CH-5-6 Strategies in Action – Strategic Management: A Competitive Advantage Approach, Concepts and Cases : Book Guide

This Document Contains Chapters 5 to 6 Chapter 5 - Strategies in Action Overview Chapter 5 provides basic guidelines for when various strategies have historically been most effective to use. This chapter also describes Porter’s generic strategies, outsourcing, reshoring, first-mover advantages, joint ventures, and partnering in the context of strategic planning. Chapter 5 concludes by describing strategic planning in nonprofit and governmental organizations. Learning Objectives: 1. Define and discuss secondary buyouts and dividend recapitalizations. 2. Identify the benefits and drawbacks of merging with another firm. 3. Discuss the value of establishing long-term objectives. 4. Identify 16 types of business strategies. 5. Identify numerous examples of organizations pursuing different types of strategies. 6. Discuss guidelines when particular strategies are most appropriate to pursue. 7. Discuss Porter’s five generic strategies. 8. Describe strategic management in nonprofit, governmental, and small organizations. 9. Discuss the nature and role of joint ventures in strategic planning. 10. Compare and contrast financial with strategic objectives. 11. Discuss the levels of strategies in large versus small firms. 12. Explain the first mover advantages concept. 13. Discuss recent trends in outsourcing and reshoring. Teaching Tips 1. Table 5-4 titled “Alternative Strategies Defined and Exemplified” is one of the most important pages in the book, so spend at least 30 minutes on that Table elaborating on those strategies, and tying in the guidelines (given also in Chapter 5) for when those strategies are good to pursue. Emphasize that no firm can do everything that will benefit the firm, due to high costs and limited resources, so tough decisions have to be made among many desirable alternative strategies. Some strategies can fit into two categories, but do not worry about this issue because this is a superior classification of types of strategies, compared for example to Porter’s 3 (or 5) generic strategy classification. 2. General guidelines for when various strategies have worked well historically are provided for each strategy type. Go over these lists so students will have a good feel for alternative strategies available to firms under various scenarios. 3. Near the end of this chapter, emphasize that all types of organizations can benefit immensely from strategic planning, including colleges, universities, zoos, churches, government agencies, startup businesses, hospitals, etc. – not just large corporations. Even nonprofit organizations have customers, employees, creditors, budgets, etc. The only difference between profit and nonprofit firms are 1) nonprofits do not pay taxes and 2) nonprofits do not have stock issuances as a source of capital. 4. At the end of Chapter 5, direct student attention to the “Special Note to Students” because this is important information as the team prepares and ultimately delivers their oral case analysis presentation later in the course. 5. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the answer, with you commenting on their answers. Many professors find this to be a fun day in class and it goes pretty quickly. 6. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. Many professors select one from each venue. Answers to End-of-Chapter Review Questions 1. Define and give an example of reshoring. What are three reasons why reshoring is becoming more popular? What are three reasons many companies expect “never” to reshore (as Steve Jobs once told President Obama)? Answer: Reshoring refers to American companies planning to move some of their manufacturing back to the USA. About 14 to 37 percent of USA companies plan to reshore in 2012-2014 for the following reasons: 1) a desire to get products to market faster and respond rapidly to customer orders; 2) savings from reduced transportation and warehousing; 3) improved quality and protection of intellectual property; pressure to increase USA jobs. Some firms will never reshore because 1) wage rates will always be lower somewhere outside the USA, 2) producing closer to customers means some producing outside the USA; 3) tax rates and import/export restrictions will always be more favorable somewhere outside the USA. 2. Define and give an example of a secondary buyout. Why did secondary buyouts triple in total dollar value in 2012 versus 2011? Answer: Private-equity (PE) firms increasingly are buying companies from other private-equity firms, such as Clayton, Dubilier & Rice recently buying David’s Bridal from Leonard Green & Partners LP for $1.05 billion. Such PE to PE acquisitions, called secondary buyouts, totaled $30 billion in 2012 in the USA, compared to $10.5 billion in 2011 – because PE firms saw an improving economy and were on the hunt for businesses they could manage for high returns. 3. The number and dollar value of hostile takeovers are on the rise. Give two reasons for this trend. Answer: 1) PE firms see an improving economy and were on the hunt for businesses they could manage for high returns. 2) Top management of firms like their job so increasingly resist acquisitions, thus spurring hostile takeovers. 3) Firms desire to grow through acquisition to gain economies of scale, so target desired firms going direct to shareholders, avoiding top management. 4. Kroger is adding clothing to its line of products. Give two reasons why this may be a good strategy and two reasons why it may be a bad strategy. Answer: Why a Good Strategy: 1) the clothing business is less competitive than the grocery business and 2) adding clothes can attract more customers into Kroger stores. Why a Bad Strategy: 1) Further reduces Kroger focus on its bread-and-butter = groceries, and 2) Kroger cannot sell clothes in sufficient volume to garner huge supplier discounts. 5. What do you believe are the five most important benefits of outsourcing? Answer: 1) enables firm to concentrate on its core competencies, 2) enables firm to capitalize on experts in various functional areas, 3) enables firm to capitalize on lower wages outside the USA, 4) enables firm to lower its tax expenses, 5) enables firm to capitalize on changing value of the dollar. Other benefits include: ● Cost restructuring ● Improve quality ● Contract ● Access to talent ● Catalyst for change ● Enhance capacity for innovation ● Reduce time to market ● Risk management 6. Define and give an example of a dividend recapitalization. List some pros and cons of doing this in a business. Answer: Private-equity firms especially, but other firms also, in 2012 extensively borrowed money, more than $70 billion, at record low interest rates (a pro), simply to fund dividend payouts to themselves, a controversial practice known as dividend recapitalizations. The previous annual record for dividend recapitalizations, according to S&P’s Capital IQ LCD data service, was $40.5 billion in 2010. Critics say dividend recapitalization saddles a company with debt (a con), burdening its operations. One reason for the high 2012 number was the expectation however that taxes on dividends may increase in 2013 (a pro), so the thinking was pay me now. Other cons are that the firm could obtain a higher ROI utilizing that money to fund growth, the practice reveals the firm does not have sufficient funds to pay desired dividends. Another pro is that it makes shareholders happy. 7. How are for-profit firms different from nonprofit firms in terms of business? What are the implications for strategic planning? Answer: Nonprofit organizations are nearly identical to for-profit companies except for two major differences: 1) nonprofits do not pay taxes and 2) nonprofits do not have shareholders to provide capital. In virtually all other ways, nonprofits are just like for-profits. Nonprofit organizations embrace strategic planning just as much as for-profit firms, and perhaps even more, since equity capital is not an alternative source of financing. 