Name of Student:

IB MOCK EXAM
Grade IB2

Subject: Business Management Level: HL

Paper: 1 Date:
Duration: 2Hrs 15min Session:
Maximum Marks: 60 # of Pages: 9

Subject Specific instructions

Instructions to candidates
• Do not open this examination paper until instructed to do so.
• A clean copy of the business management case study is required for this examination paper.
• Read the case study carefully.
• A clean copy of the business management formulae sheet is required for this examination
paper.
• Section A: answer two questions.
• Section B: answer question 4.
• Section C: answer question 5.
• A calculator is required for this examination paper.
• The maximum mark for this examination paper is [60 marks]

Exam Result

Page 1 of 9
 Skandvig Terra PLC (SVT)

Skandvig Terra PLC (SVT) initially specialized in producing and delivering potable water in Norway.
Its vision statement, “Making the world a safer place”, has remained unchanged since the founding
of the company.

SVT currently supplies potable water to over one million people in Norway and to millions of
5 households in over 20 other countries. SVT builds and operates water treatment plants to purify
the water and is responsible for maintaining the regional water supply networks in these countries.
SVT has a regional monopoly in each country in which it operates. In the 1980s, SVT expanded
into other business sectors, including desalination and household water treatment products, by
acquiring other companies.

10 SVT is organised into four divisions based on product:

y The Fresh Water Division, which supplies potable water
y The Desalination Division, which constructs and operates desalination plants
y The Engineering Division, which manufactures water treatment equipment and power turbines
y The Consumer Products Division, which manufactures home water filters

15 Each division is headed by a director with operational and tactical authority, enabling quick
decision making. For example, in response to climate change causing shortages of potable water
in some countries, Yannick Pedersen, the director of the Fresh Water Division, was able to quickly
find alternative sources of potable water.

The leadership styles of the directors differ between the divisions. Yannick has a situational
20 leadership style that works well in a division that has to respond quickly to unexpected changes
in the external environment. His leadership style contrasts with the style adopted by Ariadne
Johansen, the director of the Engineering Division. Many employees view Ariadne’s leadership
style as autocratic, a style that may have led to the Engineering Division being one of the industry
leaders in productivity per employee. However, Yannick has clashed with Ariadne on several
25 occasions, as he feels that machinery needed to update water treatment plants has been delayed
due to Ariadne having different priorities.

Fresh Water Division

This division sources, treats, stores and transports water from the environment (surface water
deposits, rivers and subterranean aquifers) for distribution to populations. The water is collected
30 and stored in large manufactured reservoirs. The division, which supplies potable water to nearly
200 million people around the world, has increased in size through both internal and external
growth strategies. Its most recent acquisition was Geng PLC, a major water supplier in the
United Kingdom (UK).

Desalination Division

35 Desalination is a process that removes salts and other minerals from sea water to produce water
that is suitable for human consumption or irrigation on farmland. SVT’s Desalination Division
manufactures and operates desalination plants around the world, providing two income streams.
The division provides 15 % of the world’s desalination capacity.

The market for desalination is growing rapidly, and some estimates suggest that the global water
40 desalination market will double in the next 10 years. SVT currently operates desalination plants
in 19 of the 120 countries that use such plants, including Australia, China, Greece, India, Japan,
Portugal, Saudi Arabia, Spain and the United Arab Emirates.

Page 2 of 9
 The Desalination Division also manufactures much smaller desalination plants, which are installed
on seagoing vessels. The large increase in the demand for cruise holidays in the last 20 years has
45 boosted SVT’s sales of these plants by 300 % since 2015.

Engineering Division

This division manufactures equipment and machinery for SVT’s water treatment plants, with
factories in Norway, Germany and the UK.

To broaden its product range, SVT completed a takeover of a rival engineering company, H4 PLC,
50 in 2015. H4 manufactures steam and gas turbines in four factories in the UK. These turbines
produce electricity. Originally a family-owned business, H4’s board of directors had been reluctant
to embrace change. Its factories operated five days per week, with a single shift that ran from
8.00 am to 5.00 pm each day. H4 employees were paid competitive salaries, similar to those
offered by rival businesses, but the company never made use of any other financial or non-financial
55 methods of motivation for its employees.

Following the takeover of H4, SVT undertook a modernization programme and reorganization of
the operations of H4’s UK factories, achieving economies of scale. SVT wanted the H4 factories
to operate 24 hours a day, every day of the week, with three eight-hour shifts per day. However,
SVT’s human resources (HR) department met resistance to this change from a significant number
60 of long-serving employees. To overcome this resistance, SVT offered a one-time incentive payment
to employees who agreed to sign a new flexible-working contract, which would include accepting a
new shift pattern every six months. Employees who did not want to sign this contract were offered
generous payments to leave SVT. Approximately a quarter of the employees, with an average age
of 61, turned down the flexible-working contract and left the company.

