OCR F297 Toolkit June 2013.pdf

OCR Business Studies F297 Strategic Management

Revision Toolkit June 2013

OCR A2 Business Studies- June 2013 F297 toolkit

OCR A2 Business F297 June 2013 © Tutor2u 2013 2

Introduction: the strategy process at CCL .............................................................................................. 3

Analysing CCL’s situation: key stakeholders at CCL ............................................................................ 3

Business Culture .............................................................................................................................. 4

Business objectives ............................................................................................................................. 5

Getting started – understanding CCL’s place in the market ............................................................... 6

Financial Accounting ............................................................................................................................... 7

Ratio Analysis: helpful insights for the data presented in the appendix ........................................... 7

Profitability ...................................................................................................................................... 9

Looking in detail at sales and profitability across different profit centres ................................... 10

Measuring Liquidity....................................................................................................................... 14

Measuring Solvency ...................................................................................................................... 14

Measuring Activity/Efficiency ....................................................................................................... 16

Shareholder Ratios ........................................................................................................................ 17

Financial analysis of the proposal to install solar panels .............................................................. 18

Financial analysis of the proposal to operate a golf pro shop - table 3 ........................................ 18

Financial summary ............................................................................................................................ 19

The Economic Environment .................................................................................................................. 20

The economic environment: summary of its impact on CCL ............................................................ 23

Qualitative considerations, including ethics and CSR at CCL ............................................................ 23

SWOT summary of CCL’s current position ............................................................................................ 25

Business decision making and implementing change at CCL ................................................................ 26

Assessing the options ....................................................................................................................... 28

Making effective use of the decision tree ........................................................................................ 31

Decision trees – the qualitative dimension ...................................................................................... 32

Have you guessed where it is yet?! .............................................................................................. 32

Exam Overview ..................................................................................................................................... 33

OCR F297 June 2013 Mock Paper ......................................................................................................... 39

Mock exam hand out – sample decision tree ................................................................................... 40

Working through the decision tree presented in the mock exam ................................................... 41



Cavendish Cycles Ltd (CCL)

Introduction: the strategy process at CCL

You can think of strategy as a process, taking a business – in this case, the bicycle, leisure and ‘life-style’ business of Cavendish Cycles Ltd – towards the future. There is more than one path towards this future, and your objective is to imagine yourself as a business advisor, seeing the possibilities and offering advice. Your answers will be cautionary in nature, packed full of “it depends” comments, warning that whatever plans are put into place, there are numerous things that could go wrong, and where there is ‘missing’ information, alternative views or events that could lead you to revise your opinions. A good start point for analysis is looking to see the main stakeholders in the business, and to compare and contrast their wants and needs.

Analysing CCL’s situation: key stakeholders at CCL

The company is owned and run by the Cavendish family (line 14). Family businesses are not necessarily simple, low key affairs. They can be enormously large and complex, although it would be unusual to encounter that type of business structure in the UK. Instead, it looks as though Phil’s family enterprise is relatively small – although with more than 59 staff and an annual turnover of more than £13m – it is approaching a size and complexity where decision making inevitably becomes more complex and difficult. Balancing the competing needs of stakeholders typically becomes more challenging the bigger a business gets. We know that “although CCL has grown, Phil strives hard to inculcate amongst all the staff a small business culture” (lines 24-25). This probably implies that when balancing the needs and wants of different stakeholders, Phil values personal relationships, low barriers to communication, open dialogue and informal, flexible decision making.

One of the questions you might like to be considering from the start is the extent to which Phil will be able to maintain this culture as the firm plans for growth (see below). The case study invites us to focus attention on three particular stakeholders:

• The owners, the Cavendish family. As the owners of the business they might be regarded as the senior stakeholders. This view is supported by the fact that “Phil has agreed with the other shareholders three objectives for 2014” (lines 52-53). The clear implication of this statement is that, in the end, objectives (and therefore strategy, and the firm’s overall aims and goals) are determined by CCL’s owners.



• The staff. As part of the paternalistic small business culture at CCL, we can see that Phil is closely engaged with his workforce. “As a service sector business, with direct customer contact, Phil thinks that the staff represent a significant source of competitive advantage and, as such, he is invariably disappointed when someone leaves” (lines 34-36). That disappointment seems likely to reflect not only a loss in a business sense (after having made a financial investment in staff) but the fact that a team member – who has made a contribution to the business beyond simply working there - has left.

• The third group of stakeholders that you are encouraged to consider are the firm’s customers. Clearly, the future success of the business will depend on effectively meeting the needs of present (and future) customers, so a discussion about the best way for CCL to meet those needs will form a significant component of your thinking as you prepare for your F297 examination.

Other stakeholders are obviously worth your consideration, from suppliers to potential business partners (and rivals). Even the banks and utility companies that Phil dislikes so intensely are part of a web of connectivity to outside groups, all of whom will influence the strategic direction and success of CCL. As you prepare high quality answers to possible exam questions, you may well want to think through the perspectives of different stakeholders in order to make thoughtful, evaluative comments.

From the evidence presented in the case study it doesn’t appear that the various stakeholders in CCL are riven by deep divisions and conflict. The small business culture of the firm seems to have served it well so far, supported by what seems to be fair and transparent dealings: “Phil believes that CCL acts ethically in its relationships with all of its stakeholders” (line 72). The issue of ethics and corporate social responsibility (CSR) is discussed later in this toolkit.

Business Culture

Having thought briefly about the staff and shareholders at CCL, it is worth reflecting on the idea of business culture – the established pattern of expected behaviour in a business organisation. Understanding the culture at CCL is likely to be an important start point before going much further into discussing how the company is likely to address challenges and handle change – a favourite topic for examiners.

“… although CCL has grown, Phil strives hard to inculcate amongst all the staff a small business culture. So, all the staff at each store know each other and will ‘muck in’ and take ‘turn and turnabout’, whether selling or servicing bicycles. For CCL there is no such thing as ‘somebody else’s job’, rather it is ‘everyone’s job’. One of Phil’s favourite phrases is ‘Team; together everyone achieves more’ (lines 24-27).”

“Phil dislikes large businesses, particularly those which seem to see their systems and procedures as more important than their customers’ needs” (lines 37-38).



Most businesses would at least say that this is exactly the culture that they want to create. It is a very clear expression of the advantages often attained by smaller enterprises, as it suggests flexibility, dynamism, effective customer service, adaptability, high levels of motivation, low absenteeism (and labour turnover) and an ability to innovate and to quickly respond to new threats, opportunities and challenges.

If CCL’s culture really is as described, then it probably represents a considerable commercial advantage. Crucially, Phil and the other shareholders will be extremely keen to preserve this culture – and need to be alert to potential threats that might undermine it. As the business sets new objectives and plans new strategic directions, CCL should have this danger in mind.

Very often, a large part of understanding how a firm behaves grows out of understanding the backgrounds of the people that work there. The case study paints a clear picture: “the average age of the 59 non-administration staff is late twenties. Phil, and the ten strong Accounts, Personnel and Administration staff are on average, older. Aside from working for CCL, a common characteristic amongst the staff is their preference for an outdoor life-style, with many actively participating in cycling competitions” (lines 31-34).

