PROFESSIONAL LEVEL

2023
LOTUS

BUSINESS STRATEGY AND

TECHNOLOGY

ANSWERS

Copyright © ICAEW 2023. All rights reserved.

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 1

Marking guide
Marks
Knowledge Skills Maximum
1.1 Porter's Five Forces model 2 6 8
1.2 (a) Budget 1 10
(b) Breakeven calculations 0 4
(c) Benefits and risks of strategies 4 9
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1.3 Ethical and business issues 2 7 8
Total marks 9 36 40

1.1 According to Porter, five competitive forces influence the state of competition in an
industry. These collectively determine the profit (ie, long-run return on capital)
potential of the industry as a whole.
The nature of the issue with Altior and Hista as electrical goods manufacturers
(EGM) selling B2C is to consider the impact on (ie the change in) competitiveness
of two of these forces, rather than the ‘level' of competitiveness.
New entrants
Profitable markets attract new entrants, which erodes industry profitability. The
electrical products wholesale and retail industries are already competitive, and this
may be a disincentive for many EGM to enter the market as they are not only
competing with incumbent electrical wholesalers and retailers but also with each
other.
Prior to the new policy, EGM sold primarily to other businesses (B2B). The new
policy of entering the retail market (B2C) means that effectively EGM are
attempting to vertically integrate down the supply chain. This is a process of
disintermediation where intermediaries, such as wholesalers and retailers, are cut
out of the supply chain.
EGM will not in future be suppliers only to the electrical products wholesale and
retail industries, but also competitors at the retail level and, through supply chain
effects, indirectly in the electrical products wholesale market.
The scale of EGM means that there are few barriers to entry in terms of
economies of scale. They will also have product knowledge and access to
consumers through investment in online facilities including marketing and data
analytics collection from their websites.
Moreover, there may be limited product differentiation for some items (eg cabling)
and low switching costs, both of which increase the competitive threat of new
entrants.
The ability to price at low margins just above manufacturing cost means that
potentially the threat from new entrants is significant.

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A number of barriers to entry do however exist:
 Most of the EGM are located overseas hence the lead times are significant
(unless they commence storage of goods in the UK to replicate the wholesale
function).
 Local knowledge and efficient customer service (including local distribution
channels) are barriers to entry to EGM and reduce the contestability of the
localised UK markets.
 Existing customer relationships are also barriers to entry and reduce the ability
of new entrant EGM to compete with incumbents.
 Entry to the industry is also likely to be unattractive in the current environment
given low margins and high levels of competition.
 Most EGM seem to be entering the B2C market for only a number of their
products. Thus, while competitive force may increase for these products, other
products may not be affected.
Bargaining power of suppliers
Industry profitability can be affected by powerful suppliers. This is because large
suppliers can exert pressure on their buyers to pay higher prices. While the major
EGM are large, their power in increasing prices depends on a number of factors.
 The number of suppliers in the industry
 Competition between large suppliers. Where other suppliers sell similar
(undifferentiated) products, then competition between suppliers may keep
prices down
 If buyers can easily switch between suppliers (ie supplier migration) this
reduces supplier power
 The fact that suppliers' prices are major element of total cost to electrical
wholesalers will make them more resistant to price increases
The power of suppliers is likely to increase relative to wholesalers and retailers by
having the option of selling directly to consumers. This increases their bargaining
power in terms of controlling prices to wholesalers and retailers, as they also
influence prices to ultimate consumers.
Conclusion
Large suppliers entering the retail market are exercising influence on industry
competition from two perspectives: firstly, as major suppliers and secondly as new
entrants in starting to sell directly to consumers. Combining and co-ordinating
these dual industry participant roles may lead to a significant increase in industry
competition, with all participants in the supply chain affected, including retailers
and wholesalers.

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 Examiner's comments
This requirement was well answered.
Most candidates recognised that the question was asking for an explanation of the
changes in competitiveness and addressed the two forces as required. However,
weaker candidates just addressed the level of competitiveness, without
considering changes.
Similarly, weaker candidates focused on the firm, PWE, rather than the industry.
Rather surprisingly, many did not mention barriers to entry, explicitly, neither did
many refer to the size advantage of the manufacturers, thereby enjoying
economies of scale. This applies to both sections of the requirement.
Weaker attempts also concentrated on wholesale suppliers, such as PWE, often
ignoring manufacturers.
Better answers understood disintermediation and its consequences for industry
competitiveness.