65 As a result of this significant exodus of former employees from H4, SVT’s HR department
organized recruitment to fill the 300 vacancies that were created. SVT wanted to appoint
employees who worked well within a team environment. These vacancies were for a variety of
different jobs, but all required highly skilled and specialized employees. People with these skills
were in very short supply in the UK. The HR department chose carefully where to advertise the
70 vacancies, and all vacancies were filled within three months. New employee induction training
included a visit to SVT’s flagship factory in Norway, which utilizes innovative technologies to
enhance the speed and quality of production.

The modernization programme of the former H4 factories was completed successfully in 2016.
The objective—to operate these factories 24 hours a day, seven days a week, with three shifts per
75 day—was met. In the last six years, labour productivity has improved, unit costs have fallen, and
labour turnover figures in these factories have been consistently below the national average. In
2022, the smallest of the former H4 factories manufactured SVT’s first wind turbine. Wind turbines
can be located on land or in the sea (offshore) and generate electricity from the wind. This factory
has the capacity to manufacture 10 large (2.5 megawatt) turbines per year and already has a
80 full order book for 2023. The demand for wind turbines is expected to grow each year as more
countries seek methods of generating electricity that do not rely on burning fossil fuels.

Page 3 of 9
 Consumer Products Division

The Consumer Products Division manufactures and sells water filters for use at home. The filters
take potable water and use carbon to remove calcium, chlorine, copper, cadmium and zinc. These
85 filters, which do not remove bacteria or viruses in the water, are not suitable for use in countries
that have problems with access to potable water.

Between 2005 and 2010, SVT’s Consumer Products Division made consistently increasing
contributions to SVT’s overall profits. In the same time period, SVT’s share price rose by 65 % and
annual profits doubled, enabling the company to increase its dividends each year.

90 SVT increased its market share in the home water filter industry by both external and internal
growth. From 2010, SVT began to take over many small water filter manufacturers in both Europe
and the United States of America (USA). SVT aims to become the brand leader in this market
in both Europe and the USA. In 2018 SVT’s board of directors approved a substantial five-year
marketing budget.

95 Corporate social responsibility (CSR) – SVT’s Outreach Programme

SVT set up its Outreach Programme as part of the company’s commitment to helping people in
less economically developed countries (LEDCs). The programme offers these countries free skilled
labour provided by SVT employees. After 10 years of continuous employment, all employees are
offered the opportunity for a three-month paid career break to take part in the programme. SVT
100 pays the employees’ travel expenses and accommodation costs and continues to pay their salary.
As part of the programme, employees have taught in schools, dug wells, repaired infrastructure
and provided training to local people in many LEDCs around the world, including Angola, Sudan
and Yemen. In the last 10 years, 6 000 SVT employees have taken part in the programme. SVT
works with charities and non-governmental organizations (NGOs) to identify projects that would
105 make the best use of SVT employees.

SVT’s directors can also take part in the programme. One director, Jayne Dees, spent three
months teaching English in village schools in Sudan in 2019. She saw first-hand that many
Sudanese people do not have access to potable water and cannot afford water purifiers that
remove bacteria and viruses from dirty or contaminated water. Some of her students walked
110 miles each day to collect water from ponds and rivers, and the water that they collected was a
threat to their health. On her return to Norway, Jayne recommended to the board of directors that
SVT become actively involved in developing low-cost, easily transportable water purifiers for use
in countries where access to potable water is limited. Her own research suggested that these
purifiers would need to operate using solar power, be simple to use, cheap to purchase and last for
115 10 years.

SVT’s board of directors were impressed by Jayne’s idea. It fitted well with SVT’s vision statement.
In 2020, SVT launched a competition, aimed at inventors and entrepreneurs, to develop a water
purifier that met strict criteria in terms of cost, usability and longevity. The winner of the competition
would receive a prize of $100 000. This competition attracted impressive entries from all over
120 the world. In January 2021, the winner was announced: James Azuki, a university student from
Tanzania. He named his design “WF15”, as it was his fifteenth attempt that finally produced potable
water in sufficient quantity, and SVT agreed to retain this name for the product.

A few hours of sunlight can power the WF15 to produce enough potable water each day to
meet the needs of up to four people. The water produced meets the World Health Organization
125 guidelines for potable water.

Page 4 of 9
 –5– 2223 – 5001

SVT’s Engineering Division began production of the WF15 in 2022. However, board members
have not yet agreed on a pricing strategy. Several directors believe the WF15 should be a not-for-
profit operation, and a minority feel that SVT should go further and subsidize the product to make it
affordable to as many people as possible. Two directors are against subsidizing the WF15, as they
130 believe subsidies will negatively impact SVT’s overall profitability, making other stakeholders in the
business unhappy.

A secondary unresolved issue is how SVT would distribute the WF15. SVT has little experience of
distributing consumer products in LEDCs and no distribution channel in place for this new product.

SVT’s marketing department recently used secondary market research to investigate the spending
135 patterns of low-income families in LEDCs and their access to media. The findings found that:
y only a minority of families owned a television set
y newspapers and magazines were seldom purchased
y levels of social media usage were fast approaching the levels seen in advanced economies.

SVT’s board of directors have much to think about. They have to make decisions in key areas of
140 the operation of SVT.