CCL seems very much to be a ‘lifestyle’ organisation. Not only does the firm retail a lifestyle product range, but its staff are part of the market segment that the business serves. This is likely to be a significant advantage in the marketplace, so it’s worth reflecting how this might be damaged if CCL make a significant move away from their current business model.

There is therefore a risk that the existing culture at CCL – which is hugely advantageous at the moment – may have a negative flipside. A determination to preserve the current culture may make Phil reluctant to make the changes that could support the company’s future growth.

“To further encourage the right culture all staff benefit through an annual bonus triggered by the performance of the whole business, even though each of CCL’s six outlets is treated as a profit centre” (lines 28-30). This policy is also likely to have contributed to the teamwork culture at CCL. The disadvantage, of course, is that it may serve to discourage exceptionally hard work, effort and efficiency in certain costs centres, whilst rewarding a far lower level of performance in others.

Business objectives

The next step in building your understanding is to be alert to the immediate objectives that CCL have set. In the case study there is a clear short term answer (lines 54-58):

1. bringing the Rockingham Forest ‘Peddlers’ outlet to break-even by the end of the 2014 peak season.

2. increasing the proportion of revenue from e-commerce to 55% by the end of the 2014 financial year.

3. becoming the number one bicycle retailer in the East Midlands.



How will CCL achieve these objectives? What recommendations can you make? This is likely to lead us towards a more interesting discussion about the firm’s longer term goals, and where it might be headed further in the future.

The next stage of understanding the strategy process is analysis of the firm’s position, and this analysis forms the bulk of the toolkit you are reading. Before a firm can plan for the future and make decisions between rival options for the best way ahead, they have to understand their current strengths and weaknesses, the opportunities open and looming threats that could throw them off course. There are many ways of doing this, and a variety of tools and techniques that can help. You need to understand the situation CCL are currently in, ranging across the whole of the business AS/A2 specification to consider issues that are of a marketing nature, some that relate to the people in the organisation, others that are about production and still more cover the financial constraints the firm is operating under. A decision tree has been included to challenge you to ask both quantitative and qualitative questions about strategic issues.

As you work through the toolkit, this analysis will probably take up the majority of your time and attention. Hopefully you should begin to form a picture of CCL and the marketplaces(s) it operates in. The purpose of gaining this understanding is so that you are well placed to address the questions posed by the examiner. These are likely to challenge you to come up with ideas, recommendations and insights about the business. Crucially, you also need to be ready to say what could go wrong – and bring out the whole host of “it depends” factors that influence your judgement – and that could ultimately mean the difference between long term success and failure for CCL.

Getting started – understanding CCL’s place in the market Cavendish Cycles Ltd (CCL) retails bicycles and related life-style complementary products, with three shops selling road bicycles and a limited range of accessories. Since then the business has steadily grown with three other outlets selling and hiring bicycles to the leisure and off-road market. An e-commerce operation, branded as CCL Direct, was opened in 2010.

• “The most recent Peddlers is next to a camp and caravan site on the edge of Rockingham Forest. The forestry owners saw all-terrain and adventure sports cycling as a further opportunity to encourage visitors to its site … (they) approached CCL with a proposal to open a small, ten year rent free, hire and sales outlet” (lines 8-11).

• “Founder and Managing Director, Phil Cavendish, has a simple two pronged business philosophy which has enabled CCL to grow in an increasingly competitive market. First, recognising that differentiation through product offering is all but impossible, CCL’s focus is on its customers’ experience” (lines 14-17).

• “Customer care is, in Phil’s view, the only way in which CCL can compete with either national retailers or Internet based firms” (lines 22-23).

• “Whereas cycling used to be the preserve of the committed enthusiast or transport for the factory worker, cycling is now very much a mainstream leisure activity” (lines 93-95).

• “The average price paid for a bicycle has risen well ahead of inflation to an average figure of £989 in 2012” (lines 95-96).



Financial Accounting

Perhaps the next stage in building up your understanding of CCL’s position is to begin a detailed analysis of their financial position. However, before you give any consideration to the data presented in appendix 1, 2 and 3 you should be sure to question if it is accurate and representative. It would be entirely mistaken to form significant conclusions based on a random view that failed to capture a real picture, over a reasonable length of time. After all, we only get a limited view of the cost and revenue data that would make up a complete profit and loss account and the balance sheet in appendix 3 is merely a snapshot. CCL’s performance is obviously seasonal and closely linked to the economic environment, which has been through a period of upheaval. It’s reasonable to expect that this would lead to a highly changeable level of financial performance. However, the data presented in the case study does give some insights into the financial constraints CCL are operating under. You might also be presented with ‘new’ data in the case study, giving you a clear motivation to be familiar with the calculations and observations that follow.

The limited amount of data that is available makes financial analysis very difficult. Judging performance only really makes sense when you judge it against something. The most obvious candidates would be figures from previous years, or perhaps from a competitor business of similar size and scale. In the absence of such figures it’s hard (but not impossible) to make a meaningful financial analysis. If we have a fair degree of confidence in the data that is presented, it can give us an important insight into the firm’s position, and should help to inform CCL about their next steps.

Ratio Analysis: helpful insights for the data presented in the appendix

A ratio is simply one number expressed in terms of another. Your specification lays out a set of financial ratios that can be very helpful in CCL’s the situation. Because there are often minor differences in the way ratios are calculated, the toolkit notes that follow are written to match the Guidance on Accounting Element OCR GCE Business Studies published by OCR in August 2012.



It’s important that you realise what you can – and can’t do with the following ratios. You should treat this section of your toolkit with some caution, and as we lack precise figures for several key indicators, and a few values that have been calculated are just approximate.



Profitability

The first graph presented in this toolkit paints a very encouraging picture, as it shows CCL’s revenues in the last four years, which have risen steadily (as highlighted by a best fit line, calculated using time series analysis). Yet at the same time, this progress needs to be viewed with caution, and seen as part of a ‘bigger picture’.

We know that “Phil feels the growth in CCL’s sales across the last four financial years (2009 £6.8m; 2010 £9.7m; 2011 £11.6m; 2012 £13.3m) may not be repeatable across the next four years” (lines 118-120). Much of your analysis, and the strategic recommendations you make in this case study will be thinking of ways by which CCL might be able to sustain the dramatic revenue growth they have experienced over the last few years.

Of course, revenue isn’t profit. And there are several ways in which profit can be expressed, as outlined below:

• Revenue minus cost of sales equals gross profit. • Next, ‘expenses’ (or fixed costs) are removed to give an operating profit figure.

Almost all the analysis of profitability that follows is based around operating profit figures, but it’s worth pausing to consider that there are still cost deductions to be made, namely depreciation, interest and tax, before you arrive at a net profit figure, which is closer to a final value. For reasons that should become clear over the next few pages, it seems a reasonable to assume that CCL’s tax, interest and depreciation costs will probably be relatively small, so won’t make a huge difference to their final profit figure. However, CCL’s operating profit figures aren’t enormous – so it’s worth having in your mind the fact that the business is only breaking even by a relatively slender margin, as explained in the next section (in data taking us up to August 2012, at the end of their peak season).

