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Business IGCSE May 2017 Paper 1 Discussion

Hi, everyone!! Given below is a discussion of the Cambridge IGCSE Business Studies 2017 May Paper 1. The paper is centered on the following topics

  • Market Research
  • Marketing Mix
  • Liquidity
  • Demand and supply
  • Stakeholders and businesses
Mass Vs Niche Markets

Here’s a short explanation of the difference between niche and mass marketing.  For an example one of my favorite products the humble potato crisp as we know you can just about buy a pack of crisps in particular Walkers crisps anywhere; garages, supermarkets, news agents, you name it you’ll find Walkers crisps in just about every outlet and they’re a great example of a mass-market product.

Walkers has over 55% of the market for crisps in the UK. It’s owned by a very large multinational called Pepsi and whilst it’s got a wide product range of different flavors essentially you’re buying Walkers crisps. You know exactly what you’re getting. However, there are also quite a large number of smaller crisp operators who try to operate in a niche segment.

For example O’donnell’s here who have a range of gluten-free crisps- traditionally hand cooked as well and you won’t find them in anywhere near as many outlets. You’ll find them maybe in  one or two selected supermarkets. Some delicatessens possibly but nowhere near the same kind of distribution that the mass market leader Walkers has and that’s quite a nice illustration.

The mass market is the biggest part of the market where there are, there may be many similar products offered by a number of competitors. The market may be dominated as it is in crisps by one large producer or possibly dominated by two or three but the key thing here is the biggest part of the market and customer needs are less specific. Needs and wants are less specific compare that contrast that with a niche market.

Of the overall market, a niche or a niche market segment is a smaller path; a smaller segment of a larger market and the reason why it’s smaller is that customers; there are fewer of them. But, they have more specific needs and wants.

In this case, with crisps gluten-free, so what can we say?  The implications of targeting trying to operate in a mass-market because it’s the biggest part of the markets and because you’re dealing with customers who have relatively fewer specific needs and once you can afford to make your products less specific and you can afford to go for high production outputs.

So, the key to success in mass markets is to have low unit costs and exploit economies of scale using unit costs and even better if you can align that also with having a brand and a name that is ubiquitous. The chances are that you create a very strong competitive position that you’re serving the biggest part of the market with a brand, a product that most consumers recognize and value and demand.

Mass-market brands that have captured a significant share of the largest part of the market from Gillette razors to Heinz beans and complex. So, to be successful with mass marketing, what you need well because it’s them the largest market; you clearly need to be able to target the widest possible customer base. If you can, the rewards are huge because your sales should be significant – in theory talk successfully targeting at mass market is lower risk. You’re pulling all your resources focused on to a large market that has the biggest possibility of making returns for you and if as we’ve said you can achieve those economies of scale and reduce your unit costs.

You should be able to target a mass market profitably. Why would a business target a niche?

Well, mainly because in a niche market, the potential for higher profit margins and the potential for differentiation of your products and service is greater. This is because we’ve said that in a niche market segment, customers have more specific need to want. Therefore, they’re probably  looking for a more differentiated product.

If a business has specialist skills, specialist knowledge, is able to differentiate its products from the mass-market offerings that it may be able to charge a higher price and earn a higher profit margin albeit to customers who are smaller in number than in the mass-market but do well and you may benefit from more loyal customers.

Clearly the drawback of targeting your niche is that you’re not or you’re less likely to gain from economies of scale simply because the output you’ll be operating at isn’t sufficient to get unit cost down low. However, you might argue that by targeting a niche and succeeding in a niche you’re less likely to attract a competition though that’s just an overview of the concepts of niche and mass markets

Having read the above, also check out the below video for a quick sneak peek review of niche vs mass marketing.

Sectors of Business

There are three sectors that you need to know in business. They’re primary, secondary and tertiary. 

Primary sector-That’s about extracting raw materials. For example of that could be fishing,agriculture or mining for any sorts of natural resource. 