Companies, products, or individuals named in this case study are fictitious and any similarities with
actual entities are purely coincidental.

Potable water - safe to drinkable

desalination - the process of removing salt from seawater.

A turbine is a machine that transforms rotational energy from a fluid that is picked up by a rotor system into usable
work or energy. Turbines achieve this either through mechanical gearing or electromagnetic induction to produce
electricity.

Exodus - a mass departure of people.

seldom - not often; rarely.

Page 5 of 9
 Section A
Answer two questions from this section.

1. Explain how the SVT could overcome high labour turnover [4]

(b) Explain the advantages for SVT of internal growth rather than external growth (line 31 & 90). [6]

2. (a) With reference to SVT, outline one advantage and one disadvantage of situational leadership
style (lines 19). [4]

(b) Explain how the methods used to motivate employees could have changed when SVT
transformed from single shift to three eight-hour shifts per day production (line 54-58). [6]

3(a) With reference to SVT, describe two benefits of having a marketing plan for low-cost water
purifier. [4]

(b) With reference to SVT, manufacturing of WF15 water purifier with the subsidies will negatively
impact SVT’s overall profitability. [6]

Page 6 of 9
 Section B
Answer the following question.
4. Jayne Dees’s idea for transportable water purifiers takes SVT into a secondary sector activity that
contrasts with its usual tertiary sector activities. In order to produce a sufficient amount of portable
water in low cost, SVT would need to invest to manufacture ten water purifiers at $1000 each. There
would be material costs and significant operating costs, as well as time and additional labour. Jayne
has produced a net cash flow forecast for the project (Table 1) assuming a five-year life for the water
purifier. She likes the idea that each water purifier produced could be of a unique design and
personalized. Some of the materials would be from recycled plastics obtained from waste at the US.
Recycling would reduce variable costs and it would be good for the US environment and for SVT’s
caring good image.

Another director Liza does not like the idea of water purifiers. She is concerned that the low-cost
purifier may damage SVT’s exclusive brand. She can see difficulties with recruiting someone with both
the necessary engineering skills and the ability to make decisions about which types of water purifier
to produce. She is particularly concerned about the impact on SVT’s current suppliers of portable
water. Yannick believes that the water purifiers technology will bring other benefits to the business.

Table 1: Net cash flow for the water purifiers project

Year Net cash flow (excluding capital investment)

1 $2000

2 $3000

3 $4000

4 $4000

5 $4000

(a) Define the term variable cost. [2]

(b) With reference to SVT, explain the differences between secondary sector activities and tertiary
sector activities. [4]

(c) Using the information above, calculate the payback period and the average rate of return (ARR)
for the water purifiers project (show all your working). [4]

(d) Using information from the case study, additional information above and your results from part
(c), recommend whether SVT should proceed with the water purifiers project for (LEDCs). [10]

Page 7 of 9
 Section C
Answer the following question.
5. Jayne Dees is considering two options for the long-term development of the business: market
development and diversification.

Option 1: Market development

Although Jayne, with his strong associations with the US, likes the idea of developing the US market
for portable water, she has concerns about it. Over the last four years, the exchange rate has
fluctuated between €1 = $1.40 and €1 = $1.03. There is some evidence that the US wants to discourage
imports and prefers foreign businesses to invest directly in the US. Jayne thinks there are other
markets in and closer to Europe that could be developed more easily without significant changes to
the distribution channels or the culture of the business. She has suggested the United Kingdom (UK)
market as an alternative, which has a portable water service similar to those in other European
countries. In most other respects the UK market is similar to other European markets. The main worry
is that the UK market would be difficult to enter, as established suppliers for portable water and selling
of water treatment equipment’s.

Option 2: Diversification

Jayne is also considering a proposal by Heinrik Langer, a business analyst. Heinrik’s idea is for
diversification. He thinks that SVT should develop portable water distribution service. SVT’s directors
and workforce have all of the skills and experience needed to help takeover businesses convert from
traditional production methods to automated robotic production processes. This portable water
distribution service would require recruitment of more engineers as well as highly skilled and
experienced person. Heinrik’s proposal is based on:

* the likely low long-term growth prospects for SVT’s water treatment products. Population trends in
Europe due to the low birth rates (Table 1) will lead to an aging population in the short and medium
term. However, in the long term there could be economic and demographic problems arising from the
eventual decline in population that is predicted to occur when the birth rate is less than 2.1

* his view that every business should have a portable water purifier

* possible financial pressures on European governments, potentially reducing water supply

spending

[Source: © International Baccalaureate Organization 2019]

Page 8 of 9
 Country Population

Germany 1.3

Poland 1.3

Italy 1.4

Spain 1.4

Russia 1.4

US 1.8

UK 1.8

Table 1: Population trend in birth rate in each country need additional water supply for each year.

SVT’s director of corporate strategy, has asked to provide data on each option to construct a
decision tree to present at the next board meeting. The decision tree below summarizes the issues
involved in the decision.

Decision tree based on estimate

Using the case study and the additional information, recommend whether SVT should choose Option
1 or Option 2. [20]

Page 9 of 9