So what’s the ‘Bottom Line’? It’s probably fair to say that this is – just about – the most important piece of financial analysis you can perform.

Revenue minus cost = profit (or loss). Gross profit margin looks at the level of gross profit as a percentage of sales, or turnover. The formula: Gross profit/sales x 100 Operating profit margin looks at the level of operating profit as a percentage of sales, or turnover. The formula: operating profit/sales x 100

Gross profit: £7435k

Gross profit margin: 55.9%

Operating profit £367k

Operating profit margin: 2.76%



So the most recent data we have reports that out of every £1 of sales revenue generated by CCL, only 2.76p remains as operating profit after deducting variable and fixed costs. Margins are slender.

Looking in detail at sales and profitability across different profit centres

The firm’s overall profit figures are perhaps quite troubling, especially as the business relies upon retained profit to provide its long term finance (see measuring solvency below). But the average headline figure of a 2.76% operating profit margin conceals some important differences between various profit centres within the business. These are shown in the adapted version of appendix 1 below:

These findings are of immediate relevance in your consideration of the first two of the three objectives CCL have set out for 2014:

1. bringing the Rockingham Forest ‘Peddlers’ outlet to break-even by the end of the 2014 peak season.

2. increasing the proportion of revenue from e-commerce to 55% by the end of the 2014 financial year.

The first objective is reassuring, at least in the sense that Phil and the other shareholders have correctly identified the worst performing part of their business and want to take action to stem the losses being incurred at the Rockingham Forest ‘Peddlers’ outlet. Therefore this objective seems entirely reasonable. We will look at monthly performance in all the profit centres over the next couple of pages. A quick glance at the table above shows that operating profit margins are the highest in the other two Peddlers’ outlets. Neither of the Maillot Jaune outlets performs very well – they only just break even, with the most slender of profit margins.

Perhaps most interesting is the performance of the e-commerce profit centre, which is the subject of the second objective. It is also reporting a very low operating profit margin of a mere 1.83%. Perhaps Phil and the shareholders are misguided to pursue growth in this area. It currently accounts



for 51.5% of revenue, so growth towards the 55% revenue objective certainly looks feasible. But is it desirable? We will return to this point - and these objectives - later in the toolkit.



Cavendish Cycles Ltd

This graph shows the revenue stream over 12 months across the whole of CCL’s business. There are two main points of interest to identify.

The first is that – in common with many retailers – CCL enjoy a Christmas surge in sales, reflected in higher revenues, in November especially. But this sales surge is dwarfed by a huge uplift in business from May into June and July, before beginning to fade in August and September. CCL is a profoundly seasonal business.

Maillot Jaune - Oakford

Maillot Jaune – Market Harworth

The time series linear trend line that has been added to all the revenue figures is slightly misleading. Without exception, they show that revenue is on the upward trend over the course of 12 months in all profit centres.

This point allows you to make a shrewd observation about the potential pitfalls of time series analysis. This upward trend over 12 months is almost entirely a result of the nature of CCL’s revenue stream, which builds up as the summer approaches, at the end of the accounts reporting period.

To get a real picture of the revenue trends in each profit centre, it would be necessary to compare data over a longer period to even out these seasonal fluctuations.

The two Maillot Jaune outlets show strikingly similar revenue patterns, with a pronounced Christmas boost, and sales peaking in August.



Peddlers Reservoir

Peddlers Market Harworth

Peddlers Rockingham Forest

The Peddlers revenue figures are striking when viewed as a graph, rather than as a table.

All three Peddlers’ outlets bank a large share of their revenue in June, July and August. The upward sloping trend line is potentially misleading.

The revenue data for the Reservoir and Market Harworth centres show revenue ticking over for nine months of the year before booming in the summer.

Interestingly, the Rockingham Forest revenue trends are not dissimilar for the quiet nine months of the year. The main difference seems to be that the summer boom is not as pronounced as at the other two centres.

This provides us with quite a strong indication of how CCL might make progress towards their second objective. They could find ways of boosting revenue during the quiet months, which would probably be a fairly challenging marketing goal. Perhaps a stronger suggestion is to find ways to boost the summer peak – possibly even by diverting business from the two sometimes overstretched Peddlers’ centres in the summer.

We return to this discussion in the overage of price discrimination later in this toolkit.

E-commerce

The E-commerce profit centre also shows a significant revenue boost over the summer period, but this sales peak is also captured briefly in the month of November, with a boost from Christmas takings.

This Christmas sales surge gives an extra dimension to CCL’s first stated objective – to boost e-commerce revenues in 2014. Although profit margins are currently slender, revenues and profits are high (in absolute terms) and are partially generated outside the peak summer



season, on which CCL utterly depends.

Measuring Liquidity Concern over liquidity means asking: are current assets bigger than current liabilities? By how much? The simplest way of measuring this is to subtract current liabilities from current assets. That value is called net current assets. It is the firm’s current spending power and is shown on the balance sheet in Appendix 3 Equally well, you might ask “how large are the firm’s current assets compared to current liabilities?” This is called the Current Ratio. Divide current assets by current liabilities. If the answer is more than 1, the firm is solvent. Less than 1 means insolvent. If you want to be really tough, do the acid test. It’s the same as above, but this time doesn’t include stock when you add up current assets. If the answer is more than 1, the firm is comfortably liquid. Less than 1 could spell trouble.

Net current

assets: £2737k

Current ratio:

2.9

Acid test 0.88

CCL appear to be in a comfortable, liquid position, assuming that they can readily turn their stock into sales. CCL’s current - or liquid - assets are dominated by their stocks, which represent over 69% of their total current assets. Cash represents a mere 4% of their current asset total. This figure could be quite troubling, especially in the light of the seasonal nature of their operations.

Measuring Solvency We’ve already looked at the relationship between short term debt (current liabilities) and current assets (funds that are cash or nearly cash). These issues are measured using the current ratio or the acid test. But long term debt is a different creature. The recent credit crunch showed how easily people were fooled by big, growing businesses, stuffed with assets and generating cash. But beneath the surface was a gigantic mountain of debt.

The key to measuring the size of a debt mountain is to add up all the long term debt on the books and see what proportion of total long term funding this represents. Formula: Long term liabilities/total long term funding x 100 Interest cover is used to help decide if a business can afford to repay a loan. The ratio measures the number of times in which a business can pay its interest charges with the operating profit it makes. Formula: operating profit/interest payable

Gearing: 0%

Interest cover:

n/a



“High on his list of dislikes is utility companies and banks … (Phil’s) views are imposed on CCL to such an extent that it has no bank borrowing and it has been, and will continue to be, zero geared. Hence, the business’ growth has been internally funded” (lines 38-39).

“Although this may have resulted in a relatively modest rate of growth for CCL, the shareholders (all of whom are members of Phil’s family) felt the benefit during the banking crisis which began in 2008. With no debt, CCL did not have to worry about continued access to long term capital” (lines 44-46).

Phil has made a clear decision. By opting to avoid bank borrowing his business is left with no debt, and no interest to pay. Was this a sensible choice? It sounds virtuous – perhaps even wise - but has CCL condemned itself to a slow path of growth, simply to indulge Phil’s personal prejudices?