8. If the CEO of a beverage company such as Dr Pepper/Snapple asked you whether backward or forward integration would be better for the firm, how would you respond? Answer: Forward integration is an especially effective strategy when present distributors are expensive, unreliable, or incapable of meeting needs. Backward integration, on the other hand, is effective when current suppliers are expensive, unreliable, or incapable of meeting needs. 9. In order of importance, list six “characteristics of objectives.” Answer: Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent across departments. 10. In order of importance, list six “benefits of objectives.” Answer: Benefits of objectives include the following: 1) Provide direction by revealing expectations. 2) Allow synergy. 3) Aid in evaluation by serving as standards. 4) Establish priorities. 5) Reduce uncertainty. 6) Minimize conflicts. 7) Stimulate exertion. 8) Aid in allocation of resources. 9) Aid in design of jobs. 10) Provide basis for consistent decision-making. 11. Called de-integration, there appears to be a growing trend for firms to become less forward integrated. Discuss why. Answer: De-integration makes sense in industries that have global distributors. Companies today shop around, play one distributor against another, and go with the best deal. Global competition is also spurring firms to reduce their number of suppliers and to demand higher levels of service and quality from those they keep. 12. Called de-integration, there appears to be a growing trend for firms to become less backward integrated. Discuss why. Answer: De-integration makes sense in industries that have global sources of supply. Companies today shop around, play one seller against another, and go with the best deal. Global competition is also spurring firms to reduce their number of distributors and to demand higher levels of service and quality from those they keep. American firms are now following the lead of Japanese firms, which have far fewer suppliers and distributors, and closer, long-term relationships with those few. 13. If a company has $1 million to spend on a new strategy and is considering market development versus product development, what determining factors would be most important to consider? Answer: A market development strategy involves introducing present products or services into new geographic areas, whereas a product development strategy seeks increased sales by improving or modifying present products or services. Determining factors for market development include the following: ● When new channels of distribution are available that are reliable, inexpensive, and of good quality. ● When an organization is very successful at what it does. ● When new untapped or unsaturated markets exist. ● When an organization has the needed capital and human resources to manage expanded operations. ● When an organization has excess production capacity. ● When an organization’s basic industry is rapidly becoming global in scope. Determining factors for product development include: ● When an organization has successful products that are in the maturity stage. ● When an organization competes in an industry that is characterized by rapid technological developments. ● When major competitors offer better-quality products at comparable prices. ● When an organization competes in a high-growth industry. ● When an organization has especially strong research and development capabilities. 14. What conditions, externally and internally, would be desired/necessary for a firm to diversify? Answer: First and foremost, diversification makes sense only to the extent the strategy adds more to shareholder value than what shareholders could accomplish acting individually. Diversification is however an attractive strategy when a firm is competing in an unattractive industry. Internally, a firm needs to be well managed and strong financially to consider diversifying. 15. Could a firm simultaneously pursue focus, differentiation, and cost leadership? Should firms do that? Discuss. Answer: Yes it is possible, especially for a multi-divisional firm where various divisions have different strategies. Differentiation and focus strategies are likely to drive up costs, so although it may be possible to combine these two strategies, adding cost leadership would be difficult. Another reason not to mix the three generic strategies within a given division/segment is that firms strive to build appeal/awareness/consistency among a customer base for particular brands. For example, Dollar General goes for cost leadership. Could you imagine that firm also going for focus. 16. List four major benefits of forming a joint venture to achieve desired objectives. Answer: Joint ventures and cooperative arrangements are being used increasingly because they allow companies to improve communications and networking, to globalize operations, and to minimize risk. Joint ventures are often used to pursue an opportunity that is too complex, uneconomical, or risky for a single firm to pursue alone. Joint ventures are also used when an industry requires a broader range of competencies and know-how than any one firm can marshal. 17. List six major benefits of acquiring another firm to achieve desired objectives. Answer: Benefits of acquiring another firm to achieve desired objectives include: 1) To provide improved capacity utilization. 2) To make better use of the existing sales force. 3) To reduce managerial staff. 4) To gain economies of scale. 5) To smooth out seasonal trends in sales. 6) To gain access to new suppliers, distributors, customers, products, and creditors. 7) To gain new technology. 8) To reduce tax obligations. 18. List five reasons why many merger/acquisitions historically have failed. Answer: Reasons that many mergers and acquisitions fail include: 1) Integration difficulties. 2) Inadequate evaluation of target. 3) Large or extraordinary debt. 4) Inability to achieve synergy. 5) Too much diversification. 6) Managers overly focused on acquisitions. 7) Too large an acquisition. 8) Difficult to integrate different organizational cultures. 8) Reduced employee morale due to layoffs and relocations. 19. Can you think of any reasons why not-for-profit firms would benefit less from doing strategic planning than for-profit companies? Answer: NO. Even competition can be as intense or more intense in the nonprofit area, such as between universities and between churches. All nonprofits have income statements, balance sheets, customers, competitors, etc. just like for-profit firms. 20. Discuss how important it is for a college football or basketball team to have a good game plan for the big rival game this coming weekend. How much time and effort do you feel the coaching staff puts into developing that game plan? Why is such time and effort essential? Answer: Football (and other) coaches spend perhaps 100 hours watching film of prior games in order to put together an effective game plan. Planning for a big game is much like strategic management for a small firm – it takes time and effort. As parity among teams (and firms) become closer, most often the better game plan is victorious. The same is true in business. Head coaches (and CEO’s) are often paid large salaries partly because of their skill as a strategist. 21. Define and give a hypothetical example of a “white knight” in the fast-food industry. Answer: White knight is a term that refers to a firm that agrees to acquire a firm that is facing a hostile takeover by some company. Perhaps Best Buy would but Radio Shack at a time when Radio Shack is to be bought by Shanghai Limited Express. 