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OCR AS Business Studies (Unit F292)

Just4kids Ltd (JKL)

Summer 2011

Pre-release Case Study: Support Toolkit

OCR AS Business Studies – Unit F292 Summer 2011

© Tutor2u 2011 www.tutor2u.net

Contents

JKL - Putting the Business in Context ...................................................................................................................................................................................... 3

Introduction ............................................................................................................................................................................................................................ 3

Key topics ................................................................................................................................................................................................................................ 4

Exam Overview ....................................................................................................................................................................................................................... 5

Specification map .................................................................................................................................................................................................................... 6

Application Analysis & Evaluation ........................................................................................................................................................................................ 14

Exam Technique Advice ........................................................................................................................................................................................................ 22

Case Study Terms .................................................................................................................................................................................................................. 27



JKL - Putting the Business in Context Introduction

Here are some key features and perspectives on JKL which you should bear in mind as you revise for Unit F292 and prepare notes on the case study, and work through this revision toolkit.

OCR F292 is concerned with the key functional areas of a business - and the way in which they interact. Let's look at the key business issues, as they relate to the four main functional areas (marketing, operations, people and finance):

From a marketing perspective, JKL seems a successful business. Its three childcare centres in Birmingham are all operating at full capacity, with another to open in a few months. Having started in 2005, the business is clearly entering a second phase of its development. The business is poised to possibly treble in size in the next five years of its life. The core product, a premium child daycare service (providing around 94%-95% of revenues) is supplemented with a widening product range offering some scope for development and growth. JKL operate in a marketplace that has seen significant expansion over the past twenty years, although it might be unwise to imagine growth continuing at the same pace, at least in the current economic climate. JKL’s future expansion may need to be achieved through capturing a greater market share. Moving out of the home market area of Birmingham also poses new marketing challenges.

The case study choice of a service sector business makes the application of ideas from operations a little tricky. It’s unlikely (though not impossible) that you will be asked to talk about different production methods and stock control. Instead, you are guided towards thinking carefully about the implications of running a business very close (or beyond) full capacity and the effects that this may have. The closely related concept of quality is also centre stage. Harriet has built her business around her own high standards and expectations and she is keen to see these maintained. It will be difficult to do this in the circumstances that she is likely to face in the near future.



In many respects, JKL appear as model employers who have created methods of motivation and leadership that seem effective, principled and appropriate to the circumstances. But these circumstances look set to change in the very near future, and JKL may very well need to adapt their approach to managing people as the business pursues its ambitious growth plans. Organisation of the business may enter a period of change and upheaval.

Finance is undoubtedly the greatest ‘grey area’ in the entire case study, with very important questions unanswered. These perhaps begin with the overall profitability of the business, which is unknown. Despite what seems like 5 years of success, the business is still at least a couple of years away from ‘break even’. A mysterious ‘equity partner’ owns the vast majority of the business, but we don’t know what their long term aims, goals and expectations are. They may be getting impatient for higher returns, especially as they have helped secure what looks to be a massive overdraft facility. Interest payments are significant. The business will have to address its cash flow problems if the situation is not to deteriorate any further. Currently, it seems as though expansion is being financed out of revenues, but this will not be sufficient to fund the planned investment of the medium term future. New budgets need to be put into place, with increased attention being given to finance at management level.

Key topics

We have summarised below what we believe to be the main Unit F292 topics addressed in the JKL case study. These are:

How will JKL’s approach to marketing have to change in order to profitably expand in the medium and long term?

How might JKL’s organisation, leadership and structure have to change to accommodate the planned growth?

Can JKL maintain and even improve their high level of quality?

What are some of the risks of growth for JKL, especially from operating over capacity?

How can JKL overcome their cash flow problems?



Exam Overview

Unit F292 - Business Functions

Pre-Release Case Study Toolkit– Just4Kids Ltd (JKL)

Exam Structure:

You will be issued with a clean copy of the case study in the exam. The paper is broken up into two sections, A and B.

Section A This will consist of a number of short-answer questions (totalling 18 marks) on any topics from the F292 specification. These questions will not relate to the pre-released case study on JKL.

Section B This will consist of one ‘calculation/numbers’ question likely to be worth 4 marks and then four essay questions (likely to be worth 16-20 marks each). These four questions will test the four ‘functional areas’ of business set out in the F292 specification and will be specific to the case study and JKL

Operations Management

Marketing

Accounting and Finance

People in Organisations

Module Length Raw Marks UMS

F292 2 hours 90 120



Specification map

The JKL case study can be broadly mapped with the Unit F292 specification as follows:

Specification Topic Case Study Topic

Marketing

Marketing Objectives

JKL have a range of marketing objectives (some of them rather vaguely defined) expressed in different timescales:

A short term target of opening a new, fourth child care centre in Birmingham in September 2011.

A medium term objective of opening ten new centres within 100 miles of Birmingham over the next five years.

A long term objective to continue growth and expansion from there. Both the medium and long term objectives were not originally part of the business plan and it’s evident that JKL’s management need to spend more time clarifying how these growth plans might be realised. Franchising is one option, to be discussed in more detail later.

