1 What is Strategy and the Strategic Management Process? CHALLENGE QUESTIONS 1-1. Some firms publicize their corporate mission statements by including them in annual reports, on company letterheads, and in corporate advertising. What, if anything, does this practice say about the ability of these mission statements to be sources of sustained competitive advantage for a firm? The act of publicizing a mission statement indicates that the managers of a firm want the mission statement to be a source of sustained competitive advantage. However, simply publicizing the mission statement does not guarantee that it will lead to sustained competitive advantage. The real test of whether a mission statement is a source of competitive advantage is the ability of the mission statement to motivate and unite people in outperforming the competition. 1-2. Why would including a corporate mission statement on company letterhead or in corporate advertising be seen as a source of sustained competitive advantage? As indicated above, the real test of whether a mission statement is a source of competitive advantage is the ability of the mission statement to motivate and unite people in outperforming the competition. When a company includes its mission statement on its corporate stationery, it is sending the message that its mission is not only important but that everyone should work consistently toward it. 1-3. Little empirical evidence indicates that having a formal, written mission statement improves a firm’s performance. Yet many firms spend a great deal of time and money developing mission statements. Why? Firms invest in developing mission statements in the hope that the mission statement will serve to motivate and unite people around a common goal. Ideally, the mission statement serves to inform people within the organization about what they can and should do to further the interests of the organization. The mission statement also communicates a message to people outside the organization. Firms rationally invest in efforts to develop mission statements because of the potential benefits of this favorable communication. 1-4. Explain if it is possible to distinguish between an emergent strategy and an ad hoc realization of a firm’s past decisions? Yes, if you know something about the extent to which the firm engaged in the strategic management process. If there is a clear history of the firm adjusting strategy in response to new information, while sticking to its mission and objectives, then the firm has engaged in an emergent strategy. If there appears to be no logical pattern to a firm’s past decisions, then it is unlikely that the firm really has a strategy. 1-5. Both external and internal analyses are important in the strategic management process. Is the order in which these analyses are done important? Although these two types of analysis are often done simultaneously, the order matters because internal analysis looks at how the focal firm’s resources compare to a competitor’s resources. In contrast, external analysis looks at factors outside the firm. The order is important because each affects the other and, in turn, both affect the company’s strategy. 1-6. If the order of analyses is important, which should come first: external analysis or internal analysis? An external analysis identifies opportunities and threats while an internal analysis indicates the company’s strengths and weaknesses. One could argue that a company’s strategy should attempt to exploit the opportunities. By this argument, an external analysis should come first. 1-7. Concerning external analysis and internal analysis, if the order of importance is not important, why not? Performing an external analysis first suggests that a company’s strategy should match a firm’s strengths with opportunities. One could argue that if an internal analysis is performed first, then its strengths could be used to develop opportunities. In short, this argument would say that the order does not matter because the end result is the same. 1-8. Will a firm that has a sustained competitive disadvantage necessarily go out of business? No, a firm could have a sustained competitive disadvantage and remain in business. Remember that a sustained competitive disadvantage simply means the firm is generating less value than competitors. Many firms continue to operate even though they do so at a competitive disadvantage in some areas because they usually have some advantage in another area. 1-9. Will a firm with below average accounting performance over a long period of time necessarily go out of business? No, a firm could have below average accounting performance and remain in business. As long as the returns to the owners of the firms are satisfactory, the firm will remain in business, even if those returns are less than the industry average. 1-10. Will a firm with below normal economic performance over a long period of time necessarily go out of business? Yes, a firm that earns a below average economic return over a long period of time will eventually go out of business. The reason for this is that the firm is earning less than its cost of capital. In time, the firm would be unable to attract capital and would be forced to go out of business. 