Secondary sector– That’s about manufacturing goods. You’re thinking here factories or it could beconstruction. Build buildings or it could be building infrastructure; so roads, train tracks, etc. 

Tertiary sector- Tertiary sector is about providing services. They could be retail services; banking services, there’s so many example of services in our economy which leads me to statistics- statisticsyou could use for an evaluation point.  The UK is heavily loaded towards a tertiary sector. 79% of our economy; the UK economy based on current data is tertiary sector, 20% is in the secondary sector and only 1% is in the primary sector.

Location Decisions for Businesses
Location Decisions for Businesses

Location is one of the most important things that businesses must decide on and we know already that location affects businesses. The way the customers will see the product and buy the product from will depend on the location. So, we have several factors that influence the location of the business.

 If we are choosing a location for the first time or if we’re trying to relocate a business and the thing that manufacturing and service businesses are not the same. So, of course, many things will differ. Especially, manufacturing businesses rely on infrastructure and facilities; roads, power supplies, water suppliers and all these things. So, they need to consider this before they locate or relocate. 

Factors affecting manufacturing businesses; I’m talking about businesses that produce goods of course Production method- for example job production businesses, they have less importance to be near components. So, if I am let’s say a dress designer, it’s not necessary to be near the supplier. But, if I’m using flow production, I need a huge amount of material to be there every day.So, that’s why I need to be near my suppliers. 

Market- If the product person is a percival product of course, I have to be near the market. The factor that I should consider as a manufacturing business; raw materials. I have to be as I said near the suppliers of raw materials I should consider this. I should consider external economies of scale. So, if you are near your suppliers, they will respond quickly to your breakdowns. It will be better of course. Maybe, this isan important thing for you. Maybe, I have to be near research departments; labor is important as well because I need to be in an area where Labor’s are available; skilled and unskilled.Remember I am a Manufacturing business.

 Government influence- It is the grants or subsidies that might affect my decision to locate. 

Transport and communication– I have to be near roads. So, of course if I’m a factory, it’s common sense says that I should be near roads, railways and all these things. I cannot like locate in the middle of the desert for example. 

Power supply and water supply, the climate-They sometimes affect my decision in locating like thedry climate and Silicon Valley in the United States. Of course, it allows the production of silicon chips. So,  here that climate is a Plains at all and just remember it’s a manufacturing business. I’m considering all this because I’m a factory, I’m a manufacturing business. If I’m a service business, I provide service. The first thing I consider, our customers; because I have to have a direct contact with my customers because it’s a service right and personal preference of owners of course plays. Sometimes, they have a business where they live, where they locate. 

Technology also affects the business. If it’s a service business when they locate because technology allows some businesses to be far from customers. So, it’s not necessary for a web designer to be in the middle of the town. For example, I can have my office on the borders because there is no need to be exactly near the customers. For example, availability of labor’s,  there’s important climate as well. If you are a restaurant, if you are a service business, you cannot locate far away because you need to be in here.

Business rent and tax has played a big role in choosing the location of your business and remember there are a lot of let’s say costs on you as a business. So, one of them will be the fixed cost related to rent for example. So, sometimes you benefit from lore and traits especially if you don’t need to be and let’s say expensive variant the middle of the city or a middle of our town for example. Shoppers for retailing businesses as important retailing businesses like furniture shop, cloth shop or whatever of course you notice that all these shops are near the shoppers near us. Near other shops of course, they are not far away. You see them near a restaurant or near the famous.

There should be a customer parking and this is really important when considering the location. Just think about it, how many times you didn’t buy from an outlet or a place simply because they don’t have parking lot availability of suitable vacant premises of course related to rent and offices access for delivery is also important and should be taken into consideration. 

Security is important. Some areas are not safe. So, the location there is not suitable; the destinations and the laws that are passed by the government are also something important to consider.  

Business Objectives

A business is any activity which provides a good or service, formed by an individual or group of individuals working towards a common objective. 

What is a business objective?  