From the outset, Harriet has been determined to raise standards in child care and that is clearly a part of the whole marketing package that JKL provides. There seems to be an implicit marketing goal of creating a premium service. As Harriet stresses she is a mother first and businesswoman second, her focus is on making JKL the best childcare centre on the market.

Market Analysis including segmentation, share and growth

The childcare market is estimated to be worth £4.3bn annually, a tenfold increase since the late 1980s. Adjusted for inflation, that would mean the childcare market was worth about £900m twenty years ago. Growth has been significant in the intervening decades. During that time local authority provision has been scaled back and the numbers of young women entering the labour market has increased significantly.

It would perhaps be unwise for JKL to assume that rapid growth in the market will continue. The labour market is not growing strongly at the moment (although local government cutbacks may continue). More significantly, the demographic growth trends for babies and young children do not favour JKL, but there may be some evidence that birth rates are again picking up after long term decline.




In terms of the Boston Matrix, JKL is probably about to enter a new sector. Having traded as a Problem Child with a low share of a rapidly growing market, the firm is now poised to gain share in a slowing market as a potential Cash Cow.

The market is heavily fragmented – there are a wide range of providers – and whilst the number of childcare places is growing, the number of providers is not. These means that the average size of nursery is increasing.

The growth that does occur tends to be ‘organic’ meaning that it is through a process of steadily increasing expansion as centres expand their intakes, rather than through series of mergers and takeovers. In fact, only 11% of childcare places are provided by ‘major providers’ (defined as those operators with three or more nurseries). JKL meets that description and so is already ‘big’ by industry standards.

The market segment might be defined as working parents (or even working mothers). It might be further specified in terms of lifestyle, culture, aspirations and certainly income, as fees could easily stretch to £1000 a month. Families with more children under 5 would face even larger bills. The socio-economic groups targeted might be identified as ABC1.

Product The product is clearly presented as a premium brand, given the considerable investment made in sophisticated premises, age specific activities, staff training and high staff/child ratios. The service itself has certainly entered the maturity stage of the product lifecycle, with limited potential for dramatic overall future growth. Expanding the business is likely to draw customers away from other providers. JKL have made progress on widening their product portfolio in order to expand into adjacent markets, such as children’s parties and evening classes (although we don’t know quite how big is their contribution to profits).

Price

(including price and income elasticity)

JKL’s pricing supports their premium position in the marketplace. Market research evidence suggests that their prices are, on average, approximately 10% higher than their local competitor TotsAtPlay (with exceptions, such as children’s parties). Even those competitor prices are perhaps 10% higher than the national average, putting JKL’s prices in a higher bracket than the norm.

JKL will be alert to the threat of changing market conditions on the demand for their services. Price elasticity of demand measures the sensitivity of customers to price changes (which might grow in a post recession environment, and in which competition may become more intense). Income elasticity of demand is a similar concept, measuring demand changes in relation to income changes. With the recession over, JKL might hope that demand will stabilise, or even pick up a little.




Place JKL are clearly well established in Birmingham and are using it as their base for future expansion. As the business grows outside its home territory it may experience consumer differences that mean its marketing mix needs adaptation to local circumstances.

For example, expansion into a less prosperous area may mean that pricing needs adjustment. Operating in a more rural community might influence the product range and types of care requested.

Promotion The case study doesn’t include a lot of detail on the promotional techniques used by JKL, but it’s reasonable to assume that the business will operate a website to provide basic information (at least) and flyers that are circulated in the local community.

For this type of service, it is very likely that promotion is dominated by word-of-mouth recommendations, which may have served the business very well up until now. However, this method of promotion will be far less effective if the business expands outside its current area and new promotional techniques will be needed.

Accounts and Finance

Budgeting The firm lacks the budgetary arrangements to manage both its finances in the medium and long term. Over the next 12 months the firm faces significant cash flow problems (see below), indicating that current budgeting has caused problems.

JKL needs to establish clearer targets and budgets at managerial level to assist in decision making (and to guarantee survival) in the months and years ahead. It may be that some ‘belt tightening’ is in order, even if new sources of finance can be tapped. Further down the hierarchy budgeting arrangements are clearly quite ‘loose’ – ‘if you haven’t got what you need, you are empowered to purchase it yourself without asking permission and JKL will pay you back immediately’ (lines 73-74). Whilst this indicates a style of decentralised decision making that may suit the business, it may also be partially responsible for some of the firm’s current cash flow problems. Greater discipline may be needed.

Cash Flow Cash flow issues are clearly highlighted as an area for the business to focus attention. There are short term cash flow difficulties for JKL to address – the business forecasts a net cash outflow over the next 10 months of £247,000. Their closing bank balance in March 2011 should be overdrawn by £24,000 but this threatens to rise to £271,000 by December of 2011. In the main, the bulk of this cash flow problem can be accounted for by the planned opening of the fourth child care centre in September. This incurs capital outlays (fittings and equipment for the new centre) of £300,000 and higher general revenue expenditure (day-to-day running costs) across




the larger business.