The most fundamental measure of business financial performance and efficiency is Return on Capital Employed, or ROCE. This measures what comes out (profit) to what goes in (capital). The higher the percentage the better and the more efficient the business is in turning capital into profit. Divide profit before interest and tax (we’ve used operating profit figures here) by capital employed, expressed as %. Return on Equity, or ROE is subtlety different. Capital is a measure of both equity and debt. ROE just focusses on the amount the shareholders are getting back on their money (share capital invested and retained profits). The figure is net profit/equity shareholders’ funds, expressed as a %. (again, operating profit has been used in this calculation).

ROCE:

11.24% (approx.)

ROE: 11.24%

(approx.)

The reason the two figures match is because the amount of equity invested in CCL is the same as the total amount of capital – there is no long term debt in the company’s balance sheet. The shareholders are getting approximately an 11% return on their personal equity investment (the figure is approximate because in this calculation we’ve used an operating profit figure). It’s really very hard to judge how ‘good’ this performance is. This is the comparison problem – to measure the success of CCL we need to compare these figures to a previous year, or a similar competitor business. About the only thing we can say with confidence is that an 11% return is good - as compared to the type of return the investor’s might get if they put their equity into a bank savings account.

Measuring Activity/Efficiency

More now on measuring efficiency. This is all about how quickly processes operate in a firm. Asset turnover is a measure of how efficiently a business is able to use its assets to generate sales revenue). Formula: sales revenue/fixed assets Stock turnover is about how many times did CCL fill its stock cupboard and then empty it? You measure this by taking the sales figures and dividing by the average amount of stock held. Formula: Revenues/stock Debtor days asks how big is the debtor figures compared to sales i.e. how many days’ worth of sales would it take to account for the money owed to the business – the lower the better. Formula: debtors/sales * 365 Creditor days asks how large is the sum owed to creditors compared to variable costs i.e. how many days’ worth of running up variable costs would it take to account for the money owed to the business – the higher the better Formula: creditors/variable costs (or purchases or similar) * 365

Fixed Asset turnover:

25.2

Stock turnover: 4.57

Debtor days: 30.4

Creditor days: 90.6



Again, we encounter the comparison problem, making it hard to make an absolute judgement on some of these values. However, a few points stand out:

• CCL have a very low level of fixed assets relative to their sales income. In fact their sales income is 25 times bigger than their fixed assets. The company is excellent at working those assets.

• As mentioned in the earlier section on liquidity, CCL is carrying rather a lot of stock, if it only attains a stock turnover value of less than five. On average it is holding stock for over two months. The company is inefficient in the amount of money it has ‘tied up’ in this way.

• CCL have an average performance in terms of debtor days. Their debtors owe a sum equivalent to about a month’s sales figures.

• CCL have bought a lot of goods on credit. This could be seen as a measure of success on some levels, as it usually represents an interest free loan. They have bought goods equivalent to almost three months’ worth of variable costs. Phil’s objection to borrowing obviously does not extend to short term finance. CCL is absolutely loaded up on credit. This needn’t be seen as a problem unless the firm finds it hard to continue to get such generous support from suppliers. If credit terms were less generous, CCL would need to be more self-financing in the short term. It would need to either have fewer debtors (to whom CCL have sold on credit), and/or hold less stock.

Shareholder Ratios What is the dividend per share? Total Dividend/total number of shares. Dividend yield, which measures how big is the dividend, compared to the price of a share: Formula: dividend/share price x 100 Price to earnings ratio: This is the best measure really. It compares the market price of a share with the net profit per share. Formula: market price of 1 share/the net profit per share (note that is very slightly different to dividend per share. It’s a helpful measure because firms don’t always pay a dividend).

Dividend per

share: N/A

Dividend yield N/A

Price/earnings ratio: N/A

These ratios are of most interest to the shareholders, who will already have taken a close interest in measures like net profit margin, gearing, current ratio, return on capital employed etc. The case study provides no data that would allow us to make a calculation for any of these ratios. One conclusion you could draw is that you will not have to prepare an answer on this topic for the summer exam. You may wish to disregard the next few lines, which contain example figures.

• Suppose there are 100,000 shares in CCL (each was initially sold at a price of £1) • Currently shares in the company are worth £30 • CCL made a net profit of £300,000 • They decide to pay a total dividend of half that net profit, or £150,000

With those values, you should be able to work out dividend per share (£1.50), dividend yield (5%) and price/earnings ratio (10).



Financial analysis of the proposal to install solar panels “To further reduce CCL’s carbon footprint, Sam Tipper, Manager of the Rockingham Forest outlet, has been investigating the installation of solar photovoltaic panels” (lines 100-101).

“Ten panels would cost approximately £15 000 and yield an energy saving of about £1200 per annum. Installations for the other two Peddlers outlets would be possible at an additional capital cost of £35 000 and would give similar energy savings” (lines 102-104).

Even a quick glance at these figures shows that this suggestion does not represent a sound investment in purely financial terms. The figures are very sketchy, but go far enough to show that the installation of solar panels at the Rockingham Forest outlet would take twelve and a half years to pay back, which is way beyond any reasonable time horizon for this type of investment (and the solar panels might not even last that long). Installations for the other two Peddlers outlets look an even worse bet: a similar cost saving, but from an even larger investment. On financial terms this suggestion should probably be rejected.

Financial analysis of the proposal to operate a golf pro shop - table 3

Year Cash flow, net receipts, £0 40,000£ 1 8,000£ 2 10,000£ 3 12,000£ 4 12,000£ Payback after 3 years 10 months5 12,000£

revenues £54,000 stage 1: calculate total revenuesprofit £14,000 stage 2: work out profit

average profit per annum £2,800 stage 3: calculate profit per annum

profit per annum as % of investment 7.0% express as % return on investment The data presented here tackles the question of investment appraisal using two techniques you should remember from F292 – payback period and ARR. On a quantitative, financial level this proposal has something to recommend it. A 7% return doesn’t quite match the overall 11% (approx.) ROE generated by the business as a whole, but it comes close. Payback is forecast within a reasonable time frame.

Seen as a whole, these important financial observations are likely to significantly influence the conclusions you may draw later with regard to both short and long term aims and goals for CCL.



Financial summary

Sales income 13293Variable costs 5858Gross profit 7435 Gross profit margin 55.9%Expenses 7068Operating Profit 367 Operating profit margin 2.76%

Fixed Assets Fixed Asset turnover 25.2Premises 500Equipment 27Total Fixed Assets 527

Current AssetsStock 2908 Stock Turnover 4.57Debtors 1108 Debtor days 30.4Cash 175Total Current Assets 4191 Current ratio 2.9

Acid Test 0.88Current LiabilitiesTrade creditors 1454 Creditor days 90.6

Net Current Assets 2737

Net Assets 3264 Gearing 0%Interest cover NA

EquityShare capital 100 ROE 11.24%Profit and loss account 3164Equity Shareholders’ Funds 3264 ROCE 11.24%



The Economic Environment

The case study tells us that Phil is “always mindful of the external environment when establishing CCL’s strategy” (line 52). The main external environment concern for CCL in is almost certainly the state of the economy. “With economic growth likely to remain uncertain for some time to come, (Phil) is concerned that the outlook for CCL is far from secure, especially as many of CCL’s customers rely on discretionary income to make their purchases. So, whilst life-style remains a key driver for demand, Phil knows it can only continue if customers actually have the cash to spend” (lines 114-118). The key economic indicators presented in table 1 of the case study are reproduced here. What follows is a discussion of what these and other relevant indicators might mean for CCL.

