IB Business Management SL 4.5 The Seven P…ing Mix

Covered syllabus points

4.5.1—Product 4.5.2—Branding 4.5.3—Pricing methods 4.5.5—Promotion 4.5.6—Place 4.5.7—People 4.5.8—Processes 4.5.9—Physical evidence 4.5.10—Appropriate marketing mixes

[Maximum number: 4]

KapTan

KapTan (KT), which manufactures rechargeable batteries for cordless consumer products like vacuum cleaners, began five years ago as a business with a product orientation. It sells business to business (B2B). Multinational companies dominate the rechargeable battery industry, and KT suffered from cash-flow problems in its first year of trading. Its profits are small and, in the last two years, have fallen.
KT has now developed an innovative battery that is small and lightweight. This battery is an emergency power source allowing electric cars to reach a charging station. However, the battery can only be used ten times before it runs out. KT has insufficient finance to create a battery that can be recharged an unlimited number of times.
Through market research, KT has discovered that:
- no other emergency batteries for electric cars exist
- owners of electric cars fear running out of power
- KT's new battery could be obsolete in five years.
KT has the capacity to produce 90000 of these new batteries each year. The average cost is $\$200$ per unit. KT has insufficient funds to invest in additional capacity.
KT is considering two options:
Option 1: Market and sell directly to existing car owners through business to consumer (B2C) at a retail price of $\$400$ . KT will need to borrow significant capital to finance this option.
Option 2: Accept an offer of a five-year strategic alliance with a manufacturer of electric cars. KT would provide its product exclusively at $\$250$ per unit. Sales are guaranteed.

$Table 2: \(\boldsymbol{K$

Table 2: \(\boldsymbol{K

With reference to Option 1, for K T, explain the relationship between the product life cycle, investment, profit and cash flow.

Initial research and development costs plus the costs involved in launching a product usually means a product will be a loss maker in its early years. Cash flows may be negative. As sales grow and the product moves into the growth phase, profits are likely to be positive but the company will require additional working capital Not until the product reaches the maturity phases of the life cycle are cash flows and profits likely to be positive. In the decline phase, cash flows and profits are likely to remain positive. The cash flows especially should be solid with the contraction of necessary working capital. For K T, the investment in R\&D for the new battery will have had a negative effect on cash flow and profits. Once the product is launched, Option 1 forecasts see quite large sales and therefore large cash inflows. However, we do not know about the marketing costs, which will increase cash outflows. Sometime in year 2, further investment would be needed if sales targets in years 3 and 4 are to be fulfilled as projected sales exceed capacity. This investment would increase fixed costs and reduce profits.

If a candidate shows some understanding the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [1].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow, but with no application to the stimulus, award [2].

If the candidate shows some understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [2].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has some application to the stimulus, award [3].

If the candidate shows clear understanding of the relationship between the product life cycle, investment, profit and cash flow and has detailed application to the stimulus, award [4].

If a candidate writes or draws some sort of table (such as exist in several of the textbooks IB students use) listing the stages of the product life cycle and showing the relationship between stages of the life cycle and their relationship to investment, cash flow and profit, accept and award [2] marks if well executed with no application to the stimulus and award [1] if poorly executed with no application to the stimulus.

If the candidate applies to the stimulus, either by making inserts into the table or with commentary before or after it, award an additional [1 to 2] according to the depth and quality of the application.

[Maximum number: 12]

Justin Price Clothing Ltd. (JP) is a private limited company that manufactures clothing. Its unique selling point/proposition (USP) is its innovative process. Customers sends images of themselves and some measurements to JP via the internet, which JP uses to determine the customer’s exact measurements. Then, a style consultant contacts the customer via video conference to discuss the customer’s fashion preferences. After this, the style consultant designs clothing for that customer. Using job/customized production, JP manufactures and ships the clothing to the customer. Most materials (stock) are ordered when a customer agrees to the designs. A total of 84 % of JP’s customers have purchased items from JP more than five times.

Justin Price Clothing Ltd. (JP) is a private limited company that manufactures clothing.

Justin Price, JP’s owner, asked his management team to consider two options and decide which would best increase profitability:

Justin Price Clothing Ltd. (JP)

Justin Price Clothing Ltd. (JP) is a private limited company that manufactures clothing. Its unique selling point/proposition (USP) is its innovative process. Customers send images of themselves and some measurements to JP via the internet, which JP uses to determine the customer's exact measurements. Then, a style consultant contacts the customer via video conference to discuss the customer's fashion preferences. After this, the style consultant designs clothing for that customer. Using job/customized production, JP manufactures and ships the clothing to the customer. Most materials (stock) are ordered when a customer agrees to the designs. A total of 84 % of JP's customers have purchased items from JP more than five times.

Table 3: Selected financial information for the year or at year's end 2020, 2021 and 2022

Justin Price, JP's owner, asked his management team to consider two options and decide which would best increase profitability:
- Option 1: Change JP's design and production model. Consultants, when working with customers online, would recommend from a series of pre-made options. The company would shift to batch production and have the stock (inventory) available. Style consultants would still be central to the process, but the clothing would no longer be custom made.
- Option 2: Increase JP's customer base. JP's customers have high brand loyalty. However, the brand is not very well known. JP would open several strategically located retail stores in a few major cities to increase brand awareness. In the store, customers could get their measurements taken and receive in-person fashion advice from a fashion consultant, after which they could purchase unique clothing. JP would continue its online services.

(a)

With reference to JP, explain the term brand loyalty.