The long term cash flow problem might more accurately be seen in terms of raising the necessary finance for the significant expansions planned for the medium and long term. It’s highly improbable that enough cash will be generated in the short term (with two years to go before the business breaks even – see below) to finance the firm’s ambitious medium and long term growth targets. This extra source of finance is a theme that requires further consideration. Will extra finance come from equity, debt or by the development of some form of franchising arrangement?

The cash flow forecast contains at least one other clue to the manageability of the level of debt owed by JKL. Over just ten months, they face an interest bill of £110,000. As their government guaranteed loan is at most £250,000 in total, the huge interest bill shows how expensive their overdraft is proving to be.

Costing The case study provides very little of the detail necessary to make meaningful costings. For instance, whilst we are told that the firm spent £5m in start up costs for the three centres in Birmingham, there is no split into fixed or variable costs. Even the marginal costs of business expansion are vague, with the plans having a suggested price tag of anywhere between £4 and £20m.

No direct or variable cost information is available for the services that JKL provides.

Break-Even Analysis

Although some information is available about pricing for day care, after school clubs, baby sitting, parties and evening classes, there is little in the case study to show variable costs and hence calculate contribution earned from JKL’s various services. Although some fixed and variable cost data can be implied from the cash flow forecast, it wouldn’t be sufficient to calculate break –even points. (An example of a fixed cost not included in the cash flow figures could be depreciation).

Investment Appraisal

The figures included in the case study also make detailed appraisal very difficult. Although we know that the initial £5m investment has earned returns, they are not spelt out (with the equity partner no doubt anxious to achieve payback at some point in the near future, having invested so much five years ago). Similarly, there are no projected returns for the vague investment plans.

As information is provided on the cost of the ‘Quality Counts’ award (£980 plus £210 per annum for 3 years = £1610 per centre) there is a hint that JKL might regard this as an ‘investment’ worthy of appraisal. After all, this sum might be expected to earn a return in the form of extra demand for services it generates, if the award is valued by customers.




Profit and Loss Accounts

There are no figures, although revenues can be estimated and we know that the business has not yet made enough profit to cover its costs so far (‘we are still at least two years away from achieving break-even” – line 38)

Balance Sheets Again, there is little balance sheet data to comment upon. However, it may be worth noting that JKL’s equity partner has provided 80% of the firm’s start up capital and so utterly dominates overall ownership of the business. The equity partner has also been vital for JKL to get access to its large overdraft facility. And although JKL appears to have very little long term debt, reference to overdrafts and looming cash flow problems certainly points to a firm with significant liquidity issues.

People in Organisations

Labour Turnover The case study makes little reference to this issue, but it’s clear that JKL will have considered the implications of high rates of labour turnover and taken steps to address it. JKL pay 90% of the child care qualification costs incurred by staff and there is therefore an incentive for them to stay with the company for at least 12 months after attaining those qualifications. Staff leaving before then have to repay the discount they were given.

Motivation JKL have deployed a wide range of techniques in order to motivate staff. Direct and indirect financial rewards (of the sort that are associated with the scientific management practices promoted by Taylor) include:

Pay rates above the industry norm.

Discounted access to childcare qualifications (and pay levels related to those qualifications), paid study leave and training time.

Bonus schemes, based on quality reviews.

Discounts for childcare and from many High Street stores.

Other motivators have obviously been given detailed consideration. Academics such as Mayo and Maslow emphasised the non-financial aspects to motivation and would have identified clearly with attempts to motivate through providing social opportunities (staff room and gardens). Further up Maslow’s hierarchy of needs would come the opportunities for greater esteem through achieving qualifications, recognition and promotion. Harriet’s philosophy towards child care might even indicate that she believes




staff can achieve ‘self actualisation’ through their employment in high status, rewarding child care roles.

Similarly, the work by McGregor on motivation is relevant in the JKL setting. It seems that Harriet has endeavoured to create an environment in which ‘hygiene factors’ – sources of workplace dissatisfaction – are attended to effectively. These would include the rate of pay, the working environment and job flexibility in the form of flexible rotas and working arrangements. McGregor saw real motivation arising from the work itself, relationships with managers and recognition (here, in the form of promotion and the quality related bonus scheme).

Leadership styles (see below) can strongly influence motivation. In McGregor’s model, it seems that the empowered staff (with authority to make minor budgeting decisions, for instance), focus on training and investment and scope for influence on company policy point firmly to a Theory Y view of the workforce. JKL must view their staff as self motivated, to a great extent.

More recent decades have seen motivation theories, presented by writers like Drucker and Peters, move even closer to the policies implemented by JKL. These theories stress the importance of targets and performance measurement linked to pay and promotion (Drucker especially) and excellent communication, worker engagement in all aspects of the business and recognised ‘champions’. Perhaps even the rather insipid sounding ‘employee of the month’ might be inspired by Tom Peters.

Leadership The fact that staff are described as ‘empowered’ (evidenced through the decentralised method of making purchasing decisions – see below), and Harriet’s consultative approach, shown in her regular meetings with staff in which she allows them a direct influence on company policy suggests a democratic style of leadership.

Of course, it’s not readily obvious if Harriet’s style is truly democratic, since we don’t know the extent to which discussions with staff actually influence the decision making process in the firm.