22. How does strategy formulation differ for a small versus large organization? How does it differ for a for-profit versus a nonprofit organization? Answer: Strategy formulation is conceptually the same for both small and large organizations. However, for large firms, there are more variables to include in both the external and internal audits. The process is usually more formal in a large firm. 23. Give recent examples of market penetration, market development, and product development. Answer: Market penetration means selling more products to existing markets by advertising more or adding sales reps, such as PepsiCo’s strategy in Russia. Market development means selling an existing product to a new market. YUM! Brands is opening 500 new stores in China. Product development means developing and selling a new product to an existing market. An example of this is Google’s new Chrome OS operating system, which is expected to overtake Microsoft Windows by 2015. 24. Give recent examples of forward integration, backward integration, and horizontal integration. Answer: Forward integration means purchasing or developing a distributor for a product. For instance, Microsoft is opening its own retail stores. Backward integration means owning a supply source for production. For example, Apple is working to produce its own internally developed chips for its iPhone and iPod Touch devices. Horizontal integration means acquiring like operations. For instance, a hospital group may purchase another hospital. 25. Give recent examples of related and unrelated diversification. Answer: Related diversification, also called concentric diversification, means adding new, but related products. When Under Armour began selling running shoes for the first time, this represented related diversification. Unrelated, or horizontal, diversification means adding new, unrelated products for customers. For instance, Qualcomm Inc. recently diversified beyond cell phones into desktop hardware. 26. Give recent examples of joint venture, retrenchment, divestiture, and liquidation. Answer: A joint venture is a partnership between two companies. As part of a joint venture, Nokia and Facebook are partnering to embed parts of the social network into some Nokia games. Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales. Recently, J.C. Penney has launched a massive retrenchment strategy in efforts to save the company. Divestiture is selling a division or part of a company. PepsiCo is considering divesting its Snacks division. Liquidation is selling all of a company’s assets. Goody’s Family clothing liquidated all of its 282 stores, resulting in the loss of jobs for all 10,000 of its employees. 27. Do you think hostile takeovers are unethical? Why or why not? Answer: It can best be argued that hostile takeovers are ethical. Shareholders and customers of the company often benefit from the new management team that perhaps does a better job at strategic planning. Most employees and managers benefit, too, but some employees and top managers usually lose their jobs when the takeover is consummated. From this angle, some students may argue that hostile takeovers are unethical – but it is better to save 75% of the jobs by letting go of 25% if that is needed, rather than losing all 100%. 28. What are the major advantages and disadvantages of diversification? Answer: Several disadvantages of diversification are (1) it is risky, (2) it is costly, (3) it requires excellent management skills, and (4) it requires an elaborate control system. Some advantages of diversification are (1) it allows a firm to spread risks and resources in more than one area, (2) it allows a firm to pursue special opportunities in diverse areas, and (3) it allows a firm to balance counter-seasonal sales yearly. 29. What are the major advantages and disadvantages of an integrative strategy? Answer: An advantage of an integrative-type strategy is that it allows a firm to offer products and services at lower prices. Another advantage is that the firm can cater to its customers better than a third party distributor. A disadvantage of integrative-type strategies is that firms can be trapped if their basic industry falters. Another disadvantage is that firms forgo the expertise of other firms in being suppliers and/or distributors for the industry. 30. How does strategic management differ in profit and nonprofit organizations? Answer: The strategic-management process is conceptually the same for both profit and nonprofit organizations, and just as important for each entity. However, compared to profit firms, nonprofit organizations often function in a monopolistic environment, produce a product or service that offers little or no performance measurability, and may be totally dependent on outside sources of financing. Thus, the types of variables examined will differ some between profit and nonprofit organizations – but this difference is minor among hundreds of similarities. 31. Why is it not advisable to pursue too many strategies at once? Answer: Organizational resources are spread too thin when more than a few strategies are pursued at the same time. All organizations have limited resources. No organization can pursue all the strategies that may benefit the firm. Similarly, no individual can take on an unlimited amount of debt to obtain goods and services. No more than a few strategies can be financed, marketed, and managed effectively at the same time. In addition to be cost prohibitive, pursuing too many strategies at once makes it difficult for firms to project consistency/thoroughness/dedication to customers. 32. Consumers can purchase tennis shoes, food, cars, boats, and insurance on the Internet. Are there any products today that cannot be purchased online? What is the implication for traditional retailers? Answer: There are very few, if any, products that cannot be purchased online. Perhaps some services such as haircuts would be an example. Some experts point to the efficiencies associated with online selling and believe that an increasing portion of the goods and services purchased each year will be done online. Other experts disagree and believe that online selling will not threaten traditional retailers in a substantive manner. Most brick-and-mortar retailers now also see the products online. A contentious related issue is not charging sales tax online. 33. What are the pros and cons of a firm merging with a rival firm? Answer: The following are some pros and cons of merging. Pros: ● To provide improved capacity utilization. ●To make better use of an existing sales force. ●To reduce managerial staff. ●To gain economies of scale. ●To smooth out seasonal trends in sales. ●To gain access to new suppliers, distributors, customers, products, and creditors. ●To gain new technology. ●To reduce tax obligations. Cons: The acquiring company may overpay for the acquired company. Merging firms must reconcile different cultures and organizational routines. Merging firms must decide who will remain as top executives, even as CEO.  34. Compare and contrast financial objectives with strategic objectives. Which type is more important in your opinion? Why? Answer: Financial objectives are those associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, and improved cash flow. Strategic objectives include examples like achieving a larger market share, quicker on-time delivery than rivals, and lower cost than rivals. Both types of objectives are important, but financial objectives must sometimes be sacrificed for the long-term benefit of strategic objectives. 