CAIE A-Level Business A2 8.1.2 Product Development Questions

[Maximum number: 12]

Clean Delivery (CD)

Until 2017 Gianni Rousseau was a marketing executive for a multinational consumer goods company. His wife, Anna, worked in the research and development (R&D) department of the same business. In 2017 they set up CD in country K.

A cleaner brand

Gianni thought there was an opportunity to disrupt the household cleaning product market in country K with a new approach to distribution. CD manufactures and sells detergent which is used to wash clothes. Sales are made to households through a subscription service using postal deliveries to distribute the product. CD claims three main benefits for customers:
• cheaper per clothes wash than leading retail brands
• environmentally responsible as no plastics are used in packaging
• flexible and convenient delivery of the detergent.

Customers control the frequency of their home deliveries online. Payments are taken directly from customer bank accounts for each delivery.

Marketing success?

The household cleaning product market is competitive. Multinationals target the mass market whilst some smaller businesses focus on the environmental market segment. CD made effective use of social media when the company launched its washing detergent. A substantial marketing budget supported rapid sales growth. CD’s share of country K’s clothing detergent market is currently 5%. CD has an objective to double that within the next two years. CD has benefited from positive publicity in the media and Gianni and Anna have won entrepreneurial awards in country K.

However, some pressure groups have questioned whether CD’s products are as sustainable as other environmentally friendly brands. Product tests have also found that CD’s products provide less effective cleaning than the market-leading multinational brands.

Developing new products

Since 2018 CD has developed a small range of additional cleaning products. CD aims to ensure that each new product can be delivered easily by post. To ensure products are sustainable CD only uses materials that are not harmful to the environment.

CD plans to increase expenditure on research and development to 3% of revenue by 2025. In a recent interview Anna commented that CD’s R&D spending is, in relative terms, double the investment of the leading multinational brand.

Inflation and government economic policy

In recent months CD has experienced an increase in the cost of chemicals and other materials used to manufacture its products in country K. CD sources most of its chemicals and materials locally to reduce the environmental impact. Rising energy prices have also had a significant effect on costs. CD has absorbed these additional costs, but Gianni wants to increase the price of clothing detergent from $4.00 to $4.60 per unit. This would be the first price increase since 2022. However, he is concerned that this will reduce demand. CD’s marketing department estimates that the price elasticity of demand for the detergent is –0.6. Current sales are 100 000 units per month.

Shareholder pressure

CD’s expansion has been financed through loans, retained profit and share capital. CD is a public limited company although Anna and Gianni still own 40% of shares. At the recent Annual General Meeting (AGM) Gianni presented CD’s ambitious expansion plan which would require additional financing, possibly from external sources.

Gianni argued it was important for CD to expand operations to benefit from internal economies of scale. Some shareholders expressed their concerns that CD should focus more on generating short-term returns to shareholders.

Table 1.1 provides selected financial data and accounting ratios for CD.

	30 January 2024 ($m)	30 January 2023 ($m)
Revenue	21.3	18.6
Profit from operations	2.6	2.5
Issued share capital	3	3
Reserves	13.5	12.8
Non-current liabilities	16	15
Current ratio	0.8:1	0.6:1
Earnings per share $	0.6	0.6
Market price per share $	4.00	3.90
Dividend yield %	3%	3.3%

Table 1.1 CD’s selected financial data and accounting ratios

Evaluate the importance of new product development to CD's future success.

Level	AO1 Knowledge and understanding 2 marks	AO2 Application 2 marks	AO3 Analysis 2 marks	AO4 Evaluation 6 marks
3				5–6 marks Developed evaluation in context • A developed judgement/conclusion is made in the business context. • Developed evaluative comments which balance some key arguments in the business context.
2	2 marks Developed knowledge of relevant key term(s) and/or factor(s) is used to answer the question.	2 marks Developed application of relevant point(s) to the business context.	2 marks Developed analysis that identifies connections between causes, impacts and/or consequences.	3–4 marks Developed evaluation • A developed judgement/conclusion is made. • Developed evaluative comments which balance some key arguments.
1	1 mark Limited knowledge of relevant key term(s) and/or factor(s) is used to answer the question.	1 mark Limited application of relevant point(s) to the business context.	1 mark Limited analysis that identifies connections between causes, impacts and/or consequences.	1–2 marks Limited evaluation • A judgement/conclusion is made with limited supporting comment/evidence. • An attempt is made to balance the arguments.
0	0 marks No creditable response.	0 marks No creditable response.	0 marks No creditable response.	0 marks No creditable response.

Evaluate the importance of new product development to CD's future success.

Figure for Answer to Question 1 — CAIE A-Level Business A2

4(b)

Indicative content

Responses may include:

AO1 Knowledge and understanding

- New product development is the design, creation and marketing of new goods and services.

- Research and development is the scientific research and technical development of new products and processes.

Benefits of new product development:

- Attract repeat purchase by offering a product that is new and better.

- Meet customer needs more effectively.

- Gain a competitive advantage over competition.

- Product differentiation.

- Control over pricing.

- Refresh the brand.

- Cost of product development.

AO2 Application

Limited application, ${ }^{\text {APP }}$ applies knowledge to CD once.

Developed application, ${ }^{\text {APP }}+{ }^{\text {APP }}$ applies knowledge to CD twice.

- Competitive market.

- Consumer product tests showing CD products not as good for cleaning.

- Environmental credentials of CD have been questioned.

- Cost of R&D - increase in expenditure to 3% of revenue (that would be $ 639000 in 2024).

- Shareholder pressure for returns.

- Reference to price inelastic demand (-0.6).

AO3 Analysis

Limited analysis AN - candidate shows one link in the chain of analysis.

Developed analysis L2AN - candidate shows two or more links in the chain of analysis.

- Improvements in cleaning power of products will maintain consumer interest and prevent the product becoming less effective relative to products of competitors AN. This will result in higher sales and increased profit L2AN.

- R&D can improve sustainability of CD's cleaning products further differentiating them from MNCsAN and attracting customers L2AN.

4(b)

- R&D can enable CD to launch new products and maintain growth in revenue AN which can help meet shareholder expectations for higher returns L2AN.

- Improved products could make CD's detergents more price inelastic AN.

- R&D is costly and may therefore negatively impact CD's cashflow and liquidity AN.

- R&D may be classified as an operating expense and can therefore result in a decrease in profit AN.

AO4 Evaluation

Limited evaluation ${ }^{\text {Eval }}$ - limited supported judgement and/or a weak attempt at evaluative comment.

Developed evaluation $\left.{ }^{\text {L2 }}\right|^{\text {Evat }}$ - supported judgement and/or reasonable evaluative comment.

Developed evaluation in context ${ }^{\left\lfloor\mathbf{L 3}^{\text {Eval }}\right.}$ - supported judgement in context and/or reasonable evaluative comment in context.

- Without product development CD will lose its competitive edge in the market. Products need to be continually improving.

- Can R&D match the results of the spending by MNCs which will be significantly more than CD can afford?

- R&D is risky and may not bring improvements to products.

- Is product development the most important factor to future success:

- Role of marketing to support new products.

- Role of marketing research as part of NPD.

- Competitor decisions.

Accept all valid responses.

CAIE A-Level Business A2 8.1.2 Product Development Topic Practice

Question 1