Organisational Structure

The organisational structure of JKL is not illustrated. There must be at least two levels of hierarchy (a Board of Directors and centre staff) and the fact that rumours readily spread from the Board to the centre staff suggests that organisation is not especially hierarchical, as information has leaked from one level to the other. The ongoing discussion and debate in JKL about increasing numbers of children in each centre points to a de-layered or ‘flat’ organisation in which power is relatively decentralised. As in the discussion about leadership styles (see above), a final judgement on the degree of decentralisation will not be clear until evidence emerges of the Board accepting and responding to concerns raised by staff.




Production

Operational Efficiency, Capacity Utilisation

A key issue for JKL is the question of size, scale and the desire to build growth in the short term through operating over capacity.

On the face of it, there seems little to commend this approach. We are told that the issue has already been a source of concern amongst the staff, who have made clear the potential for a negative impact on motivation and perhaps quality. This is in possible conflict with both JKL’s leadership style and objective to provide a first rate service. Furthermore, the business operates in purpose built premises designed for the maximum numbers currently on roll. However, there may be some limited flexibility, given that staff/child ratios are higher than the legally required minimum.

The problem has been discussed at length by the Board of Directors and operating over capacity is just ‘one of a number of suggestions made to deal with the current demand for places at JKL’.

Production Methods

The interesting choice of a service sector business for this study makes the usual discussion about job, batch and flow production seem redundant. Although it’s hard to see how flow production could be relevant in the study, the trade-offs that exist between job and batch production may have some application. After all, dealing with children and providing for their individual needs is a form of job production. Dealing with larger groups and conducting whole group activities (parties, classes, clubs) are less personalised and occur as one off ‘batches’.

Approaches to Production

Again, the nature of the business makes it a little more challenging to think about ‘approaches to production’. However, lean production ideas (reducing waste – especially by operating so close to full capacity) are relevant. The concepts of cell production and total quality management (TQM) can also be applied (see below).

Quality The issue of quality comes through the case study very strongly. The drive to achieve the ‘Quality Counts’ standard is part of a desire to attain the ‘next level of quality’. Harriet has a clearly stated aim to raise standards in child care and is actively investigating a range of initiatives JKL could implement to improve quality. It is very clear that JKL have a quality assurance philosophy in place – attention to standards is built into the way in which the firm operates.

Stock Control This is likely to be a relatively minor issue for a firm such as JKL.



Further details of the specification can be found on the OCR website at:

http://www.ocr.org.uk/Data/publications/key_documents/AS_ALevel_GCE_Business_Studies_Specification.pdf

You should remember that even if a topic may not come up specifically in the pre-issued case study, it could still be tested in Section A of the exam. There is no substitute for learning and understanding the entire syllabus.

http://www.ocr.org.uk/Data/publications/key_documents/AS_ALevel_GCE_Business_Studies_Specification.pdf



Application Analysis & Evaluation

We have developed the key issues raised in the specification map in the pages below. The following analysis is not intended to be an exhaustive list of all the potential issues – everyone reading the case study will identify their own points about issues they believe are important.

The key point to remember: an effective exam answer in part B of F292

(1) addresses the specific question asked (you must answer the question)

(2) is directed to evidence in the case study (application) rather than making general points or lists

(3) develops a small number of well-argued points in sufficient detail (analysis)

(4) expresses an opinion on the question posed, supported by a balanced appraisal of the analysis

Issue: How will JKL’s approach to marketing have to change in order to profitably expand in the medium and long term?

Application Analysis Evaluation

The firm has ambitious growth plans in the short, medium and long term.

The firm is still planned and organised around its initial business plan – this needs to change.

It appears that there is sufficient demand to grow the business, at least locally in the near future.

Plans for national growth and even international expansion are optimistic, and mostly unplanned at this stage. However much growth is planned, marketing will need to adapt. The existing marketing mix appears on the surface to be successful, but JKL has yet to breakeven.

Profitability is poor, marketing needs to be adapted regardless of growth.

There has been significant growth in the market over the last 20 years, but this may not continue. Using the Boston Matrix as an analytical tool, it may be better to seek to grow the business through taking market share, rather than relying on continued expansion.

If JKL want to build market share, they may need to target clients outside their current market segment. They could for instance, tender for contracts with local authorities to manage children

The firm seems to lack the necessary finance for all but the most limited growth. It’s difficult to discuss this topic without relating it to raising finance or franchising. (A note of caution here: neither of these topics features on the F292 specification).



currently in the care of Social Services.

Should JKL channel more marketing effort into attracting customers to their non-childcare service, which currently account for a very low share of overall revenues?

JKL’s prices are currently pitched at the top end of the market and may well need to be reduced if the business begins operation in less urban, prosperous areas. The problem of price discounting however is its effects on total revenue and ultimately, profits. JKL struggle in this area already. They need to achieve higher level of profitability and boost cash flow.

Might another policy be to increase prices? Clearly, demand currently outstrips supply. Might higher prices actually have the effect of moderating demand to more manageable levels whilst boosting profits and cash inflows?

Promotion strategies need to be adapted as the business moves beyond its traditional areas of operation. It’s likely that more will need to be spent on advertising as word-of-mouth will be less effective.