Year East Midlands unemployment rate %

Annual rate of inflation (UK) %

Annual rate of GDP growth (UK)

2009 7.4 -1.6 -0.7 2010 7.4 5.0 1.1 2011 7.9 5.3 0.1

2012 forecast 8.0 2.4 0.1

Perhaps the single most obvious observation you can make is that the economy is currently recovering – slowly –from a deep recession in which GDP (the main measure of economic activity) took a big hit.

It’s interesting that the data we have describes CCL’s revenue growth from 2009 onwards, which you can see clearly covers a period in which economic activity has been very depressed. Perhaps Phil is too pessimistic about the ability of the business to grow sales in the near future. If CCL have thrived and managed to double their turnover during such a difficult time, there’s perhaps good reason to be more cheerful about future prospects for the business in the immediate future as the economic recovery gathers pace.



However, as most analysts are keen to point out, people’s confidence about the future is almost as important as consideration of what is really happening in the economy.

In short, confidence is still very depressed, and it’s confidence that people need in order to splash out with their “discretionary” income to make purchases. This term might be used to describe the money households can choose how to spend after having covered the mortgage, groceries, motoring expenses and energy bills. It’s this discretionary income that has the potential to become revenue for CCL.

Relatively high levels of unemployment continue, and it may be 2-3 years into the recovery before they really start to fall. High levels of unemployment will continue to put downward pressure on earnings, crush confidence and encourage saving.



Discretionary spending has also been squeezed by stubbornly high consumer price inflation, forcing up the cost of the ‘basket of goods’ UK households regularly consume. It’s currently uncertain where inflation is headed next, but it’s unlikely to be falling sharply any time in the near future.

The ‘base’ interest rate is controlled by the Bank of England and is described as monetary policy. “Changes in UK monetary policy have no cost implication for CCL (because they have no long term debt); although it does have an impact on its revenue stream because of customers’ confidence and willingness to spend” (lines 47-48). At the moment it seems highly uncertain how monetary policy has any power to break the cycle that has so depressed the economy (illustrated left).

One last consideration could be the value of the £ - the exchange rate. 2009 is again significant: a year in which the exchange rate dived, forcing up the price of any goods that CCL imported from overseas. What happens next to exchange rates will both influence the price of goods CCL imports, and how attractive CCL’s e-commerce offer is to foreign buyers.



The economic environment: summary of its impact on CCL

• The UK economy – as measured by GDP – remains weak, but is perhaps recovering from one of its longest periods of recession in recent history. Paradoxically however, this period from 2009 has corresponded with a doubling of revenue at CCL. The company has actually thrived through the downturn. The economy could now be through the worst, so might Phil be a bit more optimistic about the future growth potential of his business?

• Confidence in the UK economy IS still weak, and that has a significant impact on consumers’ willingness to part with discretionary cash. Low interest rates don’t influence CCL directly (they have no long term debt) but it might boost the spending power of households a little. A revival of the banking sector, the housing market and improved consumer access to credit are all probably more important to CCL’s revenues than a low headline interest rate.

• Unemployment remains a worry, and rates have yet to come down from their (probable) peak. Unemployment has stayed stubbornly high in the East Midlands (Table 1).

• Inflation is probably the greatest uncertainty facing CCL. Higher rates of inflation will be likely to push up their costs, and squeeze household discretionary income.

What unexpected effects might the economic environment have on CCL? There’s a conventional view, expressed by Phil, that the economic environment is crucial. It probably is, but perhaps not in the way he expects. For instance, an increasing squeeze on household budgets through higher inflation, rising fuel bills and stagnant wages might serve to boost the popularity of cycling. A falling exchange rate, making foreign holiday pricier might encourage more leisure activity in the UK. Critically, we’re all aware how over the last 5 years, price conscious consumers have shifted in even great numbers towards the internet, possibly boosting CCL’s e-commerce operation.

Qualitative considerations, including ethics and CSR at CCL

The previous paragraph was intended to provoke you into thinking outside a conventional framework, an approach which can – if used carefully – be a great way to draw out the type of evaluative “it depends” comments that can turn a good answer into a great one. After spending several pages mainly focussing on quantitative analysis (with a discussion and practice decision tree still to come), it’s time to remind ourselves of a qualitative dimension to decision making, where subjective opinion counts every bit as much as objective facts.

Consider the decision to install solar panels at Peddlers’ centres. This investment choice fails as an objective test, yet “by its very nature, CCL is a business with a low carbon footprint. Recent growth in both sales and hire are, in part, attributable to shifts in society’s values” (lines 92-93). This statement serves as a reminder of the importance of values and opinions in shaping wider goals.

The establishment of Peddlers’ at Rockingham Forest was also influenced by values, “the forestry owners (knew of) CCL’s reputation and integrity, approached CCL with a proposal to open a small, ten year rent free, hire and sales outlet” (lines 10-11).



Clearly – and possibly controversially – this is a reminder that ethics and values can be a source of competitive advantage too. For example, the debate about environmental ‘sustainability’ began by taking an ethical standpoint. Yet after a few years it became simple good sense. Firms recognised that sustainable business approaches were fundamentally about reducing resource use and therefore costs. Consumers, in turn, were drawn towards firms promoting their sustainable credentials. Now most firms try to move in this direction. It helps both costs and revenues.

These related points are raised in the case study:

• “Peddlers used to offer helmet hire for £1. However, last year it was decided to hire helmets for a £1.50 donation to one of two charities ... Despite the increase in fees, Peddlers saw helmet hire rise by 25%. Encouraged by this experience, CCL decided to donate £5 to charity for every helmet sold. An unintended consequence of this decision was some regional publicity for the business” (lines 83-87).

This example is illustrative of the way in which a business operating with clear values can secure advantage, even if the outcome was not intended.

• “Phil believes that CCL acts ethically in its relationships with all of its stakeholders. However, sometimes there is a fine line between good commercial practice and ethics, with price discrimination being a case in point. Like many businesses which face changes in market demand, both across the year (peak and off-peak) and on a weekly (weekday and weekend) basis, CCL has a pricing structure for its hire business, ‘Peddlers’, which varies with time” (lines 72-76).

Price discrimination refers to charging different customers different prices based on their willingness or ability to pay. Whilst the term ‘discrimination’ can make this approach seem nasty or unethical, it is a reality of business life. It would be astonishing if a restaurant did not charge a price premium for dinner on Valentines’ Day, or a hotel over Christmas and New Year. Equally, price discrimination often leads to discounts for some groups, like off-peak users. It would be a struggle to describe CCL’s approach as unethical. It doesn’t even use discriminatory pricing for children’s’ or ‘all day’ hire.

In fact, price discrimination could be used by the business in a way that is positive – to the extent that it could even be seen to work to consumers’ advantage. Consider this point:

• “During the peak season the Peddlers outlets open from 8am to dusk. Despite these long opening hours, the bulk of the hires occur between 10am and 6pm, and, especially on warm summer weekends, significant queues for the hire of bicycles can develop” (lines 79-81).