1-11. Can more than one firm have a competitive advantage in an industry at the same time? Yes, more than one firm can have a competitive advantage in an industry at the same time. Two or more firms could have advantages in different areas and thereby appeal to different customers—each firm having an advantage over other firms with respect to different customers. 1-12. Is it possible for a firm to simultaneously have a competitive advantage and a competitive disadvantage? Yes, a firm can simultaneously have a competitive advantage and a competitive disadvantage. Wal-Mart is a good example. Wal-Mart has a competitive advantage in distribution logistics and information technology. It also has a disadvantage in reputation among some customers because of its labor and location policies. On balance, it would appear that the advantages Wal-Mart enjoys vastly outweigh its disadvantages. Problem Set Answers 1-13. Write objectives for each of the following mission statements. a. We will be a leader in pharmaceutical innovation. b. Customer satisfaction is our primary goal. c. We promise on time delivery. d. Product quality is our first priority. Answers a. At least 25% of our sales in the next five years will be generated from new products. b. Ensure that customer complaints are less than 1% of all units sold. c. At least 98% of all deliveries each quarter will be consistent with the terms negotiated with our customers. d. Ensure that Six Sigma is implemented across all manufacturing lines within two years. 1-14. Rewrite each of the following objectives to make them more helpful in guiding a firm’s strategic management process. a. We will introduce five new drugs. b. We will understand our customer’s needs. c. Almost all of our products will be delivered on time. d. The number of defects in our products will fall. Answers a. For the next five years, one new drug will be successfully brought to market each year. b. Customer profiles will be developed for each of our customers through point of sale surveys leading to at least 98% accuracy in our customer database within two years. c. Less than 1% of our deliveries each quarter will fail to meet our specified delivery times. d. Defects will not exceed 1 defect per 10,000 units produced per quarter. 1-15. Do firms with the following financial results have below normal, normal, or above normal economic performance? a. ROA = 14.3%, WACC = 12.8% b. ROA = 4.3%, WACC = 6.7% c. ROA = 6.5%, WACC = 9.2% d. ROA = 8.3%, WACC = 8.3% Answers a. Above normal economic performance b. Below normal economic performance c. Below normal economic performance d. Normal economic performance 1-16. Do these same firms have below average, average, or above average accounting performance? a. ROA = 14.3%, Industry Avg. ROA = 15.2% b. ROA = 4.3%, Industry Avg. ROA = 4.1% c. ROA = 6.5%, Industry Avg. ROA = 6.1% d. ROA = 8.3%, Industry Avg. ROA = 9.4% Answers a. Below average accounting performance b. Average (slightly above) accounting performance c. Above (average) average accounting performance d. Below average accounting performance 1-17. Is it possible for a firm to simultaneously earn above normal economic returns and below average accounting returns? How about below normal economic returns and above average accounting returns? Why or why not? If this can occur, which measure of performance is more reliable: economic performance or accounting performance? Why? Answer Generally, there is a correlation between economic and accounting measures of competitive advantage. It is possible for a firm to earn above average accounting performance and simultaneously below normal economic performance. The same is true for below average accounting performance and simultaneously above average economic performance. In the former, the firm is not earning its cost of capital but is earning above industry average accounting performance. In the latter, the firm has a very low cost of capital and is earning at a rate in excess of this cost, but still below the industry average. 1-18. Examine the following corporate websites and determine if the strategies pursued by these firms were emergent, deliberate, or both emergent and deliberate. Justify your answers with facts from the websites. (a) www.walmart.com (b) www.homedepot.com (c) www.cardinal.com Answers 1. Walmart (www.walmart.com): • Look for any mission statements, vision statements, or sections discussing corporate strategy. • Analyze their history and how their business evolved over time. This can give insights into whether their strategies were deliberate or emergent. • Check for any recent initiatives or announcements that demonstrate intentional strategic moves. 2. Home Depot (www.homedepot.com): • Similar to Walmart, look for mission or vision statements, as well as sections discussing their corporate strategy. • Examine their evolution as a company and any notable strategic shifts. • Identify any recent initiatives or investments that indicate deliberate planning. 