A business objective is a result that a company aims to achieve. It also includes the strategies that the company will use to get there.

A business objective usually includes a time frame and list the resources available.

A business objective is more specific and easier to measure than a goal.

All our basic tools that underlie our planning and strategic activities are our objectives. They serve as the basis for creating policy and measuring performance.

Making a profit

Reducing the workforce

Expanding abroad

Minimizing expenses

Goals on the other hand are statements that business makes regarding 7its future and they represent aspirations and are less specific.

The CEO of a company may say we seek to become the largest maker of bicycles in the world. This is a goal as they do not explain how the company will achieve this. The exact steps a company plans to make, to reach his goals are its business objectives.

For example, the CEO might say we will increase bicycle sales by 2.5 percent each quarter of this year, we will open new branches and factories in Germany and France.

During the next 12 months, sometimes one business objective can clash with another. For example, growth and profit may clash when a company achieves greater sales in the short term by slashing prices. It reduces short-term profit. Long-term business objectives can affect short-term prospects.

If a company invests heavily in plant equipment or new products, its cash flow in the short term will suffer.

International Marketing Mix*
International Marketing Mix*

There are 7Ps in the international marketing mix, including product, price, place, promotion, people, process and physical evidence.

Product

This is a bundle of things that generate satisfaction for the customer. Products have a life cycle and they are developed and launched. If they are successful, their sales will grow. Eventually the market will mature and it will decline when there are many other rival entrances.

Decisions about the product and how it fits into the market with the competition is the basic marketing decision. These decisions will be different at different stages in the product life cycle.

Price

In this case two generic strategies can be used to set prices. They include

  • premium pricing- where there is a premium product
  • price competition- where there is no differentiation

In addition to the above, there are various price tactics. They include:

Penetration pricing– Where the companies set low prices to build market share

Price skimming-Where companies take a temporary competitive advantage to charge high prices

Optional pricing– Where additional benefits are priced separately

Captive pricing– This is for additional products or services, once a customer is captured

Price discrimination-This is when the same product has a different price in different market segments or locations.

Usually, the pricing choices are done based on the competitors’ prices and competitors’ likely reactions to price changes. Hence, pricing is a dynamic process in which companies struggle for a position in the market.

Place

  • This is the distribution channel that a company uses to get the product to the customers.
  • In this case, it should be decided whether the product is supplied directly to customers or intermediaries are used.
  • Types of intermediaries include
    • Wholesalers
      • Buy the product from the producers
      • Break down the bulk into smaller quantities for retailers
      • Store the goods
      • Take on some  of the marketing function
    • Agents
      • Do not buy the product
      • Find the customers and take orders in exchange for a commission
      • Product is stored on behalf of the producer
      • They do not own it while it is in storage
      • They are commonly used in countries other than the one in which the manufacturer is based
    • Retailers
      • Sell many brands and may have a strong brand themselves
      • Decide what price to charge, carry out advertising and promotion
      • Provides credit to the customers
    • Internet
      • Offers a direct to customer channel for producers, wholesalers and retailers
      • Low set up costs
      • An alternative to the use of agents
  • Considering the distribution strategy, the choice and mix of channels should be decided.
    • Choice of single or multiple channels of distribution
    • Choice of changing the distribution channel according to the stage in the product life cycle
    • Length of distribution channel from production to sales
    • Avoiding conflict between distribution channels

Promotion         

  • This involves strategic choices among a range of possibilities
    • Personal selling- individual sales people meet customers(this requires high gross margins)
    • Public relations- Stories are placed in various media to transmit the company’s message to its customers
    • Direct mail- Using databases to identify and target potential customers who are likely to buy the product
    • Trade fairs and exhibitions
    • Advertising- In a variety of media
    • Sponsorship- A company pays to be associated with an event

However, in some markets for some products, personal contacts and commission paid to important people are essential parts of promotion. This is sometimes considered as corrupt. But, it is required for success.

