared to the low profit margins on kitchen appliances). XYZ wants

to take over JP. XYZ has a strong balance sheet and large cash reserves and is an expert at

marketing.

The cooperative has refused to consider the takeover bid from XYZ. The cooperative has

argued that the culture of XYZ is too different to JP’s. XYZ’s management are viewed as too

controlling. However, increased price competition has led to falling sales, forcing JP to

make redundancies. Some cooperative members argue that unless JP accepts XYZ’s bid,

additional jobs will be lost.

​ Define the term cooperative. [2]

​ Explain one positive and one negative impact of social media marketing on JP’s

promotional strategy. [4]

​ Explain two benefits to JP of using quality circles. [4]

​ Discuss whether JP should accept XYZ’s takeover bid. [10]

Question 19
Flussbiegung CityRoller (FC)

Flussbiegung CityRoller (FC) is a private limited company that sells scooters in a large

German city. Its shop is situated in an excellent location near the city centre. In 2014, FC

sold 1200 scooters at a sales price of €2200 per scooter. The business has few variable

costs.

FC only sells one brand of scooter, called Rasen, which consumers regard as high quality.

Rasen’s competitors are:

Price (in
€
Brand € s) Consumer opinion

Electrico 2800 medium quality

Elegante 2300 low quality

Zoom 1900 low quality

Elegante and Zoom have both become popular in the last five years. Despite some

problems with quality, both are seen as fashionable scooters. Elegante has successfully

built a brand identity as a stylish scooter. Electrico scooters are electric-powered and are

popular with people concerned about pollution. Rasen, Elegante and Zoom scooters all

use petrol (gas).

Despite Rasen’s reputation for quality, in the last five years FC’s market share has

decreased. Rasen’s manufacturer has also been losing market share across Germany. The

problem, according to FC, is that the manufacturer does not invest enough to update the

brand’s image. Rasen scooters appeal to an older generation in Germany, but younger
people prefer products that are fashionable. FC uses below the line promotions. These

promotions do not have the same influence on market perception as the manufacturer’s

above the line promotions, which emphasize Rasen’s quality. Another possibility for

Rasen is, rather than update its brand image, to maintain

its current brand identity but try to sell its product in different geographic markets where

its current brand identity may have more appeal, such as in eastern Europe or Africa.

​ Describe one feature of a private limited company. [2]

​ Construct a position/perception map for all four brands of scooter. [4]

​ Explain the relationship between Rasen’s product life cycle and FC’s marketing mix.

[4]

​ Discuss the importance of branding for FC and for Rasen. [10]

Question 20

Red Squirrel Apple Juice (RS)

Red Squirrel Apple Juice (RS) is a cooperative of apple farmers. _RS_was named after the

red squirrel, whose population is declining because of growing numbers of grey squirrels.

Originally from North America, grey squirrels are aggressive and take over red squirrels’

habitats. RS’s founders thought that the red squirrel would be a good symbol to reverse

the declining popularity of traditional apple juice due to consumer preference for

high-sugar American-style beverages. With the symbol, RS aimed to appeal to

environmentally aware and health-conscious consumers.

Originally, RS only sold apple juice in bulk to beverage companies. These companies

bottle the juice and sell it under their own labels. RS requires these companies to place
RS’s logo of a red squirrel on their labels. Although RS only sells to a small number of

beverage companies, its logo is on juice bottles in stores across the country.

Awareness of the RS brand grew. The cooperative’s managers recently opened another

channel of distribution: direct sales of bottled juice to consumers at the cooperative’s

processing plant. RS charges lower prices than stores. The new channel of distribution

required capital expenditure for bottling equipment and additional revenue expenditure.

_RS_experienced increased labour and promotion costs, which some farmers complained

about.

In recent decades, RS’s home country has experienced rising anti-immigrant sentiment.

Some politically motivated organizations have begun to use images of red squirrels to

symbolize this sentiment, so some beverage companies no longer want to use RS’s logo

on their labels.

Some of RS’s stakeholders are concerned.

​ State two features of a cooperative. [2]

​ With reference to RS, explain the importance of branding. [4]

​ With reference to RS, explain the difference between capital expenditure and

revenue expenditure. [4]

Question 21

KapTan

KapTan (KT ), which manufactures rechargeable batteries for cordless consumer products

like vacuum cleaners, began five years ago as a business with a product orientation. It

sells business to business (B2B). Multinational companies dominate the rechargeable

battery industry, and KT suffered from cash-flow problems in its first year of trading. Its

profits are small and, in the last two years, have fallen.

KT has now developed an innovative battery that is small and lightweight. This battery is

an emergency power source allowing electric cars to reach a charging station. However,

the battery can only be used ten times before it runs out. KT has insufficient finance to

create a battery that can be recharged an unlimited number of times.

Through market research, KT has discovered that:

● no other emergency batteries for electric cars exist

● owners of electric cars fear running out of power
● KT ’s new battery could be obsolete in five years.

KT has the capacity to produce 90 000 of these new batteries each year. The average cost

is $200 per unit. KT has insufficient funds to invest in additional capacity.

KT is considering two options:

Option 1: Market and sell directly to existing car owners through business to consumer

(B2C) at a retail price of $400. KT will need to borrow significant capital to finance this

option.

Option 2: Accept an offer of a five-year strategic alliance with a manufacturer of electric

cars. KT would provide its product exclusively at $250 per unit. Sales are guaranteed.

Table 2: KT’s forecasted and guaranteed worldwide unit sales (in 000s) for the two options

Year Option 1 forecasted sales Option 2 guaranteed sales

1 50 40
 2 60 50

3 100 85

4 110 80

5 90 60

Total sales 410 315

​ Define the term product orientation. [2]

​ With reference to Option 1, for KT, explain the relationship between the product

life cycle, investment, profit and cash flow. [4]

​ With reference to KT, explain two problems that a new business may face. [4]

​ Recommend whether KT should choose Option 1 or Option 2.