3. Cardinal Health (www.cardinal.com): • Look for sections detailing their corporate strategy, values, or mission. • Explore their history and any significant changes in their business model or approach. • Investigate recent acquisitions, partnerships, or divestitures to understand their strategic direction. To determine if the strategies pursued by these firms were emergent, deliberate, or a combination of both, you'll need to gather evidence from these websites and potentially from external sources such as news articles, financial reports, and industry analyses. Once you have the relevant information, you can analyze it to justify your assessment. 1-19. Using the information provided, calculate this firm’s ROA, ROE, Gross Profit Margin, and Quick Ratio. If this firm’s WACC is 6.6% and the average firm in its industry has an ROA of 8%, is this firm earning above or below normal economic performance and above or below average accounting performance? Answers a. ROA = 1.19 b. ROE = 17.8% c. Gross Profit Margin = 27.6% d. Quick Ratio = 2.52 It is apparent that this firm is earning below average accounting performance. 2 Evaluating a Firm’s External Environment CHALLENGE QUESTIONS 2.1. Your former college roommate calls you and asks to borrow $10,000 so that he can open a pizza restaurant in his hometown. In justifying this request, he argues that there must be significant demand for pizza and other fast food in his hometown because there are lots of such restaurants already there and three or four new ones are opening each month. He also argues that demand for convenience food will continue to increase and he points to the large number of firms that now sell frozen dinners in grocery stores. What are the risks involved in choosing to lend him money? You would not want to lend him the money. This sounds like an industry in which the threat of rivalry will be high. The numerous restaurants will have incentive to compete vigorously to survive in this environment. There will likely be a high threat of substitutes given the number of firms selling frozen dinners. These conditions suggest that there will be no above normal profits in this market. 2.2. One potential threat in an industry is buyers’ influence. Yet unless buyers are satisfied, they are likely to look for satisfaction elsewhere. Can the fact that buyers can be threats be reconciled with the need to satisfy buyers? Yes it can. If buyers are powerful as explained in the environmental threats model, a firm cannot afford to simply let buyers be satisfied by competitors. A firm would quickly run out of buyers if it did not strive to satisfy at least some buyers. Powerful buyers will try to gain their satisfaction by encouraging the firms from whom they buy to compete against each other. Of course, if a firm cannot satisfy buyers and make at least a normal economic profit, the firm should probably exit the market. 2.3. Government policies can have a significant impact on the average profitability of firms in an industry. Government, however, is not included as a potential threat. Why should the model be expanded to include government? Why or why not? No, because the forces governments can exert on an industry can be considered in the forces that are already part of the model. For example, governments can affect the threat of entry through tariffs, etc. Governments can affect the threat of rivalry by granting monopolies. Governments can affect the threat of suppliers and buyers through anti-trust policies. Notice that government policies can also present opportunities for firms. Import policies may make an industry more attractive by erecting entry barriers. 2.4. In particular, if an industry has large numbers of complementors, does that make it more attractive, or less attractive, or does it have no impact at all on the industry’s attractiveness? The model of environmental threats is an industry analysis model. Because complementors often come from outside an industry it would be best not to include complementors as a formal part of the model. In those instances when rival firms are also complementors, it is usually because the rival firm has operations outside the industry. From the perspective of the focal firm, the number of complementors available to firms within an industry is not as important as which firms in the industry benefit from the complementors. Complementors may benefit some firms within an industry while not benefiting others. If a complementor benefits a rival more than it benefits the focal firm, the complementor could actually be considered a threat, making the industry less attractive. Therefore, it is difficult to argue that more complementors are automatically better or worse. 2.5. Opportunities analysis seems to suggest that there are strategic opportunities in almost any industry, including declining ones. If that is true, is it fair to say that there is really no such thing as an unattractive industry? The most accurate characterization would be that there are opportunities even in unattractive industries for some firms. Unattractive industries, by definition, offer little hope of above normal profits because of intense competition among firms. However, if a firm is able to overcome that competition through some competitive advantage a firm may earn above normal returns in an unattractive industry. The airline industry is considered unattractive yet Southwest Airlines has consistently bested industry averages over almost three decades. 