1.2 (a)
Alternative 1 Alternative 2 Alternative 3
5% price 10% price No price
20X1 reduction reduction reduction
Retail price £55 £52.50 £50 £55
Price charged by
PWE per item £50 £47.50 £45 £50
Cost per item £44 £44.00 £44 £44
Contribution per
item £6 £3.50 £1 £6
Sales volume
(items) 240,000 192,000 240,000 120,000

Alternative 1 Alternative 2 Alternative 3

Volume change 20% down Zero 50% down
Price change 5% down 10% down zero
20X1 20X2 20X2 20X2
Retailer Retailer Retailer Retailer
£ £ £ £
Revenue 12,000,000 9,120,000 10,800,000 6,000,000
Cost of sales 10,560,000 8,448,000 10,560,000 5,280,000
Contribution 1,440,000 672,000 240,000 720,000
Fixed operating
costs 300,000 300,000 300,000 300,000
Operating
profit/(loss) 1,140,000 372,000 (60,000) 420,000

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For all three pricing alternatives the operating profit is lower in 20X2 than in
20X1 due to the influence of electrical goods manufacturers (EGM) entering
the retail market.
Alternative 1
In the first alternative, PWE reduces price by a small amount of 5% to try to
compete with new entrant EGMs but still suffers a 20% decrease in sales
volume due to the competition. This is because, despite the retailers passing
on the price reduction, the average retail price is still £52.50 which is higher
than the EGM average price of £50.
The cause of the extent of the reduction is that there is a squeezing of margin
per item from £6 to £3.50 which is a 41.667% reduction. In addition, there is a
volume fall of 20%. This makes contribution reduce to 46.667% ((1 – 0.20) 
(1 – 0.41667)) of its previous level (ie by 53.333% from £1,440,000 to
£672,000).
After deducting fixed operating costs, this reduces operating profit to £372,000
which is a 67.4% reduction on the 20X1 level of £1,140,000.
Alternative 2
In the second alternative, PWE reduces price more substantially by 10% to try
to compete with new entrant EGM. This means that, with retailers matching
this decrease, the retail price is £50 which is the same as the EGM average
price of £50. It would seem that this policy may be successful in volume terms
by maintaining the sales volume at 20X1 levels. However, the margins are
now extremely thin with contribution per item being only £1.
The cause of the extent of the reduction is therefore this squeezing of margin
per item from £6 down considerably to only £1, which is a reduction of
83.33%. While there is no volume fall, there is a reduction of 83.33% in
contribution due to the price reduction and contribution per unit reduction.
This makes contribution reduce from £1,440,000 to £240,000, which is then
insufficient to cover fixed operating costs of £300,000 resulting in an operating
loss of £60,000.
Alternative 3
This alternative is to do nothing in respect of price changes and allow sales
volumes to halve as a result of competition from new entrant EGMs.
Whilst such a strategy sounds unappealing, the budget data shows that it may
produce the highest operating profit of the three alternatives – albeit still with
damaging consequences.
In this alternative, PWE maintains its price at £50 and it therefore maintains its
gross margin per unit. Retailers have no cost saving to pass on, so the retail
price stays at £55.
The cause of the extent of the reduction is that sales volume falls by 50%. This
makes a reduction in contribution of 50% from £1,440,000 to £720,000.
After deducting fixed operating costs, this reduces operating profit to £420,000
which is a 63.2% reduction on the 20X1 level of £1,140,000.

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(b) (i) £300,000/£6 = 50,000 items to break even
ie a reduction of 190,000 items (ie, fall by 79.166%)
(ii) Break even contribution per unit = £300,000/240,000 = £1.25
Break-even price = £1.25 + £44 = £45.25 (ie, fall by 9.5%)
(c)

Volume change 10% up

Price change zero
20X1 20X2
Industrial Industrial
£ £
Revenue 14,400,000 15,840,000
Cost of Sales 12,600,000 13,860,000
Contribution 1,800,000 1,980,000
Fixed operating costs 720,000 720,000
Operating profit/(loss) 1,080,000 1,260,000
Closure of the retailer division
Benefits
There is significant uncertainty over the industry given the EGM new entrants.
For PWE, two of its major suppliers have planned to commence selling B2C
from 1 January 20X2. The estimated effect per the budget is a significant
reduction in operating profit. The best achievable result from pricing strategies
only is to maintain prices and suffer a halving of revenue and a 63.2%
reduction of operating profit.
It is possible that other suppliers may also enter the market and increase
competition in the industry even more to the extent that operating losses could
be made.
It is also possible that in the longer term, beyond 20X2, Atior and Hista may
gain more traction and penetrate the industry even more, also resulting in
operating losses and the need to consider closure and withdrawal from the
retailer industry.
It could be argued that if there is no further deterioration in the competitive
position then the figures in the budget for 20X2 can be sustained and therefore
at least a positive contribution and a positive operating profit are being
achieved. However, this may not be enough to avoid closing the retailer
division as the lower level of profit may not be a sufficient return on capital
invested.
The industrial division is budgeted to make the larger operating profit of the
two divisions in 20X2 at £1.26m, due to the 10% increase in sales and the