Why should customers have to endure queues? Couldn’t a more flexible pricing structure help balance out fluctuations in demand? Flexible pricing could be very helpful in trying to generate more stable revenue streams over the course of a year, dampening demand when it is too high and stimulating it during very slack periods. This could help both CCL and its customers.

More crucially, such a policy could be employed to help CCL achieve its second objective – break even at the Rockingham Forest Peddlers’ centre. Targeted discounts – lower prices at Rockingham Forest – could help shift demand away from the other two congested Peddlers’ centres.



SWOT summary of CCL’s current position

Strengths

Weaknesses

CCL have enjoyed strong revenue growth over the last few years, at a time when the economy has been very weak. The company is profitable. CCL have an enviable ‘small business culture’ that supports the efficient and effective running of the business, and provides a competitive advantage in the marketplace. By avoiding long term debt CCL has taken the slow path to growth, but is therefore not a hostage to accessing long term bank funding. The firm has successfully secured a very high level of short term credit funding, allowing it to minimise its cash balance whilst carrying a relatively high level of stock.

CCL have wafer-thin operating profit margins. CCL’s second objective - increasing the proportion of revenue from e-commerce to 55% - places a determined focus on one of the least profitable parts of the business. CCL’s third objective – “becoming the number one bicycle retailer in the East Midlands” is vague, unspecific and probably an unattainable distraction. The supportive business culture that exists at CCL – which has served the company so well up until now - might be threatened by the further growth and development of the business.

Opportunities

Threats

CCL are poised to take full advantage of the growth in e-commerce sweeping the UK. New opportunities exist in opening up a new golf pro shop which will further diversify the business. The Rockingham Forest branch of Peddlers’ should be well placed to pick up extra revenue and move towards break even in 2014. To some extent, CCL are insulated from economic threats. If the economy recovers strongly, consumers will have more discretionary income. If it stalls this may only serve to enhance the popularity of the cycling lifestyle. Merging the brands, ‘Maillot Jaune’ and ‘Peddlers’, into a single identity – ‘Summit Cycles’ may generate helpful synergies.

CCL’s Maillot Jaune outlets are only just breaking even. In common with many High Street retailers, they are under threat from online sales. It’s far less likely that CCL’s distinctive culture and consumer-lead business philosophy can be communicated to its web customers, compared to the Maillot Jaune and Peddlers’ operations. The firm needs to capture a slice of customers’ discretionary spending, which may be put to other uses. The company has grown on a rising tide in which cycling has become more popular, but social trends of this nature can very often fade, or be reversed quite quickly. By being heavily dependent on short term creditor finance, CCL could be vulnerable if suppliers offer less generous terms.



Business decision making and implementing change at CCL

Before you go on, it’s recommended that you become fully familiar with the material discussed earlier in this toolkit. With a great deal of analysis now complete, you’re in a more informed position to offer advice (and cautionary words) to CCL as they make their plans to pursue various objectives and initiatives. The final discussion in this exam toolkit has to cover their relative merits.

• Firstly, let’s remember the first two objectives CCL have established for 2014, namely bringing the Rockingham Forest ‘Peddlers’ outlet to break-even by the end of the 2014 peak season and increasing the proportion of revenue from e-commerce to 55% by the end of the 2014 financial year.

• Secondly is a proposal to install solar panels at the Peddlers’ outlets. • Thirdly, the Finance Director “believes that CCL should diversify. A five year lease to operate

the golf pro shop at Market Harworth Golf Club is about to come on the market. His view is that there are many synergies between the two businesses, not least in retail management and merchandising. Further, CCL’s experience in e-commerce could make it a very exciting venture. Discreet enquiries suggest that with some hard bargaining the shop could be acquired as a going concern” (lines 105-110).

• Fourthly, CCL’s marketing manager “is very keen to merge both brands, ‘Maillot Jaune’ and ‘Peddlers’, into a single identity – ‘Summit Cycles’. Phil, however, thinks that there would be little to be gained by such a move, yet an awful lot to lose. He is more focused on managing the growth in e-commerce sales, and CCL’s other objectives for 2014” (lines 111-114).

• Lastly, CCL have established the vague objective of ‘becoming the number one bicycle retailer in the East Midlands’. This is so open-ended and unspecific it seems far more like an expression of a long term aim or goal. It might even be quoted as a mission statement – an aspirational expression of where CCL eventually want to end up.

Ansoff’s Matrix can be a helpful tool as a framework to think about some of these choices.

CCL is a successful business, and they naturally want to build on that success. Current objectives (listed firstly above) are all about existing product and existing markets (as is the proposal listed secondly). These market penetration choices are essentially the lowest risk.

The ‘diversification’ move described fourthly isn’t an entirely radical leap into the unknown.

CCL would really only be making a very limited move into new markets and new products, and their financial commitment of £40,000 somewhat reduces their exposure to risk. Phil is probably right to



identify that the proposal to merge brands, whilst perhaps best described as a step towards future market development - really does pose the highest risk to the company.



Assessing the options

Proposal or objective

Advantages

Disadvantages

Bring the Rockingham Forest ‘Peddlers’ outlet to break-even by the end of the 2014. Increasing the proportion of revenue from e-commerce to 55% by the end of the 2014 financial year

This objective should be relatively easy to achieve by 2014, and it addresses the CCL profit centre which is clearly underperforming at the moment. Perhaps demand can be shifted away from the other two Peddlers’ centres, where demand is sometimes too high. Changes to Peddlers’ pricing structure might be the best way to achieve this objective. The other two Peddler’ centres are a proven success; CCL are building on a known business formula. E-commerce already represents over half of CCL’s revenues. E-commerce is growing strongly. Revenue peaks towards Christmas, as well as in summer.

Given enough time, the relatively new Rockingham Forest may well move towards break even without the necessity of establishing this as a priority objective. Moving demand away from the other two (highly successful) Peddlers’ outlets may prove counter-productive. Changes to pricing structures (recommended left) may confuse or alienate customers. The Peddlers’ centres have a highly seasonal revenue stream, and building this side of the business intensifies that problem. Profit margins are as just as thin as the ‘bricks and mortar’ Maillot Jaune. It may be harder to communicate CCL’s special culture and customer service to online customers.

Install solar panels at the Peddlers’ outlets.

As an ‘ethical’ business decision, the installation of solar panels could enhance CCL’s image as a ‘lifestyle’ company. Phil dislikes utility companies, so he might be happy to support this investment despite its financial flaws (see right).

The proposal probably can’t be defended on a financial basis (payback is over a decade and ARR is probably negative). Attempts to appear as an ‘ethical’ business can alienate some customers who suspect ‘green wash’ being used as a PR stunt.

Operate the golf pro shop at Market Harworth Golf Club.

This option builds on CCL’s proven strengths and allows them to take their successful business formula in a new direction. This is a relatively safe form of diversification. The financial commitment is quite small and the new markets and products are not a significant shift from current

Is ‘bricks and mortar’ retailing the place to be? Although CCL have a distinctive culture and customer focussed approach, it isn’t hugely financially successful. Profit margins at both ‘Maillot Jaune’ outlets are very thin. Would more focus on this operation distract from developing the e-commerce side of the business?