2.6. If there is really no such thing as an unattractive industry, what implications does this have for the applicability of environmental threat analysis? As indicated above, there are opportunities even in unattractive industries, as the Southwest Airlines example points out. In such industries, an analysis of environmental threats would help firms use the S-C-P model to their advantage by understanding the industry’s structure that would identify strategic choices available to them. 2.7. Describe an industry that has no opportunities. This would be an industry that would be ideal from a public policy perspective because such an industry would exhibit perfect competition with firms reporting average profits. 2.8. Describe when the evolution of industry structure from an emerging industry to a mature industry to a declining industry is inevitable. Most of history would suggest that such evolution is inevitable. However some industries seem to have remained mature industries for a very long time. Industries that have gone through the complete cycle have done so primarily due to technological change. That is to say, new technologies have displaced old technologies and human ‘needs’ have changed in response. Automobiles have replaced horse-drawn buggies and humans no longer ‘need’ horse-drawn buggies. On the other hand, the packaged foods industry has been around for a long time. Henry Heinz began processing and packaging and branding condiments well over a century ago. This industry is still in the mature stage even though processing and packaging technologies have advanced considerably. It is difficult to imagine that humans will ever stop ‘needing’ packaged foods. Thus, the answer seems to be: it depends on the interaction of technology and human ‘needs’. Problem Set 2.9. Perform an analysis of the profit potential on the following two industries: The Pharmaceutical Industry The pharmaceutical industry consists of firms that develop, patent, and distribute drugs. Although this industry does not have significant production economies, it does have important economies in research and development. Product differentiation exists as well, because firms often sell branded products. Firms compete in research and development. However, once a product is developed and patented, competition is significantly reduced. Recently, the increased availability of generic, non-branded drugs has threatened the profitability of some drug lines. Once an effective drug is developed, few, if any, alternatives to that drug are available. Drugs are manufactured from commodity chemicals that are available from numerous suppliers. Major customers include doctors and patients. Recently, increased costs have led the federal government and insurance companies to pressure drug companies to reduce their prices. The Textile Industry The textile industry consists of firms that manufacture and distribute fabrics for use in clothing, furniture, carpeting, and so forth. Several firms have invested heavily in sophisticated manufacturing technology, and many lower-cost firms located in Asia have begun fabric production. Textiles are not branded products. Recently, tariffs on some imported textiles have been implemented. The industry has numerous firms; the largest have less than 10 percent market share. Traditional fabric materials (such as cotton and wool) have recently been threatened by the development of alternative chemical-based materials (such as nylon and rayon), although many textile companies have begun manufacturing with these new materials as well. Most raw materials are widely available, although some synthetic products may be periodically in short supply. There are numerous textile customers, but textile costs are usually a large percentage of their final product’s total costs. Many users shop around the world for the low prices on textiles. 2.10. Perform an opportunities analysis on the following industries: The U.S. Airline Industry. Since the tragedies of 9/11, the U.S. airline industry has seen a consistent drop off in sales. This has forced many U.S. airline companies to have to cut back their employment, and several—including USAir and United—have had to declare bankruptcy. More recently, several airlines have merged (e.g., Continental and United) in order to be better able to compete. The U.S. beer industry is dominated by two companies: InBev and SAB Miller. In addition, there are several regional brewers and a large number of very small microbrewers that manufacture and sell beer in small quantities. There are over 3,000 property and automobile insurance companies in the U.S. The largest companies, including Geico, Progressive, Allstate, and Safeco, control less than 20% of the property and automobile market. Portable memory chips—sometimes worn around the neck like a necklace—may be an important substitute for compact discs These memory chips come in various sizes (from 64K to 256K) and range in price from $6 to $150. They plug into a computer’s USB port, self load, and act like another hard drive in your computer. In 2003, the German firm DHL acquired the U.S. firm Airborne Express, to become the third largest player in the small package delivery business—behind UPS and FedEx. Shipments overseas continue to be a growing part of this industry. 