35. How do the levels of strategy differ in a large firm versus a small firm? Answer: In large firms, the persons primarily responsible for having effective strategies at the various levels include the CEO at the corporate level, the president or executive vice president at the divisional level, the respective CFO, CIO, HRM, CMO, at the functional level and the plant manager, regional sales manager at the operational level. In small firms, the persons primarily responsible for having effective strategies at the various levels include the business owner or president at the company level and then the same range of persons at the lower two levels as with a large firm. 36. List 11 types of strategies. Give a hypothetical example of each strategy listed. Answer: ● Forward integration: Widgets, Inc. opens retail stores to sell its widgets. ● Backward integration: Widgets, Inc. purchases a steel mill to control its supply of steel at a reasonable price. ● Horizontal integration: Widgets, Inc. purchases We R Widgets, a competing widget manufacturer. ● Market Penetration: Widgets, Inc. launches a widget loyalty program to reward heavy buyers of widgets. ● Market Development: Widgets, Inc. begins to offer widgets in India, a new geographic market area for the company. ● Product Development: Widgets, Inc. develops a special widgets drill. ● Related Diversification: Widgets, Inc. will now manufacture and sell fasteners. ● Unrelated Diversification: Widgets, Inc. will offer a credit card for its customers. ● Retrenchment: Widgets, Inc. is cutting jobs in 20 markets in the Southwest. ● Divestiture: Widgets, Inc. is selling off its plastics division. ● Liquidation: Widgets, Inc. is selling off the equipment previously used in its now defunct plastics division. 37. Discuss the nature as well as the pros and cons of a “friendly merger” versus “hostile takeover” in acquiring another firm. Give an example of each. Answer: A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases a smaller firm or vice versa. When both parties desire a merger or acquisition it is a friendly merger. However, if it is not desired by one party, it is a hostile takeover. Wells Fargo acquired Wachovia in a friendly merger. Comcast made an unwanted bid for Walt Disney. Had the bid been successful, it would have represented a hostile takeover. 38. Define and explain “first mover advantages.” Answer: First mover advantages are the benefits a firm may achieve by entering a new market or developing a new product before any other firms. Examples of first mover advantages include securing access to rare resources, gaining new knowledge of key factors and issues, and carving out market share. 39. Define and explain “outsourcing.” Answer: Outsourcing occurs when third-party companies take over functional operations such as human resources, information systems, payroll, accounting, customer service, and marketing of other firms. 40. What strategies are best for turbulent, high-velocity markets? Answer: Firms in this type of market have a choice of whether to react, anticipate, or lead the market in terms of its own strategies. These choices are reflected in Figure 5-4. If a firm primarily responds to the turbulent market by responding to changes in the industry defensively. The react-to-change strategy would not be as effective as the anticipate change strategy, which entails devising and following through with plans for dealing with the expected changes. Ideally, a firm will strive to lead the market, by pioneering new and better technologies and products. 41. Give some advantages and disadvantages of cooperative versus competitive strategies. Answer: Cooperative strategies are generally less costly than competitive strategies. For example, firms can cooperate on development of new technologies or even new products. Cooperative between domestic and foreign companies is widely utilized to facilitate entry into world markets. However, gaining and sustaining competitive advantage is an underlying philosophy of business, so identifying competitors’ strengths and weaknesses is a vital part of the external audit. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 5A: DEVELOP HYPOTHETICAL PEPSICO STRATEGIES Answer: The following is a hypothetical list PepsiCo strategies. ASSURANCE OF LEARNING EXERCISE 5B: BARILLA’S ACTUAL STRATEGIES Answer: Forward Integration – Barilla is opening a new chain of Barilla-branded restaurants Market penetration – Barilla is spending heavily on advertising in the USA to accompany its new restaurants Market development – Barilla has begun distributing its products in Africa Product development – Barilla is producing new sauces and new flour products monthly Related diversification – Barilla could merge with Heinz Divestiture – Barilla just sold its German bread maker and its Spanish bakery-products producer Retrenchment – Barilla recently closed a bakery products manufacturing plant ASSURANCE OF LEARNING EXERCISE 5C: WHAT STRATEGIES SHOULD PEPSICO PURSUE IN 2014? Answer: Actual Strategies 1. PepsiCo is increasing its advertising and marketing support behind its global brands to 5% -7% of sales from 3% - 4% of sales. 2. PepsiCo has developed and is now introducing a new protein-based drink targeted at women – a 4 ounce protein shot targeted at women. PepsiCo is essentially creating a new market segment, a protein shot, by combining what historically has been either energy and protein drinks, or energy shots. PepsiCo is marketing this product as part of its new PLAY – which stands for Protein, Liquid, Activity, and You-time – drink initiative. 3. In 2012, soft drink industry sales volume declined 1.2%, the largest drop ever, following a sales declined 1% in 2011 and 0.5% in 2010. Thus, PepisCo is transitioning away from sugary drinks to nutritious, energy drinks and bottled water. Proposed Strategies 1. Buy a stake in Core Power, a high protein milkshake line, at least to match Coca-Cola’s recently acquired stake in the company. 2. Acquire Monster Beverage (NASDAQ: MNST), a company that develops, produces, and sells beverages worldwide, including carbonated energy supplements that compete with 5-Hour Energy. Headquartered in California, 
Monster Beverage has almost a 40% market share in the energy drink arena, has no long-term debt, and recently launched new flavors - including "rehab" drinks. 3. PepsiCo directly controls 80% of its North American beverage volume after the acquisition of its two largest bottlers. The company could acquire the other 20%. 4. Acquire Mondelez International to gain a better foothold on the snack business outside the USA. 5. Divest PAB to Anheuser Busch InBev, at the right price, and acquire Snyder’s-Lance with the proceeds. ASSURANCE OF LEARNING EXERCISE 5D: EXAMINE STRATEGY ARTICLES Answer: This is an excellent activity that introduces students to academic journals and asks students to actually read and comment on a journal article on a strategic management topic. This may be the only occasion in a student’s undergraduate education that he or she is asked to comment on an academic journal article (like those found in the Academy of Management Journal or the Strategic Management Journal). ASSURANCE OF LEARNING EXERCISE 5E: CLASSIFY SOME YEAR 2013 STRATEGIES Answer: 1. Retrenchment 2. Product development 3. Market development 4. Retrenchment 5. Liquidation 6. Forward integration 7. Divestiture 8. Related diversification 9. Related diversification 10. Divestiture 11. Backward integration 12. Liquidation 13. Retrenchment 14. Divestiture 15. Horizontal integration 16. Product development 17. Related diversification 18. Retrenchment 19. Product development ASSURANCE OF LEARNING EXERCISE 5F: HOW RISKY ARE VARIOUS ALTERNATIVE STRATEGIES? Answer: The following strategies are listed in terms of riskiness, where the first is the most risky and the tenth is the least risky. There are many variations of each of these strategies, so the sequential ordering is only suggestive; it does not always hold true. 1. Unrelated diversification – getting into a totally new business is