Changing place – i.e. operating in different areas - is certain to mean change across the marketing mix for JKL. This must be supported by further market research.

This move could open up a way to make more efficient use of capacity, such as using the centres at weekends for parties and in the evenings for classes.

This is an opportunity for you to use price elasticity of demand and talk about the impact on demand from higher prices. Crucially, this depends on customers’ incomes and the degree of competition.

This is the key evaluative conclusion – adaptation is necessary for change and growth.

Potential exam-style questions on this issue:

Discuss the extent to which further market research evidence could help JKL plan for the future.

How could JKL adjust their marketing mix in order to achieve greater success?

Explain how the concept of price elasticity of demand could be relevant if JKL decided to raise their prices.



Issue: How might JKL’s organisation, leadership and structure have to change to accommodate the planned growth?


JKL’s leadership style seems to be democratic and power is decentralised within the organisation.

Careful attention is paid to maximising motivation and reducing labour turnover.

The firm clearly benefits from its excellent relationships with staff and these may be threatened by growth. In the first place, extra staff will need to be recruited and trained which will add to the already significant capital costs associated with expansion.

In the short run, some of the extra growth may come through running the existing daycare centres above full capacity. There are already clues that this is a potential source of dissatisfaction for staff, which may ultimately erode motivation. There is also the risk of de-motivating staff if the democratic style of consultative decision making in JKL is seen to be an illusion – with the board disregarding the opinions of staff and pressing ahead with this plan despite their opposition.

It’s perhaps as well that the firm manages to decentralise authority and empower the staff to make decisions, as expansion may well force the firm further in this direction. One of the effects of expansion may well be to move the firm into slightly different marketplaces where marketing will need adaptation to local circumstances (see above). Organisations that are tightly controlled from the centre (or top, if you prefer) are often more rigid and lack the flexibility to adapt in the ways that may be necessary. It’s very likely that local managers will have to shape JKL’s offering to local wants and needs (especially if they expand abroad).

Harriet and JKL seem to have a Theory Y view of their workforce and have invested heavily in order to raise professional standards. This should create a climate in which senior management may feel they can be more laisser faire in their approach, going even further in decentralising decision making to trusted managers on the ground.

A larger firm will probably find it easy to maintain current methods of motivation by reward. Non-financial methods of motivation arising from recognition, effective communication and good relationships may suffer in a bigger firm however.

The long term aim of staff empowerment may be entirely appropriate, but in the short term it may be necessary to control budgeting more centrally in order to get a grip on cash outflows.

Allowing centres to operate independently does offer big advantages, but some functions may be more efficiently controlled from the centre, such as purchasing materials.



However, it would be surprising if significant growth did not have the effect of slightly increasing levels of hierarchy within the organisation. Additional levels of management may be necessary to handle the larger organisation, if the spans of control of the existing management team are not to be stretched beyond reasonable limits.

Extra levels of hierarchy may make the business less flexible and serve as an obstacle to communication.


Evaluate the effectiveness of Harriet’s leadership and management styles at JKL.

Explain the key methods by which JKL motivate their staff.

Evaluate the most significant human resource issues arising from JKL’s proposed expansion.

Issue: Can JKL maintain and even improve their high level of quality?


The business is committed to maintaining a very high standard of quality.

JKL may try to secure the NDNA ‘Quality Counts’ accreditation award.

The high quality of child care provision at JKL is mainly driven by:

A ‘quality assurance’ focus, placing quality at the heart of how the business operates.

A purpose built environment, designed to meet precise needs.

Commitment to staff training and professionalism.

Worker involvement in quality: a consultative style, with trusted, empowered and well motivated staff working to high standards. Staffing is also generous, and exceeds the legal minimum.

These standards could be threatened by the proposed business expansion. Growth will require extensive recruitment (and subsequent training to the necessary standard) that will be difficult, expensive and time consuming.

Attaining these standards has required significant investment, both at the start, and as an on-going expense.

Here there’s a potential short run effect (difficulty in maintaining standards) that should ease in the long run.



The proposals for short run expansion may involve running the centres above capacity. The staff have warned against this, as it will strain both human resources (the staff) and the physical resources (rooms built to match precise upper limits on group size). Staff may even become de-motivated and less committed to high standards.

Raising quality through a benchmarking process like the ‘Quality Counts’ award could act as a useful focus for the firm and discipline the business into maintaining standards. A formal framework for measuring quality could be especially helpful as the business grows to the next size and Harriet’s personal attention to detail won’t be able to monitor every centre. Local managers will need to take more individual responsibility for quality standards. A benchmarking process could be valuable across the business.

Quality is about effectively meeting the needs and expectations of customers. Harriet is personally dedicated to maintaining excellent standards. These standards of professionalism probably help create the impression of a premium service and support the current pricing structure, which is higher than either the local or national average.

The future growth and expansion of the business may well depend upon a reputation for quality and excellence (and the formal recognition of quality standards), especially as the business extends outside its home territory.

Short term expansion could come through evening classes and weekend parties that have no impact on regular day-to-day childcare.

The award may be just be a ‘bureaucratic form-filling’ exercise that costs money and achieves very little.