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reduction in profitability of the retailer division in 20X0 compared with 20X1
(per table above), whichever alternative is chosen.
However, the key question is a marginal one about whether the funds raised
from closing the retailer division (if any) could be reinvested in the industrial
division to expand it further.
Risks
A key risk of closing the retailer division is that it is likely to be impossible to re-
enter the market in future if the level of competition later decreases (eg if EGM
fail to penetrate or gain traction or other incumbents exit the industry) and
higher levels of profitability return.
A further key risk is that there may be costs of closure (eg redundancies and
lease contract breaches) such that, rather than funds being available for the
industrial division, funds are taken away from it.
While the two divisions are largely operated independently from each other in
operational terms, there may still be some economies of scale (administration
and financing) and economies of scope in distribution. Closure of the retailer
division may therefore cause additional costs to fall on the industrial division
alone.
The budget above considers only a pricing response to the entry of EGM.
Other non-price responses may be available which would mitigate against the
effects of increased competition and avoid closure of the retailer division.
Retailer partnerships are one example, as set out below.
Retailer partnerships
Benefits
Whilst Altior and Hista appear to have a price advantage, PWE's retailer
division has a number of non-price advantages which EGM would find difficult
to replicate. These include for example a shorter lead time (24 hours
compared with 4 days) and a multi supplier range of products.
As PWE sells to retailers, rather than consumers, partnerships with retailers
are likely to make the supply chain more efficient in delivery services to
consumers.
Having good information helps PWE to use its supply chain more effectively
and to coordinate supply chain flows in order to increase responsiveness and
reduce costs. This helps in integrating PWE's systems thereby helping
managers coordinate resources, procurement, inventory, orders, invoicing and
payments.
Integration of procurement and outbound logistics systems means greater
efficiency and reduced costs (eg, less inventory, no delays, improved
planning).
Consistent, reliable and prompt data and analysis about facilities, inventory,
transportation, costs, prices and customers also enables better planning and
co-ordination throughout the supply chain. Information is potentially the most

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 important driver in the supply chain because it affects each of the other
drivers.
Inventory management – in order to respond to customer demands, PWE
holds large amounts on inventory. Alternatively, it can have agile procurement
and delivery by predicting changes in customer demand and this requires an
efficient supply chain. The digital platform enables anticipation of supply needs
and therefore less inventory to be held by PWE. This lowers costs and avoids
stock out risks.
AI improves predictive ability throughout the supply chain and also enables
learning from experience and constant improvement of procurement and
outbound logistics, leading to greater efficiency.
Risks
 Cyber risks may occur by sharing IT systems with external stakeholders
such as retailer customers.
 There is a risk that the IT system fails to deliver the benefits to cover the
costs of installation.
 The new system may deliver insufficient benefits to resist the competition
from EGM and prevent closure.
 There may be insufficient retailers willing to form partnerships to make the
investment in the new digital platform worthwhile.
 EGMs may, in time, imitate the retailer partnership strategy.

Examiner's comments
1.2 (a) Calculation of the three budgeted operating profit figures was generally
very well answered and most used a clear format to present their budget,
with workings.
The narrative analysis was more varied. Some, but not all, candidates
offered an explanation of the reasons for the change in profit figures, with
the better answers explaining each policy change in turn, rather than
providing a consolidated view.
Some weaker answers wasted time calculating the industrial profit and/or
the overall profit, which was not required.
Also, some weaker answers completely missed out the discussion or just
made basic comments on the relative profit levels.
(b) This requirement was well answered by most candidates, but some
stopped at calculating the break-even levels and failed to show the
changes needed to break even as required (in either absolute or
percentage terms).
(c) Retailer partnerships: This was well answered in terms of focus on the
extended supply chain, with better answers reflecting on the added
protection of this change in strategy. The implications of implementing the
strategy using AI was also well discussed by most, but not all, candidates.

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 The best answers went on to question the sustainability of any competitive
advantage gained, given that the manufacturers are likely to imitate the
strategy in the medium term.
Weaker responses did not address competitive position or AI very well, if
at all. Very few explained the learning capability of AI.
Closing of retailer division: This was reasonably well answered by most
candidates, providing a list of benefits and risks in many cases. Weaker
efforts just concentrated on the retailer division closure, with little or no
reference to the industrial division.
Explicit mention of the closure freeing up resources for the industrial
division was only made by a significant minority. The best answers
questioned the long-term sustainability for the firm of retailer division
closure. Very few recognised the implications of this decision in the long
term as well as the short term.
Few candidates provided calculations for the industrial division.
Only a minority provided a conclusion.

