Evaluating Business Decisions

Explain two benefits to a business of using a franchise model for expansion. (6 marks)",
"marks": 6,
"solution": "Paragraph 1 - First Benefit:
One benefit is that franchising allows for rapid expansion with reduced capital investment from the franchisor. Because the franchisee provides the majority of the start-up capital for their individual store, this leads to the franchisor being able to open more outlets in a shorter period than if they had to fund each one themselves. Therefore, the business can grow its brand presence and market share much faster across different geographical locations.

Paragraph 2 - Second Benefit:
Another benefit is that franchisees are often highly motivated, which can lead to higher sales and better customer service. Because the franchisee has invested their own money and takes a direct share of the profits, this leads to them having a strong incentive to ensure their outlet is successful. Therefore, the franchisor benefits from having dedicated managers running each location, which can improve the overall performance and reputation of the brand.",
"examiner_commentary": "This is a strong response, achieving full marks. Each benefit is clearly explained using a developed chain of reasoning (implicitly following the BLT structure). The candidate uses precise business terminology ('capital investment', 'brand presence', 'market share') and explains the link between the franchisee's motivation and the franchisor's success. Each point is worth 3 marks, and both are fully developed.

A local coffee shop is considering two options to boost sales: (A) introducing a customer loyalty scheme, or (B) starting to offer home delivery via a popular app. Justify which option it should choose. (9 marks)",
"marks": 9,
"solution": "Introduction: The coffee shop must choose between a loyalty scheme to encourage repeat business and a delivery service to reach new customers. The best choice will depend on its current customer base, capacity, and local competition.

Argument for Loyalty Scheme (Option A): A loyalty scheme is a strong choice for encouraging repeat purchases from the existing customer base. Because it costs significantly less to retain an existing customer than to acquire a new one, this leads to a more cost-effective marketing strategy. For a small coffee shop, offering a free coffee after nine purchases, for example, builds a direct relationship with regulars and increases their purchase frequency. Therefore, this option can build a stable revenue stream from a loyal community of customers with relatively low implementation costs.

Argument for Home Delivery (Option B): Alternatively, offering home delivery could significantly increase the coffee shop's market reach. Because many customers now value the convenience of ordering from home, partnering with a delivery app leads to the coffee shop becoming visible to thousands of potential new customers in the local area who may have never walked past the physical store. Therefore, this option offers a greater potential for sales growth and reaching a completely new market segment, despite the commission fees charged by the app (which could be 20-30%).

Conclusion & Justification: On balance, the coffee shop should choose Option A, the loyalty scheme. While home delivery offers higher potential for growth, the high commission fees could severely impact the profit margins of a small, independent coffee shop. The loyalty scheme is a lower-risk strategy that strengthens the business's core asset: its existing customers. It builds long-term value and profitability without exposing the business to the high variable costs and competitive environment of delivery apps. The success of the business likely depends on its local reputation, which a loyalty scheme directly enhances.",
"examiner_commentary": "This is a Level 3 response. The candidate provides a balanced argument, considering both options in context. Crucially, the conclusion is not a summary but a decisive judgement that is well-justified by weighing up the key factors (risk, cost, profit margins vs. growth). The use of phrases like 'lower-risk strategy' and 'strengthens the business's core asset' demonstrates strong evaluative thinking.

A national chain of gyms is experiencing falling profits. It has identified two possible causes: the recent entry of several low-cost competitors into the market, and the poor quality of its own customer service. Evaluate which of these is the more significant cause of its falling profits. (12 marks)",
"marks": 12,
"solution": "Introduction: Falling profits for the gym chain can be attributed to both external competitive pressures and internal operational weaknesses. This evaluation will assess whether the new low-cost competitors or the gym's own poor customer service is the more significant factor in its declining profitability.

Argument for Low-Cost Competitors as the Main Cause: The entry of low-cost competitors is likely a highly significant cause. Because these new gyms offer a similar service at a much lower price point, this leads to price-sensitive customers switching away from the established, more expensive chain. This forces the national chain into a difficult choice: either lower its own prices to compete, which would directly reduce its profit margins, or maintain its prices and continue to lose market share. Therefore, the competitive pressure directly impacts both revenue (through lost customers) and profitability (through potential price wars), making it a powerful external threat.

Argument for Poor Customer Service as the Main Cause: However, poor customer service could be an even more significant internal factor. Because a gym membership is a service, the customer experience is critical for retention. Poor service, such as unclean facilities, broken equipment, or unhelpful staff, leads to high levels of customer dissatisfaction and a poor brand reputation. Existing members will cancel their memberships, and negative word-of-mouth will deter new members from joining. Therefore, poor customer service not only causes a loss of current revenue but also damages the brand's long-term ability to attract and retain customers, potentially having a more sustained and damaging impact on profits than a temporary price war.

Judgement: In conclusion, while the entry of low-cost competitors is a serious and immediate threat, the poor quality of its own customer service is the more significant cause of the gym's falling profits. This is because the gym has no control over the external market, but it has complete control over its internal operations. A competitor can always be beaten on price, but a business with a reputation for poor service will struggle to survive regardless of the competitive landscape. Fixing the customer service issue would not only help retain current members but would also create a key point of differentiation against the low-cost rivals, allowing the gym to justify its higher price point. It depends on the gym's ability to invest in staff training and facility improvements. If it can fix its internal weaknesses, it will be in a much stronger position to withstand the external competitive pressure. The internal factor is more significant because it is both a direct cause of lost revenue and a barrier to effectively competing.",
"examiner_commentary": "A clear Level 4 response. The answer provides two balanced and well-developed arguments, using context and chains of reasoning. The judgement is excellent: it makes a clear decision and justifies it by weighing the two factors against each other. The use of 'It depends on...' and the consideration of what the business can control (internal vs. external factors) demonstrates a high level of strategic thinking. The final sentence provides a powerful, synthesised conclusion.