It’s possible that JKL have placed the issue too high on their agenda – they are already struggling to meet demand. A focus on high standards is all very laudable: but not if costs are pushed to a level where the business cannot make a profit – and ultimately fails.


How important is quality for a firm operating in JKL’s marketplace?

To what extent do you believe that the ‘Quality Counts’ award will help JKL improve quality?

Describe the methods employed by JKL to maintain a high standard of quality



Issue: What are some of the risks of growth for JKL, especially from operating over capacity?


The business is a local success (although not a terrific financial success, as yet).

Might the vague proposals for dramatic growth risk ruining the business?

Successful business models do not always scale up from a small size to much larger, nor is it easy for firms who have become accustomed to operating in one geographical area to match that degree of success somewhere else.

A list of points (bullet pointed here, to avoid repetition) includes issues such as:

The existing marketing mix will need to be significantly adapted as the business grows/spreads.

Staffing, organisation, leadership and management will all need to be reviewed if the firm is still to function effectively.

Quality may well suffer as a result of expansion.

The business is already experiencing serious cash flow problems and may find that expansion pushes it towards insolvency. The lack of overall profitability is also a problem and may lead to difficulties in finding new sources of finance.

There is nothing in the case study (beyond vague proposals) to indicate that planning for growth has really begun at JKL. Even the short run plans for expansion pose significant risks and long term proposals look simply unfeasible (sadly, the point about franchising is unlikely to be explored in the exam as it is part of Unit F291).

However, growth should not be ruled out. As the business expands it may be able to find cost efficiencies and ‘leaner’ ways of operating that help to lift profits. Slowing market growth also points to the long term advisability of trying to capture market share.

JKL is already big by the standards of this fragmented industry.

Finance is the key hurdle to overcome if JKL is to grow.


Which department – or business function – will be most affected by JKL’s expansion plans?

Evaluate the benefits of JKL’s proposed expansion plans



Issue: How can JKL overcome their cash flow problems?


JKL have a substantial overdraft which is both a worry and a considerable expense, in terms of large interest payments.

Over the next 10 months cash outflows are forecast to be much higher than inflows.

Ambitious expansion is planned - and current expansion is already a huge drain on cash.

Cash flow problems are – at least superficially – very easy to fix. JKL need to find ways of speeding up cash inflows whilst also looking to reduce the rate at which cash is flowing out of the business.

Improving cash inflow could be achieved through:

Either coping with more customers and/or charging higher prices for daycare.

Either boosting demand for their other services and/or charging higher prices.

Securing a large cash injection in the form of new borrowing, or equity investment.

Slowing cash outflows might be addressed by:

Cutting back on staffing levels, perhaps closer to the statutory minimum.

Tightening up on budgeting and showing more restraint in expenditure on materials – a huge bill that sometimes reaches 25% of staffing costs. This seems excessive.

Putting a brake on current expansion plans until profitability is assured and the business is on firmer financial foundations for expansion. The £300,000 forecast expenditure for the 4th Birmingham centre accounts for much of the negative cash flow in the months ahead.

Dealing with more children looks likely to put a huge strain on the business, though raising prices may be feasible (see references to elasticity of demand). Expanding revenue from other services looks much more promising. Sadly, the option of extra financing is unlikely to be explored in the exam as it is part of Unit F291).

Staffing is much the biggest item of expenditure, but so crucial in achieving JKL’s objectives.

Staff empowerment is also a critical component of people management at JKL, but the budgeting freedoms are coming at a very high price.

It’s hard to see how expansion is currently affordable.

2-3 years of positive cash flow and a cut-back on some costs could help the business reduce



its overdraft, cut interest payments and move JKL towards profitability.


Describe the main sources of JKL’s cash flow problems.

Evaluate the approaches JKL could take in order to reduce their cash flow problems.

Describe the extent to which JKL’s cash flow situation has a relevance to their expansion plans?



Exam Technique Advice

The Case Study

Read it, read it and read it again. Then read it again. Learn it as much as you can – better knowledge of the case study will save you time in the exam and allow you to have a better discussion and understanding of the key topics.

Use the Case Study

The examiner spent a long time writing this case study – so it must be used effectively. Do NOT just give the ‘text-book’ answer, everything you write should be applied and put into the context of JKL.

React to the question set

As an examiner, it is a great pity when we have to write NAQ (not answering question) on a pupil’s work. Make sure you read the question carefully and answer it!

Essay Plans

It is a good idea to make a brief plan – but plans should be brief – allocate a couple of minutes to organise your thoughts.

Timing

Timing is crucially important and this is one of the most common failings of students in the exam hall. Quality not quantity is what counts – it is not a race to fill the answer booklet and any supplementary pages!

Practice

There is no substitute for writing timed answers to practice essay questions and then having them marked your teachers. Knowing what you can realistically achieve for each question in a timed essay is hugely important before you step into the exam hall

Mark schemes:

Well before the exam you should become familiar with the marking schemes of the module. Although F292 is a relatively new module, (and therefore has limited ‘past papers’) it replaced the old module 2873. These past papers (also case study based) are available from the OCR website:

http://www.ocr.org.uk/qualifications/as_alevelgce/business_studies/documents.html

http://www.ocr.org.uk/qualifications/as_alevelgce/business_studies/documents.html



This is a ‘levels of response’ paper – in essays you must evaluate, with reasoned judgment, effectively for the top marks.