In e-businesses, there is viral marketing, where the customers recommend the product to their friends and news spread like a virus. For example, Hotmail.

People

  • In this case, people involved at the interface and who are in contact with the customers are a valuable source of information about customer requirements and preferences.

Process

  • In service industries, process of accessing and receiving the service is an important part of the marketing mix. The strategic choices include in this are
    • Technology- to use call centers, direct contact, web based service
    • Customer co-production-choosing how much work the customer has to do to get service benefits

Physical evidence

  • This includes the physical appearance of all the elements of the product and service that the customer experiences. They include:
    • Physical product design
    • Staff uniforms and grooming
    • Buildings
    • Vehicles
    • Printed matter
    • Website design
    • Logos and other branding tools

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Success in the international field*
Success in the international field*

The success of a factory depends on rigorous inspection at every stage of the process and ability to meet stringent working conditions required by customers.

This is core because there is greater transparency in flat world. For example, in 2000, activists with the Hong Kong Christian Industrial Committee(HKCIC) reported that toys for Mc Donald’s Happy Meals were being produced by a supplier that employed children as young as 14 years old. The story had roots like follows.

Mc Donald’s had outsourced the production of its Happy Meal toys to Sinon Marketing Hong Kong Ltd. This company in turn hired a factory in Hong Kong-City Toys, Ltd- to make the toys. However, when the above story broke out, both the factory and Mc Donalds stated that they did not know it. But, the damage had been done and all what the consumers and critics saw were Mc Donald’s toys being made by underage workers. For instance, The Child Labor News service ran the headlines as “Little slaves pack (Un)happy meals”

Furthermore, in the U.S., Germany, Australia and Canada, one fifth of the customers claim to read company CSR reports when making investment decisions.

Thereby, the best thing to do is to have a code of conduct and business processes. This will help to ensure compliance even when manufacturing is dispersed. This is because, where a rigid control of day to day operations is not possible, a set of laws and policy manuals will be a powerful way to ensure that all players understand what is expected of the entire network.

However, creating a code is not enough, rigorous monitoring and certification is also needed. For instance, an annual recertification process ensures that companies are actively tested for their ability to meet expectations, rather than waiting for problems to emerge. In this case, keeping the monitoring division independent from the business is important.

Also, the compliance division should be able to act autonomously and swiftly to address problems even at the expense of short term earnings.

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Global Restructuring-Path to  a successful global business*
Global Restructuring-Path to a successful global business*

According to Farell (2004), most managers focus on globalisation as a lever to reduce costs. Yet, they should be viewing it as a means to generate new revenues too.

In order to realize the full potential of globalisation, the place where the industry falls along the globalisation spectrum should be assessed first. To do this, the ratio of annual value of global trade to the annual value of industry sales should be considered. Ratios over 100% indicate that these industries are global.

Next, globalisation’s full potential for your company should be defined. In this case, it is difficult to figure out how different forces will strenghten or weaken your business over time and how to capitalize on that evolution.

Three types of factors usually determine the course of globalisation in an industry.

  • production
  • regulatory
  • organizational

Production

In this case, there are two factors which determine an industry’s potential for disaggregating its value chain.

  • relocation sensitivity- how feasible and attractive it is for an industry to relocate parts of its production process
  • location specific advantages

Relocation senstitivity can be figured out using metrics like

  • bulk to value ratio(currency value per pound of production material)
  • ease with which your company can ensure quality standards remotely
  • how quickly your products or components become obsolete
  • volatility of the demand for your service
  • sunk costs

Location specific advantages can be determined using

  • labor intensity
  • skill requirements
  • natural resources intensity
  • economies of scale and scope

Regulatory

Particularly countries’ efforts to restrict imports or foreign investment are among the biggest constraints to globalisation in many industries.