exceptionally risky 2. Related diversification – getting into a partially new business is very risky too 3. Liquidation – Selling everything for its tangible worth usually results in shareholders failing to garner the fair market value of the firm’s assets 4. Horizontal integration – buying a rival firm can create controversy on what facilities to close or integrate and what persons to get rid of 5. Forward integration – the business of selling is much different than the business of making 6. Backward integration – the business of farming or growing is much different than the business of producing or selling 7. Market development – new countries bring huge differences in many variables 8. Product development – most firms have to continually develop new products but being a first mover can be expensive 9. Divestiture – firms usually obtain fair market value or better for divestitures 10. Retrenchment - this strategy makes firms more efficient which is oftentimes needed 11. Market penetration – spending more on advertising or adding sales reps comes with low relative risk ASSURANCE OF LEARNING EXERCISE 5G: DEVELOP ALTERNATIVE STRATEGIES FOR YOUR UNIVERSITY Answer: Strategies are listed below the key internal and external factors that would enable our university to capitalize on its strengths, improve upon its weaknesses, take advantage of opportunities, and mitigate the impact of key threats. Strengths: 1. Location in a state capital with several Fortune 500 companies nearby 2. $200 million technology donation has resulted in high-tech facilities 3. Diverse (28%) student body and faculty, up from 21% three years prior 4. Visionary presidential leadership 5. Nationally-ranked programs in nursing and business 6. Athletic teams performing excellent, raising college visibility 7. Tuition 15% lower than peer institutions 8. Our engineering and life sciences buildings are new and modern 9. We operate at full capacity in our dorms Weaknesses: 1. Urban campus with limited space for expanding campus 2. Police arrests on campus rising 5% annually 3. Gyms and athletic facilities 30 years old 4. Food service complaints up 11% vs. prior year 5. 30% of faculty are near retirement age and drawing high salaries 6. Student activity surveys indicate 14% decline in satisfaction 7. Alumni giving declining 10% annually 8. 30% of classes taught by adjunct faculty 9. Student/faculty ratio of 51 to 1 is higher than peer institutions Opportunities: 1. 14% increase in percentage of minority students enrolling in college vs. prior year 2. Need for adult education programs in the area growing 15% annually 3. Demand for international and online programs growing 20% annually 4. Large local firms seek new certification programs from the institution 5. Demand for nursing graduates growing 12% annually 6. The USA GDP is rising 1% annually 7. Social media use is growing 6% annually in North and South America 8. Demand for engineers is growing 5% annually in the USA Threats: 1. Pressure from state to admit marginal students in order to provide increased access for underserved minority students 2. Local two-year institutions offer courses 20% cheaper and less rigorous 3. 15% decline in international student applications 4. 12% annual decline in state funding levels 5. Major rival peer institutions offer and heavily market online degrees in our area 6. State population declining 4% annually 7. Unemployment rate stable at 9.0% causing many would-be students to have to work 8. The number of high school graduate is dropping 3% annually 9. The number of two-year tech school students is growing 8% annually 10. Demand for liberal arts degree students is declining 6% annually Strategies 1. Hire 3 more full-time campus policemen since campus crime is a problem 2. Remodel our student union since our student satisfaction rates are low 3. Build new dorms since we operate at full capacity 4. Hire 18 new faculty across campus since our student/faculty ratio is too high and also we rely too heavily on adjunct faculty 5. Add 15 new online courses across campus since demand is up 20% 6. Double fundraising activities since alumni giving has declined yet our athletic teams are performing great; the 12% annual decline in state funding levels also mandates this need 7. Double our nursing physical facilities since demand growing 12% annually 8. Raise tuition 5% given the decreased state funding 9. Mandate that curriculum be more experiential-skill based to offset growing tech school threat 10. Develop a satellite campus outside the USA to better meet international student needs ASSURANCE OF LEARNING EXERCISE 5H: LESSONS IN DOING BUSINESS GLOBALLY Answer: This is an excellent project for extra credit or for a class paper or project. Encourage students to consider the primary challenges reflected in the business leaders’ responses about competing in a global business. For instance, how did the lessons learned relate to strategic planning? Could the businesses have been better prepared for the situations they faced if they had applied strategic planning principles? Did the lessons relate to differences in culture between the U.S. and the other countries where the businesses competed? How could other businesses better prepare for cultural differences? A good way to end this exercise is to develop a list of best practices based on the students’ reports. Chapter 6 - Strategy Analysis and Choice Overview Chapter 6 explains how to formulate effective strategies once the internal and external audits are completed. Chapter 6 presents and exemplifies six widely used strategic planning matrices: SWOT (Strengths-Weaknesses-Opportunities-Threats) Matrix, BCG (Boston Consulting Group) Matrix, SPACE (Strategic Position and Action Evaluation) Matrix, IE (Internal-External) Matrix, Grand Strategy Matrix, and the QSPM (Quantitative Strategic Planning Matrix). Chapter 6 also describes the nature and role of boards of directors in strategic planning. The Chapter 6 Learning Objectives presented in the textbook are reiterated below: 1. Describe a three-stage framework for choosing among alternative strategies. 2. Explain how to develop a Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, Strategic Position and Action Evaluation (SPACE) Matrix, Boston Consulting Group (BCG) Matrix, Internal-External (IE) Matrix, and Quantitative Strategic Planning Matrix (QSPM). 3. Identify important behavioral, political, ethical, and social responsibility considerations in strategy analysis and choice. 4. Discuss the role of intuition in strategic analysis and choice. 5. Discuss the role of organizational culture in strategic analysis and choice. 6. Discuss the role of a board of directors in choosing among alternative strategies. Teaching Tips 1. This is arguably the most important chapter in the book, so we usually spend three or four 1.5-hour class sessions on this chapter. Six new, important matrices are presented that are widely used in strategic planning, so you need to make sure students can develop a SWOT, BCG, IE, SPACE, GRAND, and QSPM. 2. Figure 6-2 is very important because students need to understand the three stages in formulating strategies: Input, Matching, and Decision. Chapter 6 focuses on the Matching Stage. Make sure students understand that “matching internal with external factors” is the KEY to formulating strategies effectively. 