Continued overleaf Operate the golf pro shop at Market Harworth Golf Club (continued)

ones. The move may generate cost saving ‘synergies’. Operating on a 5 year lease gives CCL scope to exit from this strategy if it proves unsuccessful.

Financial projections (table 3) are not terribly exciting (7% ARR and payback in just under 4 years). Many firms find that the ‘synergies’ they hope to capture through growth and mergers are hard to achieve in practice.

Merge both brands, ‘Maillot Jaune’ and ‘Peddlers’, into a single identity.

Mergers often have the potential to generate economies of scale - and you may wish to give some thought to what these might be. In addition to cost savings, the move is clearly intended as a way of boosting revenue too, by creating a distinct identity, supporting the marketing of the business. This may be especially helpful if the business plans for more growth.

As Phil points out, the advantages of the proposal aren’t entirely clear (that doesn’t mean there aren’t any), but there are clear risks. The move could simply confuse stakeholders. The move is likely to be costly, and should be seen as an investment that probably merits a more detailed appraisal. More information – both qualitative and quantitative – is necessary.

Develop a promotional strategy for 2014.

The vaguest of all the objectives outlined in the case study; ‘becoming the number one bicycle retailer in the East Midlands’ is perhaps better expressed as a goal or corporate ‘mission’. You are invited to use a decision tree to evaluate the best way of promoting CCL (see below).

The choices for your consideration are:

1. sponsoring a regional bicycle race and so securing naming rights 2. sponsoring a team in that race 3. using above-the-line promotion 4. using the marketing budget to subsidise retail prices and so offer targeted discounts on a number of key lines.

Over the next few pages we’ll take you through the use of decision trees: how to perform the calculation, as some words of caution in the way you interpret your findings.

There was an error in Fig. 1 of the pre-release Case Study which was initially issued to centres. From node 4, the top branch previously read as £2200. This should read as £22 000. From node 5, the top branch previously read as £2000. This should read as £20 000.





Making effective use of the decision tree The purpose of a decision tree is to lay out potential investment choices and determine their estimated monetary value (EMV) based on:

• The cost of pursuing the proposal. • The financial returns of each option (split in the case study into three potential outcomes:

“good returns”, “average returns” and “poor returns”). • The probability of each outcome.

You need to be alert to the very high chance that one of your examination questions will be based on this decision tree. There are essentially two questions that you could be asked. The first is quantitative, where you will be asked to perform a calculation. The second is qualitative, where you are asked about the usefulness of this concept in the context of decision making at CCL.

For this reason, the mock exam paper included at the end of this toolkit includes a decision tree with the “missing values” included. Obviously, the values we have included are for illustrative purposes only and must not be revised. Instead, you should take the opportunity to complete the necessary calculations. The answers are provided on page 34.

Method:

• Stage 1 when you calculate an EMV is to multiply the potential return of a choice by the

probability of that choice occurring. For instance, consider one of the four possible decisions, the choice about using ‘above the line’ promotion’. If, for example, the outcome “good returns” which has a potential return of £20,000 was assigned a probability of 30%, you would multiply £20,000 by 0.3 = £6,000. Then do the same for the “average returns” and “poor returns” options.

• In Stage 2, add all three values up (and subtract from that total the cost of the “additional sponsorship” options on nodes 8 and 11) to determine the total EMV for that node.

• In Stage 3, Phil has to decide if the additional sponsorship is worth it. Check the EMV you have calculated on nodes 8 and 9 and reject the proposal with the lowest EMV. Do the same when deciding between nodes 11 and 12. Now multiply the non-rejected values by the probability of “media interest” or “little media interest”. (Stage 3 can be left out for the choices of ‘above the line promotion and ‘targeted discounts’ as this is not a consideration).

• In Stage 4 you should add together all your remaining EMVs on each of the four possible decisions. (That means you’ll either add 8 or 9 to node 10 - and you’ll either add 11 or 12 to node 13. You’ve done 4 and 5 already). Finally subtract the investment cost of each proposal (so either £2,000, £4,000, £5,000 or £10,000) and you have completed the decision tree! The highest EMV represents the ‘best’ decision… although that is very open to the qualitative discussion that almost certain to follow.



Decision trees – the qualitative dimension

These models generate lots of interesting ‘what if’ and ‘it depends’ responses that give you a chance to make some excellent evaluative points in the context of the CCL case study:

• How do you determine probabilities for outcomes that are crucial – and highly uncertain? And what about risk? Sometimes a decision tree shows you the ‘best’ option in EMV terms, concealing the fact that it is in fact very high risk, or very unlikely to be so lucrative. A ‘second best’ option might offer a slightly lower EMV, but be a far more likely outcome.

• Similarly, how are the financial returns that each outcome may generate estimated? Many of these figures may be little more than educated guesses. Closely connected to this is the issue of costs, which may be higher or lower than anticipated.

• Over what timescale are the investment values calculated? • This tool is (unashamedly) financial in its focus. That is a huge strength, on one level. But it

largely disregards issues such as marketing, public relations, stakeholder relationships and staff organisation, management and motivation for instance.

For these reasons, decision trees can only ever be a guide to decision making.

Have you guessed where it is yet?!

Throughout the case study you’ve been invited to think about the area in which CCL operates, and its characteristics. Here’s an educated guess as to the real places that have inspired the CCL case study. Of course, you shouldn’t take this too seriously, or base your answers on these real locations. Oakham (or Oakford in the case study) is marked by the blue dot in the centre of the map.



Exam Overview

“This unit is compulsory and designed to complete the Advanced GCE A-Level in Business Studies. The unifying theme is choosing and justifying strategy and as such candidates are expected to demonstrate an analytical and evaluative approach to content introduced in the unit, and to that introduced in the AS GCE units F291 and F292. Candidates are also expected to draw upon, where appropriate, the knowledge which they acquire through their study of one of the A2 optional units (F293 – F296).” (Source: OCR GCE Business Studies specification)

Exam Structure

• 30% of Advanced GCE marks • 2 hour written paper • 90 marks • Four questions based on pre-release case study material • One of the four questions will contain a numerical element • 120 UMS marks available

Question style

• 4 longer length essay style questions • Marks range from 13 to 23 (Q4) • Q1 comprised of two parts a) and b)



• Q1 a) the numerical element, no evaluation marks available. • 28 evaluation marks spread evenly amongst the remaining questions.

Application Analysis & Evaluation

The analysis offered in this toolkit is not intended to be an exhaustive list of all the potential issues – everyone reading the case study will identify their own points about issues they believe are important.

The key point to remember: an effective exam answer in F297

• addresses the specific question asked (you must answer the question). • is directed to evidence in the case study (application) rather than making general points or

lists. • develops a small number of well-argued points in sufficient detail (analysis). • expresses an opinion on the question posed, supported by a balanced appraisal of the

analysis.



Exam Technique Advice

The Case Study

Read it, read it and read it again. Then read it again. Learn it as much as you can – better knowledge of the case study will save you time in the exam and allow you to have a better discussion and understanding of the key topics. The examiner spent a long time writing this case study – so it must be used effectively. Do NOT just give the ‘text-book’ answer, everything you write should be applied and put into the context of CCL.