2.11. For each of the following firms, identify at least two competitors (either rivals, new entrants, or substitutes) and two complementors. a. Yahoo b. Microsoft c. Dell d. Boeing e. McDonald’s Answer 2.9 The Pharmaceutical Industry a. Threat from new competition: New entrants are firms that have either recently begun operations in an industry or that threaten to begin operations in an industry soon. The Pharmaceutical Industry had not seen many new entrants. Barriers to entry are significant given the emphasis on research and development. Costs are very high in this area. With significant barriers to entry in place, potential entrants will not enter into an industry even though incumbent firms are earning competitive advantages. There are four important barriers to entry that students could use to discuss the relative “height” of barriers to entry. These include: (1) economies of scale; (2) product differentiation; (3) cost advantages independent of scale; and (4) government regulation of entry. b. Threat from competition among existing competitors: Rivalry is the intensity of competition among a firm’s direct competitors. The attributes of an industry that increase the threat of rivalry include: (1) large number of competing firms that are roughly the same size; (2) slow industry growth; (3) lack of product differentiation; and (4) capacity added in large increments. For the pharmaceutical industry, there are relatively few large major drug companies. Industry growth is fairly strong. There is substantial product differentiation; and capacity is not added in large increments. Thus, the threat of rivalry c. Threat from superior or low-cost substitutes: The products provided by a firm’s rivals meet approximately the same customer needs in the same ways as the products provided by the firm itself. Substitutes meet approximately the same customer needs but do so in different ways. Generic drugs would be considered substitutes in the pharmaceutical industry. These substitutes place a ceiling on the prices firms can charge and on the profits that they can earn. d. Threat of supplier leverage: Suppliers can threaten the performance of firms in an industry by increasing the price of their supplies or by reducing the quality. There are indicators of the threat of suppliers in an industry. These include: (1) suppliers’ industry dominated by small number of firms; (2) suppliers sell unique or highly differentiated products; (3) suppliers are not threatened by substitutes; (4) suppliers threaten forward vertical integration; (5) firms are not important customers for suppliers. The pharmaceutical industry is somewhat immune to these threats given that the raw materials (chemicals) are commodities and available through a number of suppliers. e. Threat from buyers influence: Indicators of the threat of buyers in an industry include: (1) number of buyers is small; (2) products sold are undifferentiated and standard; (3) products are significant percentage of a buyer’s final costs; (4) buyers are not earning significant economic profits; (5) buyers threaten backward vertical integration. The pressure that large high-volume retailers can exert may be a factor (e.g. Wal-Mart and other big box retailers that have pharmacy outlets). However, overall the threat of buyers is rather small. The Textile Industry a. The threat of new competition is high: No one textile manufacturer has more than 10 percent of the market share. There is relatively little product differentiation as raw materials are widely available. There are few cost advantages available. There is virtually no government regulation in this industry and there are many manufacturers around the world. b. Threat from competition among existing companies: There are numerous manufacturers in the textile industry and therefore competition is high; consumers shop for best price worldwide. There is relatively slow growth in the industry. There is little differentiation; materials are either natural or synthetics. Capacity can be added fairly easily, as can be seen with the increasing number of manufacturers in Asian countries. c. Threat from superior or low-cost substitutes: There are very few substitutes except for synthetics. However, most firms in this industry are capable of manufacturing with the synthetics if they are available. d. Threat of supplier leverage: The raw materials are fairly standard (wool or cotton) with some challenges associated with synthetics. There are currently no substitutes other than those mentioned above. e. Threat from buyers’ influence: The number of buyers is fairly large except that they are very price sensitive. Products that are sold are undifferentiated and are not branded; therefore there are many alternatives. Answer 2.10 U.S. Airline Industry: Is a mature industry. Opportunities may exist by a greater emphasis on refining a firm’s current products, increasing the quality of service, and a focus on reducing costs. U.S. Beer Industry: Could be considered a mature industry (although some students may argue that it is a fragmented industry). The domination of the industry