3. The SWOT Matrix is the most widely used strategic planning matrix in the world, so carefully go over Figure 6-3 titled “A SWOT Matrix for a Retail Computer Store.” Note the matching notation after each strategy (S4, O3) because students will need to include this notation in the SWOT for their case company. Note the two basic alternative strategies faced by this store: 1) remodel existing store or 2) build a new store in new location. The QSPM presented later in this chapter will answer which of these two alternatives is best. 4. The BCG is the second most widely used strategic planning matrix in the world, so carefully go over the material and example BCG’s in the book. Perhaps the major strategy decision large firms face annually is what divisions/segments of the firm should we devote more or less resources in the future. Emphasize for students to be as “divisional as possible” in preparing all nine strategic planning matrices. Recommend that students prepare, if possible, a BCG by product and a BCG by region for their case company, to illustrate best where the team is taking the firm over the next three years. 5. Carefully cover the “QSPM for a Retail Computer Store” presented in Table 6-9 so students will understand the process of developing a QSPM. 6. Focus on the “Special Note to Students” at the end of this chapter. These sections that end each chapter are special, important tips for students to do well, primarily on their oral case analysis presentation. 7. This chapter is so important that we usually cover all the end-of-chapter review questions and all the end-of-chapter exercises, either as homework or classwork or as a part of my lecturing. All these questions and exercises are designed to apply Chapter 6 concepts and techniques. Do one half of the review questions in class on day and the other half another day. Do the same for the end of chapter exercises. Answers to End-of-Chapter Review Questions 1. Minorities and women each hold less than 15 percent of board seats of S&P 500 companies. Why is this not good? Answer: First of all, this situation sends the wrong message to potential customers, suppliers, distributors, investors, employees, managers, and others. Second, it makes the firm more vulnerable to legal suits alleging discrimination. Third, the firm forfeits the diverse knowledge and opinions that women and minorities bring to the table. 2. In developing a QSPM, if 10 strategies are being compared simultaneously, what would be a good scale for the AS scores? Why? Answer: 1 to 10, because it is best not to assign the same AS to two strategies. 3. In developing a BCG or IE Matrix, what would be a good surrogate for revenues for 1) Target Corp., 2) Burger King, 3) Bank of America, and 4) Spirit Airlines. Answer: 1. Target - # of stores per region 2. Burger King - # of restaurants per country 3. Bank of America - # of accounts or branches per region 4. Spirit Airlines - # of flights per hub 4. In developing a SPACE Matrix, what would you expect the SP average to be for 1) Apple, 2) Heinz, 3) Verizon, 4) Amazon, and 5) Kroger. Answer: -7 is very unstable; -1 is very stable 5. Rather than developing a QSPM, what is an alternative procedure for prioritizing the relative attractiveness of alternative strategies? Answer: As indicated in the chapter, participants could rate the strategies on a 1 to 4 scale, and simply add up those ratings to determine a prioritized list of the best strategies. 6. Overlay a BCG Matrix with a Grand Strategy Matrix and discuss similarities in terms of format and implications. Answer: The vertical axis is the same on both matrices. Both the BCG Matrix and the Grand Strategy Matrix are divided into four quadrants. The BCG Matrix graphically portrays differences among divisions in terms of relative market share position and industry growth rate, whereas, the Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market (industry) growth. The upper left (Stars) is best on the BCG whereas the upper right is best on the Grand Strategy Matrix. Lower right is worst on the BCG, but lower left is worst on the Grand. 7. Walt Disney’s Board of Directors consists of eight men and five women. Why should a Board not consist of all men, or all women, or all whites, or all minorities? Answer: Women and minorities ask different questions and make different suggestions in boardrooms than white men; diverse views are needed to arrive at effective, mutually supportive strategies. Women and minorities comprise much of the consumer base everywhere. No women or no minorities would send the wrong message to the firm’s many stakeholder groups, and would make the firm more vulnerable to legal discrimination suits. 8. Many multidivisional firms do not report revenues or profits by division or segment in their Form 10K or Annual Report. What are the pros and cons of this management practice? Discuss. Answer: Reasons to disclose financial information by segment include the following: 1) Transparency is a good thing in today’s world. 2) Investors will better understand the firm. 3) Managers will better understand the firm. 4) Disclosure enhances the communication process both within the firm and with outsiders. Reasons not to disclose financial information by segment include the following: 1) Less strategic information for rival firms to utilize. 2) Can hide performance failures. 3) Can reduce rivalry among segments. 9. Define halo error. How can halo error inhibit selecting the best strategies to pursue? Answer: Halo error is the tendency to put too much weight on a single factor when formulating strategies. Incorporating a weight column in matrices enables strategists to appropriately weight various factors, rather than halo error resulting in an extraordinary high weight (unknowingly) being applied to a single factor. 10. List six drawbacks of using only subjective information in formulating strategies. Answer: The absence of objectivity results in drawbacks: 1) Political factors sometimes dictate strategies. 2) Halo error can cause havoc. 3) Emotions can dictate decisions. Weakly supported ideas may die before they are given a chance. 4) Lack of data means not being able to review information to learn and improve. 5) Opportunities for benchmarking are lost. 6) The magnitude of differences in attractiveness of strategies is unknown. 11. For a firm that you know well, give an example SO Strategy, showing how an internal strength can be matched with an external opportunity to formulate strategy. Answer: An SO strategy for a clothing retailer is to add four new in-store promotions monthly. This strategy capitalizes on a strength (in store promotions boost sales by 20 percent) as well as an opportunity (vehicle traffic passing store is up 12 percent). 12. For a firm that you know well, give an example WT Strategy, showing how an internal weakness can be matched with an external threat to formulate a strategy. Answer: A WT strategy for a clothing retailer is to hire two new cashiers. This strategy attempts to correct a weakness (customer checkout is too slow) and avoid a threat (new competitor store opening nearby). 13. List three limitations of the SWOT Matrix and analysis. Answer: Although the most widely utilized of all strategic planning tools, the SWOT analysis does have some limitations. First, SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself. Second, SWOT is a static assessment (or snapshot) in time. Third, SWOT analysis may lead the firm to overemphasize a single internal or external factor in formulating strategies. This, this textbook advocates utilizing five matching strategic planning tools in conjunction with each other. 14. For the following three firms using the given factors, calculate a reasonable Stability Position (SP) coordinate to go on the SPACE Matrix axis, given what you know about the nature of those industries. Factors Winnebago Apple U.S. Postal Service Barriers to entry into market -3 -2 -1 Seasonal nature of business -6 -4 -4 Technological changes -3 -6 -3 SP Score -4.0 -4.0 -2.7 15. Would the angle or degrees of the vector in a SPACE Matrix be important in generating alternative strategies? Explain. Answer: YES. The angle and degrees of the vector in a SPACE Matrix may be important because the vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative. If the vector is 5 degrees into the aggressive quadrant, strategists may begin thinking about conservative strategies, whereas if the vector is 85 degrees into the aggressive quadrant, strategists may begin thinking about competitive strategies. 