Edexcel GCE Business: Autumn 2020 Mark Scheme and Case Studies

General Marking Guidance

• Consistency in Treatment: All candidates must receive the same treatment. Examiners are required to mark the first candidate and the last candidate with identical scrutiny and methodology.
• Positive Marking: Mark schemes are applied positively. Candidates should be rewarded for what they have demonstrated they can do, rather than being penalized for omissions.
• Adherence to Mark Schemes: Examiners must mark according to the provided mark scheme and not based on personal perceptions of where grade boundaries may fall.
• No Ceiling on Achievement: There is no limit to achievement. All marks on the mark scheme should be utilized appropriately. Full marks must be awarded if the candidate’s answer matches the specific criteria in the mark scheme.
• Awarding Zero Marks: Examiners must be prepared to award zero marks if a candidate's response is not worthy of credit according to the mark scheme.
• Judgment and Principles: Where professional judgment is required, the mark scheme provides the principles for awarding marks, though exemplification may be limited.
• Consultation: If in doubt regarding the application of the mark scheme to a specific response, the team leader must be consulted.
• Crossed-out Work: Any work that has been crossed out should be marked unless the candidate has provided an alternative response to replace it.

Product Portfolio Analysis: Question 1(a)

• Core Concepts: Identifying products to target for growth or products needing withdrawal from the market based on analysis.
• Case Study Context - Kellogg's:
  • Kellogg's manages a massive product portfolio consisting of over $1,600$ products.
  • The company operates across diverse market sectors, primarily breakfast cereals and snack markets.
• Strategic Application:
  • Portfolio analysis allows for strategic decisions regarding which products require support and which food areas necessitate innovation or entirely new product launches.

Quantitative Analysis of Revenue: Question 1(b)

• Quantitative Skill (QS2): Calculation, use, and understanding of percentages and percentage changes.
• Formula for Percentage Share of Revenue:$\text{Percentage Share} = \frac{\text{Revenue of Specific Region}}{\text{Total Revenue}} \times 100$
• Application Data (Kellogg's):
  • Revenue of Europe: $\$2,251\text{m}$
  • Total Revenue: $\$12,923\text{m}$
• Step-by-Step Calculation:$\frac{2,251}{12,923} \times 100 = 17.42\%$
  • Note: The final answer is rounded to two decimal places.

Human Resource Initiatives and Productivity: Question 1(c)

• The Summer Hours Scheme:
  • This is a non-financial human resource initiative specifically targeted at office-based employees.
  • Objective: To improve employee retention and reduce labor turnover by supporting work-life balance.
• Impact on Productivity:
  • Improved employee motivation can lead to enhanced customer service and quality.
  • Long-term competitiveness is gained through lower labor costs relative to rivals who do not offer such schemes.
  • A specific improvement of $21\%$ in productivity has been noted.
• Counter-Arguments and Limitations:
  • Employees are still required to complete a full week's work to leave early on Friday.
  • This may place additional pressure on staff to finish tasks quickly between Monday and Thursday, potentially reducing work quality.
  • The scheme may not motivate all employees; some may prefer financial rewards over flexible working arrangements.

Corporate Strategy and External Influences: Question 1(d)

• Vision and Mission: Kellogg's aims to "enrich and delight the world through foods and brands that matter," with a focus on being the leading provider of breakfast products.
• Political Influence and Regulatory Compliance:
  • The UK Government has set a target to reduce sugar in breakfast cereals by $20\%$
  • Kellogg's strategy involves helping meet this target, thereby aligning with political external influences.
• Ansoff’s Matrix Application:
  • Reformulating existing products (e.g., the Coco Pops recipe) for an existing customer base is an example of product development.
• Economic and Strategic Considerations:
  • Product redevelopment involves high Research and Development (R&D) costs to ensure the products continue to meet government targets while maintaining profit levels.
  • Cereal and snacks account for $82\%$ of Kellogg's core products, necessitating massive investment in recipe changes.
  • Social changes, such as a shift toward healthy eating and lifestyle changes, may have a more significant impact on corporate strategy than political pressures alone.

In-depth Financial Performance Assessment: Question 1(e)

• Quantitative Skills (QS1, QS2, QS5): Utilizing ratios, averages, percentages, and interpreting numerical data forms to assess financial health.
• Kellogg's 2019 Financial Margins:
  • Gross Profit Margin:$\text{Gross Profit Margin} = \frac{4,022}{12,923} \times 100 = 31.12\%$
  • Operating Profit Margin:$\text{Operating Profit Margin} = \frac{1,409}{12,923} \times 100 = 10.90\%$
  • Profit for the Financial Year Margin:$\text{Profit Margin} = \frac{961}{12,923} \times 100 = 7.44\%$
• Strategic Implications:
  • These margins suggest a successful financial year in 2019.
  • Strong financial results enable the company to pursue its strategies of acquisitions and new product launches.
• Assessment Limitations:
  • Data is for a single year; historical data is required to identify long-term trends or improvements since 2017.
  • The Statement of Financial Position would be necessary to determine liquidity and Return on Capital Employed (ROCE).
  • Comparison with rivals like Nestle is essential to determine relative performance.

Porter’s Generic Business Strategies: Question 2

• The Framework: Porter suggested four generic strategies to gain competitive advantage: Cost Leadership, Differentiation, Cost Focus, and Differentiation Focus.
• Application - Under Armour:
  • Cost Leadership: Under Armour reduced labor and closed unprofitable retail outlets to lower costs and raise profit margins, potentially allowing for lower prices than Adidas or Nike.
  • Differentiation: Seeking a Unique Selling Point (USP) to charge premium prices.
  • The "Recovery" Range: Features infrared technology to aid athlete recovery, distinguishing it from Adidas and Nike, who focus primarily on "preparation and performance."
• Operational and Strategic Risks:
  • Differentiation is expensive regarding R&D and marketing communications.
  • Reducing retail outlets might limit customer access and impede sales.
  • Low pricing might lead to a perception of lower quality, damaging the brand image.
  • The company must decide between a broad high-cost strategy versus a broad low-cost target market.

Long-term Finance and Gearing: Question 3

• Financing Methods for Growth:
  • Long-term Bank Loans: Debt capital that requires interest payments.
  • Share Capital: Equity capital that dilutes ownership but does not require repayment.
• Netflix Context:
  • Netflix requires significant capital ($\$4\text{bn}$) to develop original English-language and local language content.
  • An additional $\$1.3\text{bn}$ is required for technology and development investment.
• Analysis of Gearing:
  • As Netflix borrows more, its gearing ratio increases.
  • Current Gearing Calculation:         $\frac{12,475}{22,884} \times 100 = 54.5\%$
  • Further borrowing of $\$2\text{bn}$ will increase this ratio, making the company higher risk.
• Advantages of Loans:
  • Interest on business bank loans is tax-deductible.
  • Fixed-rate loans allow for easier budgeting and monthly payment planning.
• Strategic Risks:
  • Increased competition from Apple and Amazon makes it harder to gain users and repay interest.
  • Economic downturns could lead to falling sales revenue while interest obligations remain fixed.
  • Netflix's share price increased by $35\%$ in 2019, suggesting that share capital could be a less risky alternative for raising large sums of capital without mandatory repayments.