Evaluate finance sources by comparing control, cost, risk, flexibility and repayment obligations in IB Business Management HL cases.
Copper Health (CH)
Copper Health (CH) was the market leader in the production of anti-venom* vaccines to treat poisonous snake bites. CH's mission - influenced heavily by corporate social responsibility (CSR) - is to put customers first and profits second in the treatment of snake bites.
Despite 100000 deaths worldwide each year from snake bites and 400000 serious injuries, CH recently announced that it will no longer produce anti-venom vaccines. Several large Mexican, Brazilian and Indian pharmaceutical companies have entered the market selling anti-venom vaccines at a much lower price than C H.
A spokesperson for C H said: "We will remain a private limited company where corporate social responsibility (CSR) remains an important driving force for our mission. Our medical research is only financed from retained profit. When the lower-priced competition arrived, our sales and profits of anti-venom vaccines decreased significantly. Treating snakebites no longer makes financial sense. Instead, the technology used to produce anti-venom vaccines will be used to research and develop (R\&D) other life-saving vaccines".
A non-governmental organization (NGO) has demanded action. "CH is the largest manufacturer of anti-venom vaccines in the world. Although CH's competitors are increasing their production of anti-venom vaccines they will not be able to produce enough to satisfy demand for the next two years. There will be a major shortage. This will result in many life-threatening injuries and deaths."
The non-governmental organization (NGO) has urged CH to seek new sources of finance to continue the production of the anti-venom vaccine.
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* anti-venom: a medication made from antibodies that is used to treat venomous bites and stings
Define the term retained profit.
Retained profit is the profit remaining after all expenses, taxes and dividends are paid and that is not distributed to shareholders. It is kept as part of shareholder equity which appears on the balance sheet to provide a source of funds for possible future activities.
Accept any other relevant definition.
N.B. no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. A candidate must demonstrate an understanding that retained profit is part of shareholder equity/ or belongs to shareholders and/or that it can be used as a source of funds/ reinvestment for possible future business activities.
Explain two possible external sources of finance CH could use to continue production of anti-venom vaccines.
The question is sufficiently broad to allow candidates to explain a range of possible sources of finance, but any candidate who looks at internal organic sources, such as increasing sales/profits, must be not given credit.
Possible external sources include:
- As CH is a private limited company, the decision could be taken to raise funds through an initial public offering. CH could be "floated or listed" on the appropriate local share market to raise funds targeting ethical investors.
- Angel investors who have strong ethical/CSR intent could provide funds.
- The NGO has demanded action. Given the number of deaths and injuries from snakebites, the NGO could be approached to provide new finance or governments in those countries predominantly affected. There could be the possibility of a private public partnership.
- Bank loan. If candidates uses this source of finance, it is expected that the candidate either comments on the fact that is likely to come from banks with ethical objectives or from banks which accept the risk associated with CH's mission statement or that the bank is likely to give a loan for a cause such as saving lives.
It is expected that the candidates incorporate the ethical investors/ ethical support issues given the current mission statement of 'people before profit 'as application.
Candidates do not have to use the exact words as above but to show understanding that whoever provides the finance should believe in/ support CH's mission/able to justify given the finance that might be risky due to CH's mission and the possible impact on the population.
Accept any other relevant possible source. (grant, subsidies)
Donation is not really an applicable source of finance for what has to be done. CH is not a charity
Mark as 2 + 2.
- For an identification or a description of one possible source of external finance with or without application [1].
- For explanation of one source with no application [1].
- For explanation of one source and application [2].
Application must refer to the possible sources of finance for production of anti
venom vaccines.
Rox and Inclusive Music (IM)
Rox was a music band managed by Michel Mbappe. The band enjoyed considerable commercial success thanks to Michel's autocratic leadership style. He personally made all decisions. Rox had given generously to local schools and other non-profit organizations. The band received many awards for their acts of corporate social responsibility. Their last CD "Action Not Words" had brought them considerable fame.
In June 2010, Michel was asked to help finance the start-up of a new non-profit music school called "Inclusive Music" (IM). IM's aim was to support young musicians from low income families. At first, Michel was very enthusiastic and prepared a business plan. Unfortunately, he realized that Rox could not afford to finance IM fully. External sources of finance other than contributions from Rox would be needed for IM to grow. Until then IM would only have a limited budget for marketing and market research.
In June 2011, IM opened with the mission statement "Action not words". To support its mission, it offered free lessons and allowed students to borrow musical instruments. Michel asked a popular former singer, Louis Marsaud, to be the school's director. Louis adopted a laissez-faire leadership style, hoping it would allow creativity among students. Initial student attendance was lower than expected and quickly worsened. Within three months, many instruments had gone missing and many students were no longer attending music lessons.
IM's finances were deteriorating, and Louis could not attract external sources of finance. Michel took action and organized a concert by Rox to promote IM. He also examined IM's accounts and discovered a significant liquidity problem. Without consulting anyone, he dismissed Louis. In the music media, Michel received much criticism for dismissing Louis. Journalists argued that the two main problems were, IM's vague mission statement and poor marketing. However, Michel aimed to ensure that IM became sustainable in the long term.
Discuss two possible medium- to long-term external sources of finance that IM could use to help solve its financial problems.
Possible medium- to long-term external sources of finance include:
- Seek new funding/finance from philanthropic investors/business angels. However, new business angels may demand greater scrutiny, or ask for control in the organization. This could have an impact on IM's mission statement.
- Bank loan secured against future royalties from Rox. However, a bank may impose a high interest rate if it thinks that the risk is high.
- Rox to invest further in IM to demonstrate their commitment to CSR. However, will Rox be willing to bail out IM? It is already invested in the organization and is holding a concert. There is an indication in the stimulus material that the group has insufficient funds.
- Share capital (probably private and restricted to businesses/musicians in the music industry) sufficient funds could be raised. However, financial controls demanded by the new investors may inhibit some forms of creativity. Michel will have to justify this strategy to the shareholders and seek approval; moreover, issuing shares may be expensive. New investors may demand a quick return for their involvement and this adds additional pressure on IM at a time of falling revenue.
- Government grants/subsidies. On the positive side, this money does not have to be paid back. However, is the government likely to offer a subsidy for such a luxurious product?
However, as the business is quite a new venture it may be difficult to source external finance. Michel will have to present IM as a viable business venture which may be difficult given its questionable success ("low attendance", "student missing lessons"). It already says in the stimulus that he has been unable to attract external sources of finance. This is a difficult decision for Michel given his leadership style. He would have to give up some form of control of the organization.
It is expected that the candidates provide substantiated conclusions which incorporate the significance of the arguments presented which are prioritized.
Accept any judgment, provided it is well substantiated/supported and relevant to IM.
Accept any other substantiated discussion with a conclusion.
If the candidate does not discuss two possible sources of external finance then they can only achieve up to a maximum of [3 to 4 marks].
If the response is a one-sided relevant approach with no discussion, award a maximum of [4 marks].
Award a maximum of [ 5 marks] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [5 to 7] markband if they give judgment/ conclusions that are not based on analysis already given in their answer.
Marks should be allocated according to the markbands on page 4.