React to the question set

As an examiner, it is a great pity when we have to write NAQ (not answering question) on a pupil’s work. Make sure you read the question carefully and answer it!

Essay Plans

It is a good idea to make a brief plan – but plans should be brief – allocate a couple of minutes to organise your thoughts.

Timing

Timing is crucially important and this is one of the most common failings of students in the exam hall. Quality not quantity is what counts – it is not a race to fill the answer booklet and any supplementary pages!

Practice

There is no substitute for writing timed answers to practice essay questions and then having them marked your teachers. Knowing what you can realistically achieve for each question in a timed essay is hugely important before you step into the exam hall. If possible practice a two-hour mock practice paper, your teachers can help you with this and it will benefit you in the long run. A mock exam paper is included in the appendix at the end of the toolkit.

Mark schemes



This is a ‘levels of response’ paper – in essays you must evaluate, with reasoned judgment, effectively for the top marks. According to OCR, candidates are expected to demonstrate the following in the context of the content described:

AO1 Demonstrate knowledge and understanding

Demonstrate knowledge and understanding of the specified content;

AO2 Apply knowledge and understanding

Apply knowledge and understanding to problems and issues arising from both familiar and unfamiliar situations;

AO3 Analyse Analyse problems, issues and situations;

AO4 Evaluate Evaluate: distinguish between, and assess appropriateness of, fact and opinion, and judge information from a variety of sources.

A typical F297 will allocate the 90 marks on offer as follows:

More on AO3 - Analysis

Analysis involves making well-reasoned, step-by-step arguments using appropriate business studies tools & concepts. To get your marks for analysis, you will need to:

• Make a point • Explain why the point is important • Explain the significance of this to ….

Your examiner will see that you are analysing when you are doing any of the following:

• The causes are….the possible consequences are….. • The advantages for CCL are….the disadvantages for CCL are….. • On the one hand CCL may……on the other hand, they may……. • The data for CCL shows that…..on the other hand, it may suggest…… • This is likely to lead to……..but it may lead to……… • In this case…..is an advantage because……



• The likelihood of this happening is……Consequently the business must…. • The trend in this case is…….shown by…… data

Analysis is about how you consider the ‘ifs and buts” as well as the “however and maybe”. You should view your written answers as your conversation with the examiner. Imagine how it would sound if you read a list of bullet points aloud - is this what you want your examiner to hear?

More on AO4 – Evaluation

Evaluation is the hardest skill of all. Very few candidates develop their skills of evaluation which is why it is awarded the highest grade when examiners see it. All questions (aside from the numerical element) require the candidate to undertake significant evaluation- 7 marks are available per question. Evaluation means giving your final judgements after dismissing all other arguments and saying why the judgement you have made is superior to all others. To do this, you must be knowledgeable about all the other arguments over which you are claiming superiority.

It is not enough to use a trigger phrase and to expect the examiner to award the highest mark – the examiner wants to see a robust, developed argument that weighs up the critical points and then come to a conclusion as to which is likely to be most significant – given the circumstances of the case study. You can demonstrate the skill of evaluation when, in the context of the case study, you:

• Make a small number of points pointing out the options and/or the issues • Justify which of several arguments are more persuasive and why • Comment on the reliability of data or information given • Support your judgement with evidence and draw conclusions from the evidence • Consider limiting factors e.g. feasibility, impact and internal and external constraints • Consider long term and short term issues • Discuss how objectives, internal and external constraints constrain decision making

Examples of trigger phrases demonstrating evaluation include:

• Overall, the greatest effect this will have on CCL is……because… • The extent of the impact will depend upon …. • Whether this happens depends upon …. • In the short run… but in the long run… • The most important issue/factor is… because… so… • In addition, CCL needs to consider …. and ….

Remember evaluation means weighing up options and making a recommendation. There is no ‘one best option’. It all depends on the circumstances of the CCL business in the case study.

Special thanks to Ellie Murphy, Sami Haycox and Alice Finch for providing extra analysis, comments, corrections and excel data entry for this toolkit.





OCR F297 June 2013 Mock Paper

Data available on the day – see the complete decision tree overleaf:

1 a) Using the decision tree data presented overleaf, calculate which of the four choices that are presented offers the highest EMV. [13]

b) To what extent should CCL be guided towards business decisions by different types of quantitative analysis? [18]

2. Discuss the most effective initiatives CCL could implement in order to achieve their objective of “becoming the number one bicycle retailer in the East Midlands”. [18]

3. Evaluate the extent to which economic changes might impact on the future success of CCL. [18]

4. Discuss the importance of an ‘ethical’ approach to business at CCL. [23]



Mock exam hand out – sample decision tree



Working through the decision tree presented in the mock exam

Stage 1 Stage 2 Stage 3 Stage 4EMV EMV EMV

sponsor racemedia

interestadditional

sponsorship good returns 0.5 30,000£ 15,000£ 10,000£ 0.6 £ 1,500 average returns 0.4 18,000£ 7,200£ 21,900£ 13,140£

poor returns 0.1 12,000£ 1,200£ 9,140£

no additional sponsorship good returns 0.4 30,000£ 12,000£

£0 average returns 0.3 18,000£ 5,400£ 21,000£ rejectedpoor returns 0.3 12,000£ 3,600£

little media interest good returns 0.1 30,000£ 3,000£

0.4 average returns 0.2 18,000£ 3,600£ 15,000£ 6,000£ poor returns 0.7 12,000£ 8,400£

sponsor teammedia

interestadditional

sponsorship good returns 0.7 20,000£ 14,000£ 2,000£ 0.6 £ 1,500 average returns 0.2 12,000£ 2,400£ 15,700£ rejected

poor returns 0.1 8,000£ 800£

no additional sponsorship good returns 0.6 20,000£ 12,000£

£0 average returns 0.2 12,000£ 2,400£ 16,000£ 9,600£ poor returns 0.2 8,000£ 1,600£

13,680£

little media interest good returns 0.5 20,000£ 10,000£

0.4 average returns 0.3 12,000£ 3,600£ 15,200£ 6,080£ poor returns 0.2 8,000£ 1,600£

above the line promotion good returns 0.3 22,000£ 6,600£ 5,000£ average returns 0.5 18,000£ 9,000£ 18,400£ 13,400£

poor returns 0.2 14,000£ 2,800£

targeted discounts good returns 0.3 20,000£ 6,000£ 4,000£ average returns 0.4 16,000£ 6,400£ 16,600£ 12,600£

poor returns 0.3 14,000£ 4,200£

A method for working through this decision tree (taking you from stage 1 through to stage 4) is described on page 26.

At T2U we’ve ‘fixed’ the outcome of this decision tree to make one option ‘win’, but by a very narrow margin. Phil should sponsor a team, hoping for media interest (although if there is media interest, he shouldn’t bother to invest in extra sponsorship). Hopefully you can see how to turn this into an interesting discussion. There are plenty of other viable choices he could make. For instance,



investing in above the line promotion has far less uncertainty, and even the worst outcome isn’t too bad.

Documents

OCR F297 Toolkit June 2013.pdf