16. On the competitive position (CP) axis of a SPACE Matrix, what level of capacity utilization would be necessary for you to give the firm a negative 1? Negative 7? Why? Answer: A capacity utilization near 100% is excellent (-1), whereas a capacity utilization near 30% would be terrible (-7). The competitive position axis shows the average scores for all CP variables. Plotting at negative 1 indicates that the firm is in the best possible position competitively when averaging all factors. Plotting at negative 7 indicates that the firm is in the worst possible position competitively when averaging all factors. 17. If a firm has weak financial position and competes in an unstable industry, in which quadrant will the SPACE vector lie? Answer: If a firm that has weak financial position and competes in an unstable industry, its SPACE vector would lie in the lower left or right quadrant of the SPACE depending on the CP and IP axis scores. 18. Describe a situation where the SPACE analysis would have no vector. In other words, describe a situation where the SPACE analysis coordinate would be (0,0). What should an analyst do in this situation? Answer: Although this is not likely to occur, it is possible that when averaging the two scores on the x-axis, and the two scores on the y-axis, both points come to zero. This means that financial and stability position factors neutralize one another, while competitive and industry position factors neutralize one another as well. The analyst should add additional variables to be examined under the four axes, to in essence make the analysis more robust, while at the same time shifting the vector into a discernable quadrant. 19. Develop a BCG Matrix for your university. Because your college does not generate profits, what would be a good surrogate for the pie slice values? How many circles do you have and how large are they? Explain. Answer: Rather than tracking revenue, colleges generally use enrollment headcount as a measure of growth. Headcount represented within academic programs (College of Business vs. School of Nursing vs. School of Education vs. School of Engineering for example) would be a valuable analysis, so programs can represent the circles divisions within the BCG Matrix. This matrix will identify those programs that are Cash Cows, Question Marks, Stars, and Dogs. For the pie slice, % of graduating students with full-time jobs could be meaningful to examine. 20. In a BCG Matrix, would the Question Mark quadrant or the Cash Cow quadrant be more desirable? Explain. Answer: An argument for the Question Mark being more desirable is that these divisions compete in a very attractive, growing industry, even though they have a low relative market share. Also, Cash Cows are usually nearing the end of their product life cycle. An argument for the Cash Cow however being more desirable is that Cash Cows divisions are proven winners, and have large relative market share, but are in a slow growing industry. Answers can vary by industry and firm. 21. Would a BCG Matrix and analysis be worth performing if you do not know the profits of each segment? Why? Answer: YES. The BCG Matrix allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share and industry growth rate of each division relative to all other divisions in the organization. The location of segments with the matrix is very useful strategic information, even without the pie slices (profit information). Oftentimes firms will use surrogate variables for profits, such as customer retention rate or customer loyalty rate or even employee morale measures. 22. What major limitations of the BCG Matrix does the IE Matrix overcome? Answer: 1) Nine cells provides more informative than four cells. 2) The IE axes are much more informative than the BCG axes. The IE Matrix requires more information about the divisions than the BCG Matrix, thus providing more strategic information to the analyst. 23. In an IE Matrix, do you believe it is more advantageous for a division to be located in quadrant II or IV? Why? Answer: In an IE Matrix, Quadrants II and IV are both placed in the “grow and build” category, so answers can vary to this question depending on one’s views regarding the relative impact of internal and external issues. Quadrant II divisions are stronger externally, whereas Quadrant IV divisions are internally stronger. 24. Develop a 2x2x2x2x2 QSPM for an organization of your choice (i.e., two strengths, two weaknesses, two opportunities, two threats, and two strategies). Follow all the QSPM guidelines presented in the chapter. Answer: For Artic Cat Corporation Conclusion: Should Build Snowmobile Factory. 25. Give an example of “equifinality” as defined in the chapter. Answer: Equifinality means that it is possible to achieve similar results using different means or paths. For example, companies can grow through acquisition (inorganic) or building new stores and factories (organic). 26. Do you believe the reasons to disclose by-segment financial information offset the reasons not to disclose by-segment financial information? Explain why or why not. Answer: Reasons to disclose by-divisional financial information include the need for a culture of transparency rather than secrecy in a firm, which enhances communication both internally and externally. The communication benefit offsets the reasons not to disclose, which are based on the desire to conceal strategic information from rival firms. 27. How would application of the strategy-formulation analytical framework differ from a small to a large organization? Answer: The strategy-formulation analytical framework is conceptually identical for both small and large organizations. However, in large organizations, there are more variables to analyze and forecast, making the strategy-formulation process more complex. 28. What types of strategies would you recommend for an organization that achieves total weighted scores of 3.6 on the IFE and 1.2 on the EFE Matrix? Answer: Hold-and-maintain-type strategies are appropriate for an organization that scores 3.6 on the IFE Matrix and 1.2 on the EFE Matrix. The location if far left, bottom quadrant. 29. Given the following information, develop a SPACE Matrix for the XYZ Corporation: FP = +2; SP = -6; CP = -2; IP = +4. Answer: The directional vector of the SPACE Matrix lies in the lower right quadrant, indicating that competitive-type strategies are most appropriate. Directional Vector Coordinates: x-axis: -2 + 4 = 2; y-axis: 2 + -6 = -4 = (+2, -4) 30. Given the information in the table below, develop a BCG Matrix and an IE Matrix. Answer: There will be three circles: Circle1, Circle2, and Circle3. Circle1 and Circle3 will be the same size since they have the same sales, and Circle 2 will be one half that size, since it has half the sales. The pie slices are based on profit, so since the profit total is 50, Circle1 has a 20% pie slice, Circle2 has a 30% pie slice, and Circle3 has a 50% pie slice. This is all true for both the BCG and the IE Matrix. Now, place the three circles in the two matrices based on the respective axes. Center each circle at their respective coordinate. 31. Explain the steps involved in developing a QSPM. Answer: There are six basic steps involved in applying QSPM: Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM. Assign weights to each key external and internal factor. Examine the Stage 2 matrices and identify alternative strategies that the organization should consider implementing. Determine the AS for each strategy given each respective factor. Compute the TAS for each strategy given each respective factor. Compute the Sum TAS for each strategy. 