1.3 In making any ethical evaluation, it is first necessary to establish the facts. In this
case, there have been no actions yet taken as they are only intentions and the
ethical judgement is of those intentions.
Jamal is still friendly with some Lexo customers, which does not of itself present
an ethical problem.
The issue of legality applies whereby there may be terms in Jamal's employment
contract which prevent him from disclosing or using information that he has gained
while an employee of Lexo. There may also be legal data protection issues (eg
GDPR).
Even if there are no confidentiality terms in the employment contract, there is an
implied ethical duty of confidentiality to keep private any details acquired during
the course of employment, or at least not to exploit them for gain.
There is an issue of transparency – would PWE suffer if the Lexo board became
aware of what has happened? Transparency might also affect the new
partnerships if other customers became more cautious of sharing information.
Similarly, would the consumers being targeted mind if they knew what had
happened (although as contacts of Jamal they could be made aware)?
There is an issue of honesty. Deception in the way the information has been
acquired and used would fail the honesty test.
The self-interest test would mean that Jamal and the marketing director could be
acting in their own self-interest to improve salary. The same may be said for the
board if they approve the proposal.
Fairness – it is likely that competitors, Lexo and consumers would not take kindly
to the fact that PWE has used inside information to price just below Lexo to gain
unfair advantage.

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Business trust
Business trust emphasizes the importance of understanding the relationships
between stakeholders and the value of relational contracts based on trust and
commitment, rather than just transactional contracts in which each side tries to get
the greatest gain for itself. In a transactional relationship, there is no commitment
to the long term.
The deception of using Jamal's information is likely to undermine, not only the trust
of the customer supplier relationship with Lexo, but if information entered the
public domain, it could undermine the trust needed for the intended partnerships.
It may also undermine the promise of retailer customers to match the price
decreases of PWE as originally promised in seeking their own self-interest once
the trusted relationship has broken down.
Actions
Before the board gives its approval, it should ask Jamal to disclose his
employment contract with Lexo to establish whether any breach has taken place
or will take place if there is disclosure.
The board should discuss the broader strategy of a B2C policy and whether it is
appropriate. If it is decided in an open way, then there should be transparency.
Inside information on Lexo should not be used.
The importance of ethical behaviour should be emphasised to Jamal and the
marketing director. There should be a general review of the company's overall
culture to ensure that all staff are in line with the importance of openness and
maintaining corporate ethics.
Examiner's comments
Generally, this was well-answered. Most candidates referred to key ethical
principles. A minority of candidates woodenly used the
transparency/effect/fairness framework which severely reduced the scope of their
answers.
A significant minority asserted that the proposal is illegal without reference to
whether or not there was a contractual obligation to confidentiality, instead alluding
to insider dealing, which was not relevant.
Many candidates failed to recognise that no decision had yet been taken by PWE,
so no ethical misconduct had, as yet, taken place. It was only future actions being
considered that may be unethical.
Nearly all candidates recognised both business and ethical issues in the proposed
use of customer information from Lexo. However, some candidates suggested that
PWE should weigh up the risks and benefits of adopting the proposal as it stands,
thus implying unethical behaviour could be considered if there were significant
commercial benefits.
The ethical actions suggested were not always clear and often produced vague
statements with the actions unspecified.

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 2

Marking guide
Marks
Knowledge Skills Maximum
2.1 Data analysis and assimilation 3 9 10
2.2 Data reliability and bias 2 6 8
2.3 Evaluation of strategic proposals 4 15 18
Total marks 9 30 36

