Cambridge Assessment International Education

Cambridge International Advanced Subsidiary and Advanced Level

BUSINESS 9609/32
Paper 3 Case Study February/March 2019
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PapaYo (PY)

PY going global?

PY operates a number of frozen yoghurt cafés in country S, in South East Asia. The business
was founded by Yoon Taemin in 2005. It now faces the most critical decision in its history. The
Board of Directors is meeting tomorrow to make a final decision regarding Yoon’s proposal to
expand the business into the highly competitive North American market. Yoon is proud of the 5
progress his business has made. He has just finished writing the business plan he is going to
present to the Board of Directors. A thorough strategic analysis of PY has been completed and
Yoon is convinced that PY should proceed with international expansion. Despite the need for
substantial external finance, Yoon is confident that his fellow directors will be persuaded once
they see the investment appraisal he has prepared. 10

Maintaining control

Yoon had always wanted to manage his own business. However, after leaving university he
worked in the marketing department of a multinational ice cream manufacturer in country
S. When working on a marketing campaign he identified a gap in the market for a healthier
alternative to ice cream, with a lower fat content. As a result, he left his job and opened his first 15
café, selling frozen fruit yoghurt. The success of this encouraged Yoon to expand PY rapidly.
From the start, Yoon fully controlled the development of the business. He focused on developing
a strong brand image with a café style environment in which customers can meet and relax.

Organisational structure

PY has always had a centralised organisational structure and all managers have to report 20
directly to Yoon, the Chief Executive. There is little delegation of decision-making to individual
cafés. All cafés have to obtain supplies from the central purchasing department. All employment
decisions have to follow PY guidelines, including the use of zero hours contracts, as set out by
the Human Resources Director.

Closing cafés? 25

PY has grown steadily and now has 75 cafés in country S. Typically, new cafés return a profit
quickly after opening. However, Yoon is worried about the performance of three cafés that were
opened in the North East of country S in 2018. The cafés were opened on time, following PY’s
usual planning approach. The North East of country S is relatively poor, with a higher than
average rate of unemployment. All three cafés made a loss in the first year. Yoon has asked 30
the Finance Director for financial data, which is presented in Table 1. Yoon will make a decision
after considering this and other information.

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Table 1: Financial data and other information for the three cafés – first year of trading

Totals for all Forecast revenue Actual revenue

Notes
three cafés and costs ($m) and costs ($m) 35
Revenue 3 2.25 The average target spend of
$6 per customer was not met
Inventory costs 0.5 0.6 Cost of fruit used in yoghurts
has increased
Other variable 0.9 0.85 • There are 25 employees 40
costs of which 6 are full time and
considered a fixed cost
Annual rental 1.2 1.2 • Rental agreement for
costs and other properties until end of 2021
fixed costs • Fixed costs include 45
national marketing

Opening a new café?

PY is continuing to expand in country S. Although the market is increasingly saturated, PY has

identified an opportunity in city X. A property in the centre of the city is available to rent. The
Operations Director has been asked to prepare a network analysis for opening the café. Yoon 50
wants the café opened in time for the summer season in 10 weeks’ time. The network analysis
is shown in Table 2 below and Fig. 1 in the Question Paper.

Table 2: Network analysis for opening new café

Preceding Duration
Activity Activity described
activities (weeks) 55
A Negotiate rental agreement None 2
B Design interior changes None 1
C Building work changes A&B 4
D Order equipment and fittings A&B 1
E Install equipment C&D 2 60
F Recruit employees A 3
G Train employees F 1
H Plan marketing A 2
J Marketing activities H 2
K Test operations E&G 1 65

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Marketing focus

PY marketing focuses on the health benefits of frozen yoghurts. With a slogan of ‘Chill the Fruit’,
advertising campaigns in health magazines and on television have contributed to PY achieving
a market share of 13%. PY’s website promotes the company’s approach to corporate social
responsibility (CSR), highlighting its support for government campaigns for healthy and active 70
living. Sponsorship of community projects is also an important part of PY’s marketing strategy.
Recent market research has found that customers like the consistent service and product quality
across PY cafés. The Marketing Director produces sales forecasts for PY each quarter, based
on historical sales data. She uses the moving average method. Appendix 1 and Appendix 2
show the most recent sales data. 75

Is frozen yoghurt healthy?

