Unit 1 Test: Protect Ltd Case Study and Strategic Options

Unit 1 Test
Section A
? The following questions follow the same format as Section B of your IB Paper 2 Exam.
? The questions are drawn from Topic 1 - Business Organization and Environment of the IB syllabus.
? Students answer 2 structured questions based on stimulus material from a choice of 3. If you answer all 3 questions, only the first 2 will be marked.
? The questions are each subdivided into parts.
? The command terms used in each part indicate the depth required.
? The questions may require: knowledge and understanding (AO1); application and analysis (AO2); synthesis and evaluation (AO3); and a variety of appropriate skills (AO4).
? The marks available for each part are indicated.
? Each question is worth 20 marks.
? Section A is worth a total of 40 marks.
? For sections A, marks are allocated using a combination of an analytic markscheme and markbands.
? You are NOT allowed to use any outside sources for this section.
? You are to complete this section in a single 75-minute session.

? You may use a calculator for this section, but really should not be needed.
? Compose your answers to the questions using either a computer or a pen and paper. If you handwrite your answers, you will then need to scan in your work. 

1. Protect Ltd. Protect Ltd is a relatively small, Australian leisure clothing company. It imports materials from Asia to produce high quality clothing used by walkers and joggers. It has a large share of the domestic market, but in recent years also exported to Europe. These exports now represent 60% of all sales revenues. The research and development department has invented a new lightweight, breathable waterproof fabric. Initial market research has shown very positive results from existing customers and identified potential applications to a range of sports markets. To manufacture new garments using this fabric, Protect Ltd will need new manufacturing equipment. The research and development department believes that it can improve the fabric further to provide the strength necessary for contact sports such as rugby and American football.

The board of directors recently identified three potential strategic options:
1. As the sports market is highly competitive, sell the patent for the new fabric to a leading sportswear manufacturer for $10 million. 
2. Purchase machinery at a cost of $2 million to manufacture the new fabric as outdoor clothing. The estimated success of this option is 80 % with returns of $20 million. However, the failure of the product in the marketplace would result in a loss of $5 million.
3. Conduct further research and development into improving the fabric for sports use. This would cost $2 million. Failure to produce a suitable fabric would result in a loss of $5 million. However, it is believed that there is a 60 % chance of success. If a suitable fabric is produced then the firm would have another choice. They could either sell the patent for the improved fabric for $25 million, or choose to manufacture it themselves at a cost of $2 million. If they choose to manufacture, the estimated chance of a successful market launch is 50 % with estimated returns of $72 million. However, if the market launch proves a failure, they would make a loss of $8 million.

The board of directors are concerned about the economic conditions in Europe, with the expectation of increases in inflation and interest rates. Asian currency markets are also volatile with Asian exchange rates expected to rise. The popularity of sports and exercise continues to increase globally though preferences in clothing are constantly changing. The increasing incidences of severe weather conditions due to climate change (e.g., forest fires) continue to impact business activity in Australia and other parts of the world.

Additional explanation of business terms used in the stimulus material:
? A patent is a limited legal monopoly granted to an individual or firm to make, use, and sell its invention, and to exclude others from doing so. [businessdictionary.com]
? Businesses conduct market research to learn about the competition, the state of the market/industry in general, and/or the needs and wants of existing and potential customers. [Pamoja Business Management course]

(a) Describe one benefit of operating as a small organization such as Protect Ltd versus operating as a large organization. [2] Describe (AO1) = Give a detailed account.
(b) Prepare a decision tree to show the three options available to Protect Ltd, the expected values of each, and identify the most profitable option. [8]
Prepare (AO4) = Put given data or information from a stimulus/source into a suitable format.
(c) With reference to the external environment and the decision tree prepared in (b), recommend an appropriate course of action for Protect Ltd. [10]

Recommend (AO3) = Present an advisable course of action with appropriate supporting evidence/reason in relation to a given situation, problem or issue.