APT’s initial critique of Section 1 of this years’ OCR GCSE Business Studies A293 Case Study on Bowton Mountain Festival. This is just a tiny Extract of what will be included in our highly acclaimed Revision Buddy produced each year to support teachers and their students on the pre-released case study.
In detail our Complete Student Revision Buddy contains: A step-by-step explanation of the key terms, concepts and issues raised (directly or indirectly) in the Case Study; A wide range of mini quizzes, (including answers); A mock examination paper, with detailed mark schemes and highly comprehensive range of responses; Ideas for further research; and Tips on how to maximise performance.
The Complete Student Revision Buddy is due out 31 October 2017 and two additional mock papers will be published February 2017. Click here to pre-order if you have not pre-ordered already:
Explanation of Key Terms, Concepts and Issues Raised
SECTION 1 – INTRODUCTION
The Legal Structure of Bowton Mountain Festival Ltd
P.2, Section 1 – lines 2 to 3.
What the Case Study says
The case study tells us about the Bowton Mountain Festival (commonly referred to as ‘The Festival’), which is largely concerned with outdoor pursuits. It takes place over three days in the town of Bowton in August each year, and is organised by Bowton Mountain Festival Limited, ie BMF Ltd. The word ‘limited’ and letters ‘Ltd’ tell us that this is a private limited company.
What is the significance of this in relation to the A293 specification?
There are a number of advantages and disadvantages of private limited companies but these are outside the A293 specification and direct questions on legal structure have not, therefore, arisen on this particular paper.
The legal structure of the business is, however, relevant to questions on sources of finance, as it can be a factor influencing choice of finance. This will be discussed in subsequent sections relating to sources of finance that might be used to finance the running of The Festival, or the purchase and selling of The Festival T-shirts.
In a private limited company, finance initially comes from the sale of shares in the business. In this particular case, Section 3 of the case study (lines 48 to 49) informs us that BMF Ltd was formed by a group of outdoor pursuits enthusiasts some 20 years ago who each invested £5,000 in shares in the company.
Private limited companies differ to public limited companies (plc’s) in that shares cannot be offered for sale to the general public (via the stock exchange). Private limited companies can only sell shares in the business to family and friends.
The Criticism about Drunk and Badly Behaved People
P.2, Section 1 – lines 9 to 10.
What the Case Study says
The case study tells us that last year there was ‘criticism in the town’ about ‘the number of people who were drunk and badly behaved after the nightly parties’.
What is the significance of this in relation to the A293 specification?
This is relevant to Section 2.3.3 of the A293 specification – Environmental influences and business ethics – and ‘the social costs of business activity’. It is an example of an ‘external’ cost (or negative externality). Remember:
- Social costs are the total of all costs incurred through an economic activity ie an activity undertaken by a business or consumer. They are the sum of private costs and external costs.
- Private costs are the costs incurred by a business or consumer when they carry out production or consumption or, in simpler terms, undertake a particular activity.
- External costs (or negative externalities) are the costs incurred by a third party ie those not directly involved in the production or consumption pertaining to a particular activity.
Bowton Mountain Festival’s Customer Base
P.2, Section 1 – paragraph 2.
What the Case Study says
Paragraph 2 of the Case Study tells us that over 10,000 people attended the Bowton Mountain Festival last year, out of which:
- 20% (ie around 2,000 [10,000 x 0.2]) came from other European countries.
- 60% (ie around 6,000) were under 30 years of age.
- 70% (ie around 7,000) had incomes above the EU average.
What is the significance of these statistics in relation to the A293 specification?
20% of 2016 Festival attendees came from other European countries
The fact that BMF Ltd sells tickets to people from other European countries concerns the ‘globalisation’ section of the A293 specification. It provides an example of how BMF Ltd is involved in international trade.
It means that the cost of attending The Festival for people from other European countries, will be affected by changes in the exchange rate between the pound sterling (£) and the currency of the European countries within which these festival attendees live.