by the two companies requires the development of experienced repeat customers for both the large firms and the smaller regional and microbrewers. Here the opportunities may be found in refining current products. Process innovation may also represent an opportunity where there is an effort to refine and improve the firm’s current processes. Automobile Insurance Companies: Could be considered a fragmented industry. Large numbers of small or medium sized firms operate and no small set of firms has dominant market share. The major opportunity is the implementation of consolidation strategies. Portable Memory Chips: Emerging industry. This is characterized by technological innovations. First-mover advantages should be considered. Firms can establish first-mover advantage through technological leadership, preemption of strategically valuable assets, and the creation of customer switching costs. In this market, technological leadership strategies should be employed. Small Package Delivery Business: Opportunities in an International Context. There is an increase in the amount of international customers and firms should pursue multinational opportunities and the development of experienced repeat customers. Here there should be an emphasis on refining current products and an emphasis on service. Answer 2.11 a. Yahoo – Competitors: (1) MSN; (2) Google. Complementors (1) Google, (2) Firefox. b. Microsoft – Competitors: (1) Red Hat Linux; (2) Sun Microsystems. Complementors (1) Java; (2) Adobe. c. Dell: – Competitors: (1) HP; (2) Lenovo. Complementors: (1) Canon printers; (2) Intel. d. Boeing: – (1) Airbus; (2) Pratt Whitney. Complementors: (1) Rolls Royce Engines; (2) GE engines. e. McDonald’s: – (1) Burger King; (2) Wendy’s. 3 Evaluating a Firm’s Internal Capabilities CHALLENGE QUESTIONS 3.1. Explain which of the following approaches to strategy formulation is more likely to generate economic profits: (a) evaluating external opportunities and threats and then developing resources and capabilities to exploit these opportunities and neutralize these threats or (b) evaluating internal resources and capabilities and then searching for industries where they can be exploited. Answer (b) is more likely to generate economic profits because the firm in answer (a) would have to acquire resources. These resources would have to be acquired in a market where other firms would very likely know the value of the resources. Prices would be bid up to the point where economic profits would probably not be possible. The firm in answer (b) already has the resources and capabilities and they would not capitalize the value of the resources and capabilities in the process of acquiring them. 3.2. Which firm will have a higher level of economic performance: (a) a firm with valuable, rare, and costly-to-imitate resources and capabilities operating in a very attractive industry or (b) a firm with valuable, rare, and costly-to-imitate resources and capabilities operating in a very unattractive industry? Assume both these firms are appropriately organized. Explain your answer. The firm in answer (a) will have higher performance because overall profits will be higher in the attractive industry. There will be less pressure from each of the five forces explained in Porter’s Five Forces Model. However, this is not to say that a firm in an unattractive industry cannot earn high economic performance. In fact, some firms do earn very attractive returns in industries that would be considered unattractive because they have resources and capabilities that set them apart from competitors. Wal-Mart is a good example. 3.3. Considering which is more critical to sustaining human life—water or diamonds – why do firms that provide water to customers generally earn lower economic returns than firm that provide diamonds? Water is more important, but it is relatively more abundant than diamonds. However, in areas where water is critically short, people will spend more on water than on diamonds. 3.4. Why would a firm currently experiencing competitive parity be able to gain sustained competitive advantages by studying another firm that is currently experiencing sustained competitive advantages? The correct answer depends on what the firm does with its analysis. If the firm studies the firm with a sustained competitive advantage and then tries to imitate the source of advantage, the answer is no. Such a firm will likely stay at competitive parity because that firm’s offering will most likely not be rare. If, on the other hand, the firm studies the firm with a sustained competitive advantage and then formulates a strategy that results in resources and capabilities that are valuable, rare, and costly to imitate, then the answer would likely be yes. Such a firm’s offering would generate competitive advantage as predicted by the VRIO Framework. 