2.1

A B C D E F G

61 Total
average
score 2.6(1)

62

63 Standard
deviation 1.27(2)

64

65

66 Socio-
economic Total Average
group Number score score

67 A 10 20 2.0 Low socio

economic

68 B 32 90 2.8 High socio

economic

69

70 Age
group

71 1 8 37 4.6 Under 50

72 2 34 73 2.1 Over 50

73 42

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Spreadsheet notes
(1) The spreadsheet formula used is =AVERAGE(D18:D59) See pre-populated
data in question.
(2) The spreadsheet formula used is =STDDEV(D18:D59) See pre-populated data
in question.
The analysed data shows the overall response by the sample of 42 customers to
the statement:
“If Kizzion products were more environmentally friendly, I would be more likely to
buy them.”
Care must be taken with drawing any conclusions from the sample as it is small
and may not reflect the views of customers generally. Indicators of bias might be
the number of shops in the sample, the day(s) of the week that sampling took
place and whether the respondents had different characteristics than the non-
respondents who refused to take part in the survey when asked.
The overall average score of 2.6 out of 5 does not give a strong indication that
making Kizzion products more environmentally friendly would influence the sample
of customers to make more purchases.
The standard deviation of the scores is quite high at 1.27, which indicates that
there is a variety of opinion with at least some customers holding strong views
either way about the effect of environmental impact on the purchase decision. For
example, at one SD above the mean in the distribution the score would be nearly
4, which is strong agreement that customers would be more likely to buy Kizzion
products if they were more environmentally friendly. However, by mere inspection
of the data in the pre-populated spreadsheet, the scores do not look to
approximate a normal distribution, so there are significant reservations about any
analysis based on SD for this small sample, beyond indicating an approximate
measure of dispersion.
The segmented data (by socio-economic group and age) provides the opportunity
to engage in target marketing a sub-group where there is an indication of strong
opinions about the environmental impact of Kizzion products.
The higher socio-economic group, B, appears more concerned than the lower
group, A, with average scores of 2.8 and 2.0 respectively. However, neither score
is high, so socio-economic grouping is not a factor in identifying interest in
environmental issues that is sufficient to drive purchasing decisions.
In respect of age groups, the under 50 group appears much more concerned than
the over 50 group, with average scores of 4.6 and 2.1 respectively. This shows
that target marketing the younger age group about reducing environmental impact
may be effective in driving their purchasing decisions, however the very small
number of under 50 responses (only 8 out of 42) suggests that no decisions
should be taken in this respect without additional research.
Beyond the problems presented by the fact the sample is so small, it is possible
that there is some inaccuracy in the data recorded. In relation to age, some
customers may have been reluctant to identify their actual age to a researcher in a
face-to-face situation, so some of the under 50 age group data may belong in the

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 over 50 group (and vice versa). In addition, postcodes may be an unreliable
method of identifying socio-economic grouping (see answer to (b)). Finally, there
may be data bias in that people tend to respond more favourably to a statement
when face to face with a researcher.
Tutorial notes
There are several different methods and functions that can be used to analyse the
data.
To obtain the average score for each group we can total the scores for the group
using SUMIF (=SUMIF(B18:B59,1,D18:D59)) then divide the total by the number
of customers in each group, calculated using COUNTIF
(=COUNTIF(B18:B59,1,D18:D59)). Alternatively, we could use AVERAGEIF on
the raw data (=AVERAGEIF(B18:B59,"A",D18:D59).
Further analysis could look at the standard deviation of the individual groups, by
age or socio-economic grouping, to measure the variability of scores awarded
within the sub-groups.
However, given the small sample size, such further analysis of standard deviation
has limited statistical value.
Also, it is questionable (just by inspection) whether the data relating to scores
awarded approximates a normal distribution.
2.2 The fact that there were 1,940 responses means that there is a large sample, but
a degree of professional scepticism needs to apply to this sample as it may not be
representative of all the customers in the survey (15,660). This not just because of
the low response rate (12.4%) but also because there may be a degree of data
bias (eg, the most enthusiastic customers are responding).
Although the overall sample size is large at 1,940 the sub sample of those under
the age of 50 (220 respondents) was fairly small and of those in lower socio-
economic groups (90 respondents) even smaller. They may not be large enough
to provide reliable data.
The measurement method for identifying segmentation of the markets is crude.
The grouping of above and below 50 years old may reveal very different
preferences in each group. For example, a 51-year-old and an 81-year-old may
have very different preferences. This limits the decision-making effectiveness in
targeting markets for a segmentation strategy.
Similarly, the identification of socio-economic groups by postal district is crude, as
databases only show the average value of houses in the postal district. A
customer may own a house much lower or higher than the average value in the
postal district. Alternatively, a customer may have high wealth in property, but a
small disposable income with which to buy expensive handbags and accessories.
Also, the usefulness of the data in decision making for entering new markets or
making product changes may be limited by asking only existing customers. This
reinforces the existing product view and says nothing about the opinion of new
potential new customers and new variations of products.

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 It should also be noted that the sample of Kizzion customers might not reflect the
population generally, as for example Kizzion sells leather goods which are likely to
attract customers who are less concerned with the environment.
Finally, the questionnaire sample was determined by, and the questions were
written by, the marketing department. Professional scepticism might therefore
suggest that how the questions were expressed could exhibit bias towards their
own objectives.
Examiner's comments
Most candidates displayed a good understanding of the concept of data reliability
and bias and made reference to decision making. The better answers covered
both age group and socio-economic group data, as well as critically reflecting on
the questionnaire statements.
Only a significant minority linked the survey information to informing future
decision making by the firm. Weaker answers considered the online survey to be
very good and were uncritical of the data as a basis for decision making.
Some excellent answers provided a critical appraisal with clear improvements for
obtaining data from the target markets.