Writing

Get a nice pen (splash out!), this will avoid the dreaded writer’s cramp – particularly with long essays as examiners hate illegible work! If possible practice a two-hour mock practice paper, your teachers can help you with this and it will benefit you in the long run.

Levels of Response

Some reminders now about how you are assessed in the F292 exam.

According to OCR, candidates are expected to demonstrate the following in the context of the content described:

AO1 Demonstrate knowledge and understanding

Demonstrate knowledge and understanding of the specified content;

AO2 Apply knowledge and understanding

Apply knowledge and understanding to problems and issues arising from both familiar and unfamiliar situations;

AO3 Analyse Analyse problems, issues and situations;

AO4 Evaluate Evaluate: distinguish between, and assess appropriateness of, fact and opinion, and judge information from a variety of sources.

A typical F292 will allocate the 90 marks on offer as follows:



From this you can see that marks for AO3 (analysis) and AO4 (evaluation) are only available for the four questions in section two of the F292 paper.

Each of the longer questions in section 2 has substantial marks available if you can effectively demonstrate analysis (22 marks) and evaluation (21 marks).

More on AO3 - Analysis

Analysis involves making well-reasoned, step-by-step arguments using appropriate business studies tools & concepts.

To get your marks for analysis, you will need to:

Make a point

Explain why the point is important

Explain the significance of this to ….

Your examiner will see that you are analysing when you are doing any of the following:

The causes are….the possible consequences are…..



The advantages for JKL are….the disadvantages for JKL are…..

On the one hand JKL may……on the other hand, they may…….

The data for JKL shows that…..on the other had, it may suggest……

This is likely to lead to……..but it may lead to………

In this case…..is an advantage because……

The likelihood of this happening is……Consequently the business must….

The trend in this case is…….shown by…… data

Analysis is about how you consider the ‘ifs and buts” as well as the “however and maybe”. You should view your written answers as your conversation with the examiner. Imagine how it would sound if you read a list of bullet points aloud - is this what you want your examiner to hear?

More on AO4 - Evaluation

Evaluation is the hardest skill of all. Very few candidates develop their skills of evaluation which is why it is awarded the highest grade when examiners see it.

Evaluation means giving your final judgements after dismissing all other arguments and saying why the judgement you have made is superior to all others. To do this, you must be knowledgeable about all the other arguments over which you are claiming superiority.

It is not enough to use a trigger phrase and to expect the examiner to award the highest mark – the examiner wants to see a robust, developed argument that weighs up the critical points and then come to a conclusion as to which is likely to be most significant – given the circumstances of the case study.

You can demonstrate the skill of evaluation when, in the context of the case study, you:

Make a small number of points pointing out the options and/or the issues

Justify which of several arguments are more persuasive and why

Comment on the reliability of data or information given

Support your judgement with evidence and draw conclusions from the evidence



Consider limiting factors e.g. feasibility, impact and internal and external constraints

Consider long term and short term issues

Discuss how objectives, internal and external constraints constrain decision making

Examples of trigger phrases demonstrating evaluation include:

• Overall, the greatest effect this will have on JKL is……because…

• The extent of the impact will depend upon ….

• Whether this happens depends upon ….

• In the short run… but in the long run…

• The most important issue/factor is… because… so…

• In addition, JKL needs to consider …. and ….

Remember evaluation means weighing up options and making a recommendation.

There is no ‘one best option’. It all depends on the circumstances of the business in the case study.

Analysis and Evaluation Compared

Candidates often ask what the difference is between Analysis (AO3) and Evaluation (AO4):

• Analysis assesses the causes and consequences of an issue and explains the likely impact and reaction of the firm.

• Evaluation builds on analysis and involves candidates weighing up options and coming to a view on what the firm should do.

For example – the question asks you to “discuss a strategy”:

• Weighing up the evidence upon which a strategy would depend – AO3

• Recommending one strategy based on analysis – AO4



Case Study Terms

This section highlights and defines the key business terms and phrases used in the case. Remember you can demonstrate your knowledge by making effective use of definitions.

Accreditation scheme

(‘Quality Counts’)

Awards, issued by a nationally recognised body, to organisations that meet a set of agreed criteria or standards. The awards can be helpful for marketing and promotional purposes. A logo or ‘kitemark’ can often be seen on the stationery and materials issued by an organisation that has successfully attained the award. An example would include the Investors in People award administered by UK Commission for Employment and Skills and supported by the Department for Business, Innovation and Skills (BIS). Supporters of such schemes also point to the beneficial effects they can have, if the process of claiming the award forces organisations to make real and sustained improvements to their business practices.

The National Day Nurseries Association (NDNA) operates a ‘Quality Counts’ scheme which investigates 16 different aspects of childcare ranging from accurate record keeping to health and safety, partnerships with parents to trips and outings. An accreditation panel of inspectors visits to make a judgement and give feedback on the centre’s success in meeting the standards.