For people living in a European country within the Eurozone the cost of attending The Festival would be affected by changes in the exchange rate between the pound sterling (£) and the euro (€). This includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
It should be appreciated that the cost of attending The Festival for people coming from European countries (other than the UK) would not just concern the price of the Festival ticket, but the cost to travel to, within, and from the UK, and the price of food and accommodation in the UK. Not surprisingly, therefore, changes in the exchange rate between the British Pound (£) and the currency of other European countries could, therefore affect the number of people attending The Festival from other European countries. If, for example, 1.4 euros equalled 1 British Pound, but this fell to 1.2 euros equals 1 British pound then, all other things remaining equal (eg the price of tickets, cost to travel and book accommodation and buy food within the UK), it would cost a potential attendee from a country within the Eurozone less to attend The Festival, and this could increase the number of people attending The Festival from countries within the Eurozone. If we just look at the price of the weekend pass in 2017 suggested later in Section 3 of the Case Study, which is £60, then:
- at 1.4 euros to the pound, a £60 weekend pass would cost 84 euros (60 x 1.4)
- at 1.2 euros to the pound, a £60 weekend pass would cost 72 euros (60 x 1.2).
If, on the other hand 1.2 euros equalled 1 British Pound but this increased to 1.4 euros, then (all other things remaining equal) it would make it more expensive for people from within the Eurozone to attend The Festival, and this could reduce the number of people attending The Festival from countries within the Eurozone.
60% of 2016 Festival attendees were under 30 years of age
The fact that the majority of Festival attendees were under 30 years of age could give rise to questions about how attendance at The Festival might be affected by changes to the population, in particular, changes to the age structure of the population.
The Festival clearly attracts people under 30 years of age and so an increase in the number of people within the UK and other European countries falling within this age category, could increase the number of Festival attendees and, thus, income for BMF Ltd, and vice versa.
70% of 2016 Festival attendees had incomes above the EU average
The fact that the majority of Festival attendees have incomes above the EU average might mean that the type of people who attend The Festival will be less sensitive to changes in price (eg changes in the price of a weekend pass).
The Theme of the Festival and One of BMF Ltd’s Core Values
P.2, Section 1 – paragraph 3.
What the Case Study says
The Case Study tells us that the theme of this year’s (2017) Festival is ‘Enjoying but protecting the environment and its people’, and that the ‘protection of the environment’ is one of BMF Ltd’s core values, which it has taken every opportunity to highlight the importance of in previous festivals.
How might having and promoting the protection of the environment as one of its core values benefit BMF Ltd?
People are becoming increasingly concerned about the impact of a business’s activities on the environment, and so potential customers (in this case Festival attendees), employees and investors may be more willing to trade with an ‘environmentally friendly’ business. Therefore, having the protection of the environment as one of its core values, and taking every opportunity to highlight the important of this in previous festivals, could:
- help BMF Ltd to attract and retain customers ie Festival attendees. This would help to maximise revenue for BMF Ltd.
- enable BMF Ltd to charge a higher price (than it otherwise could) for its Festival tickets and, possibly its Festival T-shirts (although there are environmental and other issues with its current supplier of T-shirts which need to be addressed – see below) – as people may be willing to pay a higher price for a company with an ‘environmentally-friendly’ image. This would also help to maximise revenue for BMF Ltd.
- make it easier to attract and retain good staff to help run The Festival each year, which would minimise recruitment and labour turnover and associated costs.
- make it easier to attract good speakers, which could increase the popularity of individual events and, thus, the price of tickets for these individual events and, thus, the total revenue for BMF Ltd.
- make it easier to raise finance, including sponsorship (from businesses that manufacture or retail outdoor pursuits clothing and equipment, and from adventure holiday companies) and grants (from Bowton Council), as well as loans (from its bank) and / or, even trade credit (from suppliers) if required. This would make is easier for BMF Ltd to secure the finance required to fund future plans / growth.
Note: If the reports about the Chinese supplier that BMF Ltd currently uses for its Festival T-shirts are true (regarding the use of too many non-renewable resources and the treatment of employees), and BMF Ltd continued to use this supplier, this could damage BMF Ltd’s reputation as a company that cares about the environment and its people, and result in the reverse of the above potential benefits. This issue is discussed in more detail under ‘Section 5’ below.
Spirit of Adventure – An Independent Shop and Only Retailer of Outdoor Pursuits in Bowton
P.2, Section 1 – paragraph 4.
What the Case Study says
Paragraph 4 of the Case Study introduces us to a completely different business called Spirit of Adventure, which sells a range of expensive outdoor pursuits gear. This includes clothing and specialist equipment, such as climbing ropes and canoes. We are told that it is an ‘independent’ shop and ‘the only retailer of outdoor pursuits gear in the town’. We are not given any further information about this shop until much later in Section 6.
What is an ‘independent’ shop and what is the significant of this in relation to the A293 specification?
Independent shops are usually small single shops (ie not a chain of shops) that are managed by their owner.