2.3 Ansoff's growth-vector matrix describes how a combination of a firm's activities in

current and new markets, with existing and new products, can lead to growth. By
relating product opportunities to markets, this mix identifies four broad alternative
strategies.
The Lynch Expansion Method Matrix is another two-by-two matrix of company
growth (organic growth and external development) and geographical location
(home (domestic) and international).
These models can be used to analyse the three strategic proposals.
(a) Proposal 1 – Overseas sales to be made online
Within the Ansoff matrix, the proposal to enter the overseas market by selling
online is market development: existing products and new markets.
The new markets are new geographical areas and export markets. These
sales are achieved through new distribution channels to attract new
customers.
This strategy takes the existing leather handbags and accessories and finds
new geographical markets for them overseas, offering new opportunities for
expansion.
The fact that items with adjustments are not available for overseas customers
could be important as it restricts the product range available. Indeed, over half
of all current sales revenue (50.45% ie £5,040k/£9,990k) is from adjusted
items which will not be available in the overseas online market.
In terms of the Lynch Expansion Method Matrix, it would be regarded as
growth through internal development abroad (ie, exporting).

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 These sales are likely to all be incremental with minimal leakage between
home and export markets as prices are similar and the markets are
geographically separated.
While this strategy is positive in terms of generating more revenue, it has a
number of problems in relation to costs and risks:
(1) The costs incurred in penetrating new markets (eg, IT costs, marketing
costs and distribution costs) may be significant compared to the revenues
earned. However, there are no shop overhead costs to be incurred.
(2) The downstream supply chain is geographically lengthened significantly,
thereby increasing costs of distributing goods to customers.
(3) There may be different fashions in different countries such that products
developed for the UK market may be less attractive and the brand less
recognisable in many overseas countries, particularly as they have not
been sold overseas previously. In some countries, leather may not be
acceptable to a majority of the population.
(4) Additional risks apply (eg, international physical distribution and foreign
exchange rate risk on settlement).
(5) There may be reputation effects from not selling directly from shops with
service from sales assistants.
(6) The is a limited product range to be sold abroad. The bestselling UK
product, handbags with adjustments, is not available for the online
overseas market.
(7) Overseas markets may be more price sensitive (ie, have different price
elasticities) which could increase or decrease their profitability.
(8) UK customers may be frustrated that they are not being offered an online
purchasing facility that is available to overseas customers.
(9) Environmentally there will be an increased carbon footprint for Kizzion
arising from shipping products across the world from the UK factory.
(10) The products being sold continue to be made from leather which also has
a large carbon footprint resulting from emissions associated with cattle
farming. The chemicals used to treat leather before production are also
toxic and harmful to the environment.
(b) Proposal (2) – Diffusion brand – ‘Young Kizzion'
Within the Ansoff matrix, the proposal to launch a new range of handbags
made of cheaper fabric is product development: new products and existing
markets.
In terms of the Lynch Expansion Method Matrix, it would be regarded as
growth through internal domestic development.
The new strategy is for Kizzion to launch a new product in the existing market
so there is likely to be some overlap of market knowledge and networking
contacts. However, it could be argued that the new strategy is in a different
sector of the same market, that is a form of diversification (under Ansoff).

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This proposal has several advantages:
 Kizzion can exploit its existing marketing arrangements such as the use of
its shops network and internet advertising.
 Kizzion should already have good knowledge of some of its customers
who may be interested in the new range from the statements in the
questionnaire surveys (“If Kizzion introduced new products made of fabric
at a lower price, I would be likely to buy these and also “If Kizzion products
were more environmentally friendly, I would be more likely to buy them”).
 It may be less risky than Proposal (1), which targets overseas markets, as
there are no language/cultural barriers.
 Kizzion's brand name is already known to the UK market and is perceived
as high-quality, so diffusion brand sales can benefit from this.
 A lower cost diffusion line is a way for Kizzion to make its brand more
accessible to a wider spectrum of the market.
 The diffusion brand increases awareness, recruiting younger consumers
and generating a new revenue stream of £600,000 (800  £750).
 In terms of relative scale, existing revenue is:
Price Revenue
Vol £ Total
Standard handbag 2,500 1,500 3,750,000
With adjustments 2,800 1,800 5,040,000
Accessories 1,600 750 1,200,000
9,990,000
 Therefore, the diffusion brand would increase total revenue by 6%
(600,000/9,990,000). This is only a minor increase relative to the core
product.
 The non-leather material used for the products is recyclable, which will
appeal to the demographic being targeted as well as improving Kizzion's
approach to sustainability.
This proposal also has several disadvantages:
 From a generic strategy point of view, Kizzion's existing products are very
upmarket and differentiated and it protects itself from competition by
operating in this market niche through reputation. The diffusion brand still
includes the Kizzion name so there may be brand confusion, to the
detriment of the reputation of the main brand.
 Use of the same pattern for the diffusion brand and the main brand may
increase this confusion.
 There is greater competition in lower price ranges so margins may be
lower.
 Kizzion will need to develop new manufacturing processes and new
suppliers, as it has no experience in manufacturing fabric products.