The e-Quality Counts is NDNA’s online quality improvement scheme created specifically for the nursery sector and is designed to meet their needs.

The Quality Counts scheme itself is accredited by another organisation, the Continuing Personal or Professional Development (CPD) Certification Service.

Biometric entry system Entrances are secured with a ‘key’ that identifies individuals by personal physical characteristics, such as finger prints.

Break even The point at which the total revenue a business earns exceeds the firm’s total costs. If a firm manages to reach and exceed this level of sales it’s possible to make a profit.

Business Plan This is a document primarily used by a business to secure finance. Before a firm starts up, entrepreneurs are often keen to either borrow money or to sell shares to willing investors (see ‘equity partner’ below). It’s unlikely that anyone will provide finance without, at the very least, an outline description of the firm’s trading plans. This may include a basic marketing,



production and personnel plan, supported by a cash flow forecast and even an estimate of when break-even may occur.

JKL have clearly outgrown their initial business plan, which secured the support of their equity partner and the Small Firms Loan. This document now needs updating as the firm moves into the next phase of development.

Capacity The total amount (in this case study, expressed as the number of day care places) that a business can provide over a period of time. Capacity is usually measured in terms of units per period of time (e.g. each childcare centre has a maximum of 100 places at any one time).

Capacity utilisation The proportion of capacity that is used. A half used childcare centre would be operating at 50% capacity.

Cash flow, cash flow problems

Even growing, successful and profitable firms can run out of cash. Cash is needed for both day-to-day revenue expenditure and for larger, occasional capital items. Firms will experience cash flow, or ‘liquidity’ problems if cash is leaving the business faster than it is being generated. Under these circumstances firms will eventually be forced to act. If it’s not possible to sufficiently speed up cash inflows, or slow down cash outflows extra finance will be needed. That might typically be raised through either fresh borrowing, or selling (liquidating) some fixed assets.

Empowered workforce Where employees are given authority (power) to make decisions about their work.

Equity partner A partner who provides equity i.e. buys shares in a business. Their control of the company and share of dividends is proportionate to the amount of equity they have provided.

Financial partner More broadly speaking, a financial partner has some financial stake – and say –in a business.

Fragmented This describes a situation in which a market is divided into a large number of suppliers. In this case study, the structure of the nursery market is described as fragmented because of the wide variety of providers of childcare. They are diverse in terms of size and type of ownership.

Franchising, overseas franchise

Franchising allows more rapid business growth as finance is drawn in by external groups who have expressed willingness to trade under the firm’s name. As franchisees, these individuals invest on behalf of the company and usually operate to an agreed set of criteria. In return for the initial investment and ongoing fees (or ‘royalties’) the franchisee adopts a proven



brand and business model in the hope of earning high returns.

The original business – the franchisor – can achieve rapid growth and scale economies. In the case of an overseas franchise, the franchisor may also find that local knowledge and experience is especially helpful.

Growth strategy A long term plan, typically organised around a series of short- and medium- term targets or objectives that is usually needed for a business to achieve a growth aim.

Legislative and regulatory requirements

The laws and regulations that a firm must abide by to avoid the risk of prosecution.

Market structure A description of the degree of competition in an industry. Where market structure is described as a monopoly, the market place is dominated by a single provider. More competitive market structures see market share divided out amongst a larger group of competing businesses.

Medium term target A goal or objective that a firm might hope to achieve in the ‘medium term’. This is an elastic timeframe that might mean anything from perhaps 12 months to 3-5 years.

Minority stake This term would apply to an investor who bought fewer than half of the shares available in a company. Harriet and her family are minority shareholders in their ‘own’ business, owning just 15.8% of the equity (they put in £750,000 out of the £4.75m of total equity).

Nominal terms Nominal figures have not been adjusted to take account of inflation (whereas ‘real’ figures have been).

Organic growth This is the process of businesses expansion due to increasing overall customer base or new sales, rather than through mergers and takeovers.

Overdraft A source of finance where the borrower is allowed to run a negative bank balance, although within agreed limits (and often at relatively great expense).

Preliminary data Initial market research findings, subject to updates and further investigation.



Small firms loan guarantee scheme

The DTI's Small Firms Loan Guarantee Scheme provides a government guarantee for loans by approved lenders. Loans are made to firms or individuals unable to obtain conventional finance because of a lack of track record or security. The guarantee generally covers 70% of the outstanding loan. (This rises to 85% for established businesses trading for two years or more. Loans can be for amounts between £5,000 and £100,000 (£250,000 for established businesses) and over a period of two to ten years.

Stakeholders People, groups or organisations which have an interest in the activities of a business

Start-up capital The finance raised at the start of a firm’s trading operations. This is typically in some combination of equity (shareholder investment) and debt (borrowing).

Target market A group of people (often a particular ‘market segment’, which describes a group if consumers who share the same buying habits) who form the majority of a firm’s customers. They can then be ‘targeted’ through a marketing strategy that creates products at prices they are willing to play.

Venture capitalist A wealthy individual - like one of the BBC’s ‘Dragons’ from the Den - who may provide finance, contacts and expertise in return for a share in a business.

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