3.5. Your former college roommate calls you and asks to borrow $10,000 so the he can open a pizza restaurant in his hometown. He acknowledges that there is a high degree of direct competition in this market, that the cost of entry is low, and that there are numerous substitutes for pizza, but he believes that his pizza restaurant will have some sustained competitive advantages. For example, he is going to have sawdust on his floor, a variety of imported beers, and a late-night delivery service. What are the risks in lending him the money? No, you would not want to lend your friend the money. The claimed sources of competitive advantage do not meet the VRIO criteria. The sawdust might not even be valuable and the imported beers and late-night delivery are not rare. There should be no expectation that the new pizza restaurant would earn any better than a normal return. In fact, unless your friend is at least as good as the other restaurants, below normal returns would be expected. 3.6. In the text, it is suggested that Boeing did not respond to Airbus’s announcement of the development of a super-jumbo aircraft. Assuming this aircraft will give Airbus a competitive advantage in the segment of the airliner business that supplies airplanes for long international flights, why did Boeing not respond? A possibility is that Boeing may think that the market is not large enough to justify the development costs of such an aircraft. 3.7. In the text, it is suggested that Boeing did not respond to Airbus’s announcement of the development of a super-jumbo aircraft. Does it have its own competitive advantage that it does not want to abandon? Explain. Boeing may have an advantage in other segments of the airliner industry that it doesn’t want to abandon or risk eroding. Boeing may also think that the market is not large enough to justify the development costs of such an aircraft. 3.8. In the text, it is suggested that Boeing did not respond to Airbus’s announcement of the development of a super-jumbo aircraft. Does it not have the resources and capabilities needed to respond? Explain. Boeing may believe that it simply doesn’t have the resources necessary to build such an aircraft and still keep building the other aircraft it currently builds. 3.9. In the text, it is suggested that Boeing did not respond to Airbus’s announcement of the development of a super-jumbo aircraft. Is it trying to reduce the level of rivalry in the industry? Explain. It may also be the case that Boeing sees this as an opportunity to divide the market and let Airbus focus on long-haul aircraft. This would allow Boeing to face less fierce competition in the short-haul markets. Reduced competition would benefit both firms if the firms do, in fact, divide the market and let the other firm dominate its respective part of the market. 3.10. Between the following two firms, which firm is more likely to be successful in exploiting its sources of sustained competitive advantage in its home market in a highly competitive, non-domestic market: a firm from a less competitive home country or a firm from a more competitive home country? Why? The firm from the more competitive domestic market will likely be more successful in exploiting its sources of sustained competitive advantage. This is because it has been forced by competition to develop organizational characteristics that will be more likely to enable the firm to face the rigors of another highly competitive market. Such a firm would have a marked advantage over other firms attempting to enter the same market if those other firms lack reporting and reward systems, etc. that provide strong incentives for people to figure out how to make things work. Problem Set 3.11. Apply the VRIO Framework in the following settings. Will the actions described be a source of competitive disadvantage, parity, temporary advantage, or sustained competitive advantage? Explain your answers. a. Procter and Gamble introduces new smaller packaging for its laundry detergent, Tide. b. American Airlines announces a 5% across-the-board reduction in airfares. c. The Korean automobile firm Hyundai announces a 10-year, 100,000-mile warranty on its cars. d. Microsoft makes it easier to transfer data and information from Microsoft Word to Microsoft Excel. e. Merck is able to coordinate the work of its chemists and biologists in the development of new drugs. f. Ford patents a new kind of brake pad for its cars. g. Ashland chemical, a specialty chemical company, patents a new specialty chemical. h. The New York Yankees sign All-Star pitcher Randy Johnson to a long-term contract. i. Michael Dell uses the money he has made from Dell Computers to purchase the Dallas Cowboys football team. j. Ted Turner uses the money he has made from his broadcasting empire to purchase the Atlanta Braves baseball team. 3.12. Identify three firms you might want to work for. Using the VRIO Framework, evaluate the extent to which the resources and capabilities of these firms gives them the potential to realize competitive disadvantages, parity, temporary advantages, or sustained advantages. What implications, if any, does this analysis have for whom you might want to work for? 3.13. You have been assigned to estimate the present value of a potential construction project for your company. How would you use the VRIO Framework to construct the cash flow analysis that is a part of any present value calculation? Answer 3.11 a. Procter & Gamble – temporary advantage. This will be imitated by other firms. b. American Airlines – temporary advantage. This will be imitated by other airline carriers. c. Hyundai – sustained competitive advantage. 