[ 2 ]

(b)

Discuss the two options that Justin has suggested.

[ 10 ]

Option 1, switching to batch production, would mean that one important feature of JP's business model would weaken: clothing would no longer be unique to each customer ("consultants would recommend from a series of pre-made options";
"clothing will no longer be custom-made"). A second disadvantage would be that the company would have to increase its investment in stock. Right now, clothing is made one at a time, with stock delivered after the customer has approved the designs. With this option, JP would have large amounts of stock, both before production, during work-in-progress, and finished goods. This would require an increase in working capital. Will the price be the same?
The advantages of switching to batch production are: that costs will be lowered, as batch production is generally cheaper than job production. Further, JP should be able to deliver items to the customer faster (since design options will come from ready-made items). A further advantage is that if JP's sales grow, and all indications are that is what JP wants, the business can scale up operations more easily.
However, it seems unclear how this change will improve JP's brand awareness, one of its aims.
Option 2, building retail stores, would probably increase JP's brand awareness and, therefore, its customer base. Brick-and-mortar stores, if properly located, would increase visibility. Curious potential customers could walk into the stores, where they would probably see mannequins attired in J P clothing. Further, the process of being measured in a store by JP's own trained salespeople and/or tailors will lead to more accuracy in measurements, which should strengthen brand loyalty further. Finally, the service would be even more personalized than before. Salespeople will be able to see customers in person and have a sharper sense of their fashion desires and requirements.
The disadvantages of this approach are that J P will have to make an investment in the brick-and-mortar stores. Already the business has loan capital and not strong liquidity. Increasing debt and increasing debt service might well strain JP's liquidity even further. While the business is profitable, its profitability declined for two years in a row, and increased expenses of the new stores and the interest expense may weaken profitability further.

Accept other relevant judgments, if justified.
Marks should be allocated according to the markbands on page 3 with further guidance below.
N.B. The marks listed are maximum awards.
Maximum mark award
Option 1
Option 2
Judgments/conclusion
3
One option unbalanced
N/A
4
One option balanced (one argument for and one argument against;
or Both options in an unbalanced fashion
N/A
5
One balanced and one unbalanced
N/A
6
Both balanced
No judgments/conclusions
7-8
Balanced Largely effective use of business language and the stimulus
Judgments/conclusions based upon analysis and explanation in the body of the response
9-10
Balanced Rich use of business language, business theory, and the stimulus
Judgments/conclusions based upon analysis and explanation in the body of the response

[Maximum number: 10]

SVT’s product penetration in Europe and the United States of America (USA) is high and growing but low in the rest of the world. In 2022:
• SVT’s total sales revenue from home water filters was $4.9 billion
• the average revenue earned per water filter was $20
• 90 % of SVT’s home water filter sales were to Europe and the USA.

In 2022, SVT announced the closure of its European and USA water filter manufacturing factories. Water filter profit margins had fallen for three years, partly because of increasing costs of energy, rent and labour. SVT has since built a huge new factory in Asia to manufacture home water filters.

In 2022, the global home water filter market was $14 billion.

SVT's product penetration in Europe and the United States of America (USA) is high and growing but low in the rest of the world. In 2022:
- SVT's total sales revenue from home water filters was $\$4.9$ billion
- the average revenue earned per water filter was $\$20$
- 90 % of SVT's home water filter sales were to Europe and the USA.

In 2022, SVT announced the closure of its European and USA water filter manufacturing factories. Water filter profit margins had fallen for three years, partly because of increasing costs of energy, rent and labour. SVT has since built a huge new factory in Asia to manufacture home water filters.

SVT's market research, using quota sampling, found that 80 % of households that purchased an SVT water filter:
- had an above-average income
- owned two or more cars.

In January 2023, SVT:
- launched an advertising campaign in Europe and the USA highlighting the lack of potable water for millions of people in less economically developed countries (LEDCs)
- announced a 5 % worldwide increase in the price of its home water filters.

SVT committed to use the revenue from the 5 % price increase to provide two million free WF15 water purifiers annually to charities in LEDCs. It costs SVT $10 to make a water purifier.

Some disagreement occurred among the board of directors regarding this price increase. Some directors felt it would highlight SVT's vision and commitment to helping people in LEDCs, but others believed sales might fall, impacting profits in SVT's Consumer Products Division.

Discuss whether SVT should have increased the price of its home water filters.

Possible arguments in favour:
- enabled them to launch advertising campaign which would potentially benefit millions;
- enabled some filters to be provided free to charities in LEDCs;
- fits in with SVTs CSR ideas;
- good for SVTs reputation;
- 80\% of SVT's customers in Europe and the USA have above-average incomes and can afford the price increase from $\$20$ to $\$21$ .

Possible arguments against:
- many customers may not be able to afford the increased price;
- sales might fall;
- say lead to lower profits;
- some directors disagree.

Accept any other relevant arguments.
Marks should be allocated according to the markbands on page 4 with further guidance below.

Theoretical answer or context limited to naming the business or lack of development max [4].

Discussion of only one option marks limited to [5].
Discussion but no clear balance [6].
Options considered, good use of evidence, particularly from section B, but no effective conclusion award a maximum of [8].

For [10] the answer needs to be clearly relevant to SVT with good use of context and a clear sense of whether or not SVT should have increased its prices.

All question bank results loaded

IB Business Management SL 4.5 The Seven Ps of the Marketing Mix Topic Practice

Covered syllabus points

Question 1

Question 2

Question (a)

Question (b)

Question 3