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  The new strategy will require marketing expenditure for a young lower
income group (eg, using social media) where there is little experience.
 This strategy is still UK-focused and may offer limited scope for growth.
 Kizzion is encouraging more frequent purchases with the cheaper price
point and the bags may start to be seen as a fast fashion item. Even
though the material is recyclable, the recycling process and the production
of new bags are likely to be resource-intensive and polluting. Any bags
that are not recycled may end up on landfill sites.

(c) Proposal (3) – License the Kizzion brand

Licence fees amount to £216,000 (3,600  £60). This is only 2.16% of existing
revenue so it is relatively small. Costs should however be low, mainly
comprising monitoring costs.
Within the Ansoff matrix, the proposal to license the manufacturing and selling
of a new range of products is diversification: new products and new markets.
Diversification occurs when a company decides to make new products for new
markets. PWE should have a clear idea about what it expects to gain from
diversification through brand licensing. New products and new markets should
be selected which offer prospects for growth, through licensing fees, which the
expansion of the existing product-market mix would not offer.
Diversification stands apart from the other strategies. It can involve the
greatest risk of all strategies. It requires new skills, new techniques and
different ways of operating. In the case of Kizzion it does not involve new
manufacturing skills, but it does require skills in building relationships with
business partners and monitoring the licensing arrangements, which is moving
away from existing core activities and core competences.
The greatest risk however is dilution of the brand name and the brand's
distinctive pattern, which can now be obtained on cheaper goods. Moreover,
there is loss of control over the brand and distinctive pattern in the way it is
sold, unless this is tightly controlled under the licensing agreement. With only
a 2.16% increase in revenue, this seems a low return for the risk incurred.
From an environmental and sustainability perspective, Kizzion will lose control
of the manufacturing and selling process through any licensing agreement.
The materials used to manufacture the products under license may not be
ethically sourced or recyclable. Working conditions at factories may not be in
line with the conditions expected at Kizzion's own premises, likewise, pay and
employment terms may also not be as expected. If Kizzion wishes to protect
the brand it is important that any licensee adheres to the same environmental
and sustainability standards as Kizzion.

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Examiner's comments
For many candidates, this was their best answered requirement.
The majority made appropriate references to strategic models such as Ansoff
or Lynch.
Benefits and risks associated with each proposal were generally well
discussed, however potential for leakage between markets was seldom
referred to.
Most candidates recognised brand dilution as a major risk with both the
diffusion option and the licensing arrangements.
Lack of understanding of the third proposal, licensing, was evident in weaker
answers, often with the implication that Kizzion was proposing to license
manufacture of its handbags or was franchising.
Most, but not all, candidates used the numbers in the questions and basic
calculations (eg, £216,000 for the licence, and £600,000 for the diffusion) to
support their arguments. Candidates are advised that, typically, where there
are numbers in the question, there should be numbers in the answers.
Most candidates provided recommendations, but the quality of these varied.

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3

Marking guide
Marks
Knowledge Skills Maximum
3.1 Product and service assessment 1 8
3.2 Business viability 2 8
3.3 Growth prospects and barriers to growth 1 7
Total marks 4 23 24

3.1 Business Plan

Application for MBDA grant on behalf of Daya Abiko
Product and service (meeting customer needs)
Product
Daya is yet to select the precise type of drone to be purchased, but it will be a mid-
range drone costing about $10,000. The photography equipment needs to be
suitable for the drone (eg, weight) and for client needs so they will be purchased
together.
It has been considered that the mid-market type of drone should suit the expected
engagements and client needs. Conversations will be held with the Blanfort CEO
to confirm the capacity and capabilities required.
A survey of the locations of wind turbines will be carried out to ensure that the
drone purchases can reach most of them and make the return trip to land with the
available range. At a 8km range, this would limit the furthest wind turbine to be
accessed to 4km, but some safety margin is needed in case the range is limited by
bad weather or load. Some time is also needed at the wind turbine to take photos.
Daya will review new models being launched until just before purchase in order to
make take advantage of any new technical improvements.
It is recognised that future requirements for other industries need to be anticipated
as the useful life of three years goes beyond the one-year planning horizon for the
two initial industries.
Service
It is a recognised weakness that Daya is the sole person working for the company
and there is only one drone. The advantage could be high utilisation, but
recognised disadvantages are:
 Inability to service two urgent and simultaneous client requests
 Downtime if Daya is ill or the drone is faulty
 Inability to service larger client requests requiring multiple drones at the same
time

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To mitigate these factors Daya will:
 Focus on planned work, rather than response work.
 Aim to expand the business with new assets and new people when demand
develops eg, in three years, when the replacement drone is purchased, do not
retire the old drone and look for a partner/employee with a licence.
 Maintain good communications with clients to plan workflows and, if possible,
to build in flexibility (eg, building site photos could be taken flexibly on various
days to accommodate other work).