  • tariffs
  • quotas
  • minimum content from local production
  • ban foreign investment outright
  • failure to invest in regulatory and legal infrastructure

Organisational

The main organisational factors that can limit globalisation for a company or an industry include

  • internal management structures
  • incentive systems
  • unionization

Yet, all production, regulatory and organisational forces evolve over time. Along the line, the full potential of globalisation for companies and industries change with the geopolitical and macro economic environment.

Thereby, with escalating competition, steady trade liberalisation and continuous introduction of new technologies, the pressure on companies to globalise tend to increase.

Then, the options to capture value in the new global environment should be considered.

According to Farrell (2004), industries and companies both tend to globalise in stages and in each stage, there are different opportunities for creating value.

Stage 1: Market Entry

This is when companies enter new countries using production models that are very similar to the ones they deploy in their home markets. In this case, typically companies need to establish their production presence due to the nature of their businesses or due to local tariffs and import restrictions.

Stage 2: Product Specialisation

This is when companies transform the full production process of a particular product to a single low cost location and export the goods to various consumer markets. For example, GM now manufactures all Pontiac Azteks in Mexico ad all Chevrolet TrailBlazers in the U.S.

Stage 3: Value Chain Disaggregation

This is when companies start to disaggregate the production process and focus each activity in the most advantageous location. Eg: Recent trends for U.S companies to offshore business processes and IT services

Stage 4: Value Chain Re-engineering

This is where processes are re-engineered to suit local market conditions. For example, Indian car makers have a manufacturing process tailored to take advantage of low labor costs. They also design and build the capital equipment for their plants locally.

Stage 5: Creation of New markets

This is the expansion of the market.

However, these 5 stages are not necessarily a rigid sequence that all industries follow. Companies can skip or combine steps.

If the business wants to shape rather than react to the industry’s evolution, it is necessary to size up the opportunities that emerge for your business at each stage of globalisation. This means determining potential cost savings from global industry restructuring and identifying new market opportunities which it can create.

  • Labor
  • Re-engineering their production processes
  • Utilizing capital equipment more intensively
  • Hiring local engineers in low wage environments to design and build cheaper capital equipment
  • Manage other fixed costs of doing business

For example, Maruti Udyog, an Indian carmaker designed its won robots for its assembly lines. This cost the company a fraction of what Suzuki, its Japanese partner paid a third party vendor for similar machines.

However, experiences of French retailer Carrefour and U.S. retailer Walmart in Brazil and Mexico indicate the need for both optimism and caution in the pursuit of globalisation.

In order to ensure success as your industry restructures along the global lines, a sound strategy, consistent execution and new ways of viewing the business and managing people are required.

Accordingly, the following are some lessons drawn from the experiences of companies that have ensure success.

  • Abandon incremental thinking- Adopt bold performance targets sooner rather than later
  • Use global assets effectively and efficiently- Get the best mix by increasing labor resources to better use expensive capital, improving shift utilization, developing cheaper capital equipment.
  • Tailor your best practices to local conditions- Leverage the best practices in ways that fit conditions in the host country. For example, in Mexico, Walmart uses the same trademark “Everyday low price” strategy which it uses in U.S.
  • Aim for higher quality

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Maximizing benefits of Off Shoring*
Maximizing benefits of Off Shoring*

When a European or North American manufacturer thinks about off shoring a factory or function, it often looks first at China and India. This is because both of these countries offer an attractive combination of

  • low costs
  • well developed capabilities
  • business friendly regulatory environments
  • large domestic markets

However, for people considering offshoring, it is dangerous to take a narrow geographical view. This is mainly because every country has a different mix of strengths and weaknesses.

For example, a country may have very low labor costs but a high degree of political instability and a small domestic market. Another might have engineering talents, but quickly rising labor rates.

Hence, to obtain the maximum benefit from offshoring, the foreign operations should be spread over a broader and well balanced mix of regions and countries.

Vestring et al(2005)’s research into industrial offshoring confirms the wisdom of a portfolio approach. Accordingly, in creating their offshoring portfolios, cost leaders take into account a wide range of decision criteria. For example, current labor rates, related costs like facility construction and utilities, education and skill levels of local workers, their business experience, maturity and stability of the nation’s infrastructure. Also, these cost leaders consider both short term and long term benefits which affect all relevant criteria.