There has been a rise in health problems in country S linked to the consumption of sugar. A
recent television documentary included an investigation into PY’s products. It was critical of PY’s
marketing of frozen fruit yoghurts as a healthy alternative to ice cream and the lack of nutritional
information provided for customers. PY’s products were analysed and found to contain high 80
levels of sugar. Following the documentary there was increased negative social media activity
directed at PY. Comments were also posted regarding the employment practices of PY, claiming
that some employees were paid below the minimum wage. PY has yet to officially comment on
the claims made in the documentary and on social media. These issues and how to respond
have been added to the agenda for the Board meeting being held tomorrow. 85

Overseas expansion and Yoon’s strategic analysis

Growth is a key corporate objective for PY. Yoon is convinced that PY should enter the North
American market. This would involve opening 10 cafés by the end of 2020. Yoon and a small
project team have been working on the details for three months. The capital cost would be
$20m. Internal sources of finance are insufficient to fund the expansion. Yoon realises that 90
establishing an effective supply chain will be crucial. He will present his business plan to the
Board of Directors tomorrow and he is confident that the directors will agree with him. Yoon has
recently completed a SWOT analysis, as shown in Appendix 3. An extract from Yoon’s analysis
of Porter’s Five Forces is shown in Appendix 4.

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Appendix 1: Sales data for PY

Quarterly Average
Seasonal
Sales revenue moving Seasonal
Year Quarter variation*
($m) average Variation*
($m)
(Trend) ($m)* ($m)
1 18
2 20
2014
3 25.1 20.65 4.45 5.42
4 19 20.90 –1.90 –2.43
1 19 21.26 –2.26 –1.94
2 21 21.56 –0.56 4(a)(ii)
2015
3 27 21.69 5.31 5.42
4 19.5 21.69 –2.19 –2.43
1 19.5 21.75 –2.25 –1.94
2 20.5 21.91 –1.41 4(a)(ii)
2016
3 28 22.14 5.86 5.42
4 19.8 22.45 –2.65 –2.43
1 21 22.70 –1.70 –1.94
2 21.5 22.85 –1.35 4(a)(ii)
2017
3 29 22.94 6.06 5.42
4 20 23.00 –3.00 –2.43
1 21.5 23.06 4(a)(i) –1.94
2 21.5 23.25 –1.75 4(a)(ii)
2018
3 29.5
4 21

* Figures to 2 decimal places

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Appendix 2: Graph of moving average trend and line of best fit

25

24
Line of best fit

23
Moving Average
(Trend)
22
Sales ($m)

21

20

19

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3
15 4
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18 4
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19 4
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Q
20 Q
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20 Q
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20 Q
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20 Q
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20 Q
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Appendix 3: Yoon’s SWOT Analysis of PY

Strengths Opportunities

• Award winning marketing • North American market, although mature,

• Positive customer feedback is expected to grow at 5% per year
• Effective senior management • Expand product offering to include fruit
• High recognition of the brand in the key smoothies
16–34 age group in country S
• Reputation for being a socially
responsible firm
Weaknesses Threats

• Gearing ratio of 65% • Major competitor Blue Berry has

• High labour turnover increased market share in country S to
• Retained profit in 2017 only $3m 10% in the last year
• Market is saturated in country S
• Rising cost of fruit

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Appendix 4: Porter’s Five Forces – North American frozen yoghurt café market
(extract from Yoon’s analysis)

Threat of new entrants Buyer power

• Economies of scale are low • Individual consumers

• Brand preference for established • Easy for buyers to switch brands
businesses
Threat of substitutes Supplier power

• Many substitute products are • Many independent fruit and yoghurt

available in cafés producers in North America
• Substitutes priced competitively

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