Establishing viability
The supply of commercial drones is increasing at 6% pa while demand is growing
by 7% pa. A superficial view might regard this as favourable for drone operators
with demand growth exceeding supply growth.
However, further reflection would show that this is not comparing like-with-like.
The demand growth considers each year separately, whereas supply is cumulative
in that a useful life of say 3 years means that the number of drones operating in
the market is growing cumulatively over this period.
We need further information on the actual absolute numbers, but the supply and
demand balance trend is not necessarily favourable.
It is recognised that the ability for Daya to compete against incumbents is
constrained by the following factors:
 Daya is a new entrant and (other than Blanfort), they do not have an existing
customer base so need to establish one over time.
 The product is mid-market and may meet some customers' needs, but larger
drone companies have superior drones and may meet customer needs better.
 Larger companies may also have more drones and more staff.
However, Daya has already recognised that they cannot compete across the
sector and therefore will focus on being able to compete in the niche market of a
small range of industries and against smaller incumbent drone companies. They
can do this by:
 Acquiring a mid-market drone, rather than a low market drone, as for smaller
competitors.
 Using joint experience from their degree and photography interest, thus
bringing two relevant core competences to the business.
 If awarded the grant, on the basis of this business plan, Daya has the
opportunity to acquire assets and engage in marketing to gain a foothold in the
business that other competitor entrepreneurs may not be able to replicate (eg,
because they are over 25 years old).

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It is recognised that gaining a foothold in the wind turbine market may not be easy,
given the scale of the companies involved and the geographical challenges for a
mid-market drone. However, there are opportunities to gain a foothold and
establish financial and commercial viability in this market:
 The wind turbine industry is growing in Monranto so there is a derived demand
for aerial photos that is also increasing.
 Multiple suppliers are used by wind turbine companies so there are
opportunities to gain a foothold as a supplier for at least a few of these.
 Aerial photos of turbines from drones are cheaper and easier than physically
climbing. It also saves money from expensive downtime from unrecognised
faults and closure during climbing. Drone technology is therefore superior to
the alternatives and is the chosen technology for the wind turbine industry for
inspections. As it is the chosen technology, there is limited competition from
substitutes.
Gaining a foothold in the real estate industry is easier as a family connection
appears to have created the opportunity to have a six-month contract with a
medium sized housebuilding company. In terms of gaining a foothold and
establishing commercial and financial viability this helps by:
 Generating early and reliable cash flows.
 Giving the opportunity to gain experience in the industry and learn basic
technical and business skills to the extent that they have not already been
acquired.
 Giving the opportunity to gain reputation and contacts in the real estate
industry in dealing with Blanfort's stakeholders and establishing reputation in
the industry more generally.
 Giving the opportunity to renew the contract after six months and extend the
above benefits further.
It is recognised however that there is a threat to viability if the Blanfort contract is
not renewed after the short period of six months.
Growth prospects and barriers to growth
The growth prospects of the industry appear good given that the new technology
has market demand for the services it can deliver in a number of industries.
However, given changing technology, it is recognised that there are risks from
maintaining the technology as current, which may require continued new
investment. Alternatively, new technology may decrease in price and increase in
capability making the markets of larger drone companies more contestable by
smaller drone companies.
On the demand side, the ability to grow comes from building market share in a
growing market (ie, to expand faster than the market as a whole).

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On the supply side, barriers to growth at the moment include:
 Human resources – only Daya currently, and there may be problems in hiring
staff with the new government licence requirements.
 Financial resources – the grant will help the start-up, but internally generated
cash appears to be needed for further growth (eg, an additional or
replacement drone).
 Geography – Monranto is quite a big country for a population of 20 million. The
inability to service clients across the whole country may therefore be a barrier
to growth.
However, a favourable supply side factor is that the new strict government
regulations on the issuing of drone licences is a barrier to new entrants which will
restrict industry supply and force up prices.
Examiner's comments
Answers tended to be reasonable on the whole, but variable in quality at the lower
end.
The great majority of candidates followed the suggested structure in the question.
The few who did not, tended to achieve lower marks due to lack of coherent
structure and a lot of repetition of the same points.
Weaker responses tended to focus disproportionately on only one of the two
chosen market segments.
In the final section, a number of candidates framed their answer in terms of
barriers to entry rather than barriers to growth for Daya.
The security of the 6-month real estate contract was raised by most candidates in
terms of affording some degree of financial viability for the business, but many
failed to recognise this is a relatively short period and that the risk of non-renewal
is a threat to viability.
Only a minority explicitly raised the financial impact on the business if a grant were
to be awarded.
Likewise, only a minority explicitly considered the growth limitations for a one-
person business. The benefit of possession of a pilot's licence was raised by
many, but the logic of the new government regulations restricting growth due to
inability to hire qualified staff was only raised by a few.
Most mentioned the benefit of a growing market in the wind turbine sector, but few
considered that the supply/demand trend was not necessarily favourable to Daya.

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