However, maintaining production facilities in higher cost countries makes sense when labor is a minor cost component or when transportation costs are high. For example, call centers and textile industry.

Thereby, deciding whether to shift costs requires making focused decisions for each product line, while looking deeply into issues like relative labor costs, logistics costs, customer requirements and time to market.

For example, Emerson Electric Co a U.S. based conglomerate embarked on a strategy to methodically and progressively shift sourcing, manufacturing and engineering from its traditional bases in Western Europe and U.S. to a variety of low cost countries around the world in Asia, Latin America and Eastern Europe.

It set up production operation in Mexico, for its low costs and proximity of the operation to U.S. Also, production capacity was established throughout in Asia to tap both into low costs and ensure a high degree of responsiveness to rapidly growing Asian markets. For example, Emerson hedged its risks by accessing skilled labor pools in Phillipines, India and China. By 2002, low cost countries accounted for 44% of Emerson’s total manufacturing labor cost. This has led to improvement in the company’s operating profit margin.

Emerson is thus known to have benefited from being earlier and bolder in its pursuit of cost migration.

This has led to the understanding that offshoring is not limited to routine production and assembly jobs. This is why cost leaders examine specific functions like finance, ICT, marketing on a case by case basis.

For example, Boeing Co. has a center that designs and does technical work in Russia. P & G gets its taxes done in Costa Rica, which has a strong cadre of workers with accounting skills. General Electric Co, has an R&D center in India with a staff of about 500 with about a third of them being locales with doctorates.

Considering portfolio diversity, it should be highly disciplined, balancing the risk advantages of consolidation. For example, Emerson concentrates its activities in 4 major production centers.

Achieving such a balanced portfolio requires a centralized approach to planning, with headquarters overseeing and coordinating a company wide offshoring program. This is mainly because leaving offshoring decisions upto individual business units has its own drawbacks.

  • It provides no mechanism to temper risk by distributing functions across a range of countries
  • It prevents companies from reaping savings across business units

Thereby, cost-migration leaders take a number of practical steps to ensure that their portfolios are constructed successfully.

  • Establish and constantly update a detailed and robust database of current costs and other key criteria across low cost countries
  • Carefully set priorities for both functions and countries
  • For each activity, a short list of target countries are evaluated on the basis of long term competitiveness, current costs and capabilities
  • Upfront investment in building its infrastructure and capabilities

Thus, benefits of off shoring can be maximized.

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Negatives of global supply chains*
Negatives of global supply chains*

Global supply chain offers unlimited opportunities for achieving economies of scale. However, recent problems related to the global supply chain highlight some important issues regarding the limitations of the global supply chain.

The US Consumer Product Safety Commission in 2008, stated that recalls have increased drastically in the 2000s. Also, a vast majority of the recalled products were made in China. However, the product quality had fallen due to several reasons.

  • Trade policies of the U.S.A
  • Poor regulatory regimes in China
  • Squeezing of suppliers by big box retailers
  • Poor supply chain management
  • Focus on branding at the expense of quality by companies

Beamish and Bapuji(2008) studied the US toy industry. This industry in 2006 has an estimated annual sales of 22.3 billion US dollars. Over the years, these toy companies shifted their production overseas. They focused on product design, marketing, research and development and other high value activities in the domestic range.

Studying the industry, it was found that toy recalls that took place due to design flaws have not only been higher, but increased at a faster rate. There were also recalls due to manufacturing flaws.

For example, several industry experts agreed with the findings that the single largest cause of recalls, deaths and injuries involving toys was small parts. This clearly means it is a design flaw, not a manufacturing error. Despite this, some toy company executives and the public blamed China for virtually all the flaws in toy recalls.

This has increased calls for evidence based management and research which could make an impact on practice by providing evidence.

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