100,000-mile warranty is valuable, rare, and costly to imitate. d. Microsoft – sustained competitive advantage. Costly to imitate. e. Merck – could be either temporary or sustained competitive advantage. Merck is using “organization” to exploit its resources and capabilities. f. Ford – temporary advantage. Depends on the cost to imitate and perceived value. g. Ashland Chemical – Temporary or sustained competitive advantage. Depending upon the rarity of the chemical, cost to imitate, and its value. h. New York Yankees – Parity. This could be considered parity or temporary advantage as this resource is not permanent. i. Michael Dell – Competitive disadvantage. The resources could be better utilized for research and new product development. The football team does not directly benefit the firm. j. Ted Turner – Students may argue several different options here. Arguments could be made for competitive disadvantage, parity, and perhaps temporary advantage Answer 3.12 Let's select three diverse firms and evaluate their resources and capabilities using the VRIO framework: 1. Google: • Valuable: Google possesses valuable resources such as its search algorithm, brand reputation, vast user data, and diverse portfolio of products (e.g., Google Search, YouTube, Android). • Rare: Many of Google's resources, such as its search algorithm and user data, are rare and difficult to imitate. • Inimitable: Google's core competencies, like its search algorithm and data analytics capabilities, are complex and challenging for competitors to replicate. • Organized to exploit: Google has a strong organizational structure and culture focused on innovation and leveraging its resources effectively. Evaluation: Google's resources and capabilities provide sustained competitive advantages. Its dominance in search and advertising, coupled with its continuous innovation efforts, position it well for long-term success. 2. Tesla: • Valuable: Tesla's electric vehicle technology, brand image, and innovation in autonomous driving are valuable resources. • Rare: While electric vehicles are becoming more common, Tesla's combination of technology, brand, and infrastructure is still relatively rare. • Inimitable: Tesla's technological expertise and its vertically integrated approach to manufacturing and software development are difficult to replicate. • Organized to exploit: Tesla's organizational culture emphasizes innovation and rapid iteration, enabling it to capitalize on its resources effectively. Evaluation: Tesla's resources and capabilities offer sustained competitive advantages in the electric vehicle industry. Its technology leadership and strong brand position it ahead of traditional automakers. 3. Patagonia: • Valuable: Patagonia's commitment to sustainability, high-quality outdoor apparel, and brand authenticity are valuable resources. • Rare: While sustainability is gaining importance, Patagonia's deep-rooted commitment and integration of sustainable practices throughout its business are relatively rare. • Inimitable: Patagonia's brand ethos and corporate culture, which prioritize environmental and social responsibility, are not easily replicated. • Organized to exploit: Patagonia's organizational structure and mission-driven approach enable it to effectively leverage its resources for competitive advantage. Evaluation: Patagonia's resources and capabilities provide sustained competitive advantages, particularly in the outdoor apparel industry. Its strong brand identity and commitment to sustainability resonate with consumers, fostering loyalty and differentiation. Implications: • Based on this analysis, working for Google, Tesla, or Patagonia could offer exciting opportunities to contribute to companies with strong and sustainable competitive advantages. • Each company's distinct strengths and values may appeal to different individuals depending on their career aspirations and personal values. • Candidates interested in technology and innovation might be drawn to Google or Tesla, while those passionate about sustainability and corporate responsibility might prefer Patagonia. • Ultimately, the choice of which firm to work for should align with one's professional goals, values, and the potential for personal growth and fulfillment. Answer 3.13 Using the VRIO Framework would allow for the specifying of a value chain associated with the potential construction project for the company. This listing of the various business activities must be completed for the construction project to be completed. It allows for an analysis of the process in a disaggregated way, which can be useful in constructing the cash flow analysis. In essence, using this approach allows one to think about how each of the activities associated with the construction project affect the financial, physical, individual, and organizational resources of the firm. Further, VRIO Framework allows one to track the impact of the construction project on the firm’s revenues and costs. Solution Manual for Strategic Management and Competitive Advantage Concepts and Cases Jay B. Berney, William S. Hesterly 9781292060088, 9781292258041
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