This piece of information is significant in terms of ‘production costs’, ‘sources of finance’ and ‘the competitive environment’ sections of the A293 specification. For example:
- In terms of ‘production costs’ and competitiveness, Spirit of Adventure is likely to have fewer opportunities for economies of scale (factors which lead to a reduction in unit cost as a business increases in size) than a chain of retailers and so may not be able to be as competitive on price. Section 6 of the case study does, in fact, inform us that large national retail chains of outdoor pursuits gear are able to sell their products at cheaper prices through their shops, compared to the prices that Spirit of Adventure charges (lines 114 to 116). This is likely to be due to the economies of large scale selling and distribution.
- In terms of finance, Spirit of Adventure will not have access to the financial support of a larger parent company and less capital raising opportunities than a shop which is part of a chain of retailers. Growth may, therefore, be slower.
On another note, employees may also have fewer promotion prospects and may not enjoy the benefits offered by a business that has the financial banking of a larger organisation, such as a pension scheme, as a smaller, independent business may not be able to afford this cost.
It should, perhaps, also be pointed out that there are some potential benefits / advantages of being an independent business. For example:
- Spirit of Adventure might be able to respond more quickly to changes in local market conditions than a shop that is part of a chain of retailers. This is because there is no requirement to refer to ‘a higher authority’ before making decisions, which is often the case with a chain of shops.
- employees may also be more aware of, and more committed to, the business objectives – due to closer personal contact with the owners.
- well-motivated staff – Daily routines may also be more flexible and employees allowed to use their initiative in an independent business, compared to a business operating within a national chain. If so, this would provide people with the opportunity to achieve self-actualisation (Maslow’s hierarchy of needs).
What is a retailer?
The fact that Spirit & Adventure is a retailer does not directly relate to the A293 specification, but it is worth reminding students what retailers are, including the potential benefits and drawbacks associated with selling through retailers.
Retailers are business organisations who buy from wholesalers or direct from producers / manufacturers for sale to the general public in shops or other retail outlets. They often advertise the goods they sell and provide feedback to the producer on customer demand and / or reaction to products. They add on a ‘mark-up’ to the price they pay for the product from the producer (or wholesaler) before selling it on to the end-customer or consumer – to go towards paying their costs (eg premises and staffing involved in running their retail outlet) and making a profit.
For consumers, besides providing convenient access to a wide range of goods, retailers provide advice and after sales service, and may also provide credit facilities.
For producers, selling through retailers (as opposed to selling direct to the end-customer / consumer ie individual members of the general public) can be a highly cost-effective way to reach a large and dispersed market. However, producers have less control over the price the end-customer pays and, potentially, lower profit margins than selling direct to the end-customer / consumer.
What is the significance of the fact that Spirit & Adventure is the only retailer of outdoor pursuits gear in the town?
The statement that Spirit & Adventure is the only retailer of outdoor pursuits in the town might lead us to believe that Spirit & Adventure operates in a ‘monopoly’ market as opposed to a ‘competitive’ market, but when we consider the situation in more depth, this is not the case.
A market is a place where buyers and sellers (or suppliers) get together to exchange products and services (for money).
A monopoly market is where only one firm supplies the market ie there is no competition and no close substitutes in the eyes of the customers or consumers. There are also usually exceptionally high barriers to entry. The only firm supplying the market is called the ‘monopolist’. They have considerable power over setting prices and are, therefore, price makers.
A competitive market is where there are many buyers and many sellers and each seller is likely to have a small share of the market. The product is differentiated but differences between products are not sufficient to eliminate the products as substitutes. Products are likely to have the same basic functions but there may be (perceived or actual) differences in product ‘qualities’ eg appearance and texture (with clothes), taste (with food) and / or circumstances eg in terms of location or reputation. There are also usually few barriers to entry and exit. Firms operating in competitive markets have some control over price.
Although Spirit of Adventure is the only retailer of outdoor pursuits gear in the town of Bowton, there are numerous sellers of outdoor pursuits gear that people living in, or near to, the town of Bowton may be able to access – either via the Internet, or by travelling further afield. Therefore, Spirit of Adventure is unlikely to be able to enjoy the benefits that a true monopolist would enjoy, which mainly concern considerable power over setting prices.
Furthermore, although Spirit of Adventure has an opportunity during the festival weekend to sell its products to a much bigger customer base – as people from all over the UK and other European countries flock to the town to attend the festival, it faces direct competition in capturing sales from these additional potential customers, from specialist retailers who rent stalls on the Festival Field, of which there will be 22 in this year’s festival. This issue is considered in further detail under ‘Section 6’ of this Revision Buddy later below.
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