32. How would you develop a set of objectives for your school of business? Answer: A school of business should develop a set of objectives and strategies in the same way as any other type of organization. That is, a vision and mission statement need to be established, an external and internal audit performed, and strategy-formulation techniques used to effectively develop a set of objectives and strategies. 33. What do you think is the appropriate role of a board of directors in strategic management? Why? Answer: Board members should review strategy formulation, implementation, and evaluation reports. Board members are increasingly being held personally liable for failed strategies in organizations, so they should provide input, advice, suggestions, and comments about strategic-management activities. The board should evaluate, hire, compensate, and/or fire the CEO, among many other duties outlined in the chapter. 34. Discuss the limitations of various strategy-formulation analytical techniques. Answer: All analytical techniques have limitations, but analytical techniques are essential for assimilating and organizing information in a way that enhances strategic decision-making. Due to various limitations, the book advocates that five matching tools be utilized in conjunction with each other: BCG, IE, SWOT, SPACE, and GRAND. The SWOT has the fewest limitations. The GRAND is the least robust of the five, so that is a limitation. The BCG’s axes are deficient even as compared to the IE. The SPACE analysis can end up with no vector at all. However, analytical tools are vital for effective strategic planning. 35. Explain why cultural factors should be an important consideration in analyzing and choosing among alternative strategies. Answer: Cultural factors are an integral part of everyday life in organizations. An organization’s unique culture represents the heart of work. Employees and managers get emotionally attached to cultural factors. Thus, in choosing among alternative strategies for an organization, consideration should be given to the different levels of support that proposed strategies would receive from existing cultural products. Consideration should also be given to whether cultural changes could be achieved readily. Cultural factors should not dictate the choice of various strategies, but they should absolutely be considered in the discussion and analysis. 36. How are the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix similar? How are they different? Answer: The SWOT, SPACE, BCG, IE, and GRAND are similar in that all are matching tools in stage two of the strategy-formulation analytical framework. The intent is to match internal with external factors, for example, to use strengths to take advantage of opportunities. The five tools each had different axes so it is best to utilize all five in strategic planning. The SWOT is most widely used because it is conceptually simple yet comprehensive. The BCG and IE are portfolio matrices that apply best to a multidivisional firm. The GRAND is used least, with the SPACE next least, but again, all five are useful as all five aim to effectively match internal with external factors in formulating strategies. 37. How would profit and nonprofit organizations differ in their applications of the strategy-formulation framework? Answer: The strategy-formulation framework is conceptually identical for both profit and nonprofit organizations, although the nature of variables would differ for each type of organization. 38. Develop a SPACE Matrix for a company that is weak financially and a weak competitor. The industry for this company is pretty stable but the industry’s projected growth in revenues and profits is not good. Label all axes and quadrants. Answer: Financial Position: 2 Competitive Position: -5 Stability Position: -3 Industry Position: 2 Directional Vector Coordinates: x-axis: -5 + 2 = -3; y-axis: 2 + -3 = -1; (-3, -1) This organization should pursue defensive strategies (lower left quadrant). 39. List 4 limitations of a BCG Matrix. Answer: Viewing every business as one of four types is an oversimplification. Some businesses are not easily classified. The matrix does not reflect whether or not various divisions are growing over time, because the matrix has no temporal qualities. Other variables besides relative market share position and industry growth rate in sales should be considered in strategic planning (such as size of the market and competitive advantages and pricing etc. 40. Make up an example to show clearly and completely that you can develop an IE Matrix for a 3-division company, where each division has $10, $20, and $40 in revenues, and $2, $4, and $1 in profits. State other assumptions as needed. Label axes and quadrants. Answer: Division Revenue ($) Revenue (%) Profit ($) Profit (%) EFE IFE 1 10 14 2 29 2 2 2 20 29 4 57 4 4 3 40 57 1 14 1 2 In this example, Division 1 falls in quadrant V, Division 2 falls in quadrant I, and Division 3 falls in quadrant VIII. I II III IV V VI VII VIII IX 41. What procedures could be necessary if the SPACE vector falls right on the axis between the Competitive and Defensive quadrants? Answer: If this situation occurs, you should add additional relevant factors for each of the axes, making the analysis even better and more robust. For example, on financial stability, add ROI and ROE if not considered yet. 42. In a BCG Matrix or the Grand Strategy Matrix, what would you consider to be a rapid market (or industry) growth rate? Answer: A 5% average industry growth rate is good and could be considered rapid. 43. How does the Sarbanes-Oxley Act of 2002 impact boards of directors? Answer: Basically the Act simply makes board members more liable for actions, strategies, and overall performance for the firm. It requires audit committees of boards to meet more frequently and establishes “best practices” of boards of directors of public firms. The Act states that the jobs of chief executive and chairman are now held by separate persons; board audit committees must have at least one financial expert as a member; and board audit committees must meet 10 or more times per year rather than 3-4 times per year. 44. Rank Business Week’s “principles of good governance” from 1 to 14 (1 being most important and 14 least important) to reveal your assessment of these new rules. Answer: Rankings will vary by student but the principles are as follows: ● No more than two directors are current or former company executives. ● No directors do business with the company or accept consulting or legal fees from the firm. ● The audit, compensation, and nominating committees are made up solely of outside directors. ● Each director owns a large equity stake in the company, excluding stock options. ● At least one outside director has extensive experience in the company’s core business and at least one has been CEO of an equivalent-sized company. ● Fully employed directors sit on no more than four boards and retirees sit on no more than seven. ● Each director attends at least 75% of all meetings. ● The board meets regularly without management present and evaluates its own performance annually. ● The audit committee meets at least four times a year. ● The board is frugal on executive pay, diligent in CEO succession oversight responsibilities, and prompt to act when trouble arises. ● The CEO is not also the Chairperson of the Board. ● Shareholders have considerable power and information to choose and replace directors ● Stock options are considered a corporate expense. ● There are no interlocking directorships (where a director or CEO sits on another director’s board). 45. Why is it important to work row by row instead of column by column in preparing a QSPM? Answer: The rows of a QSPM contain the key external and internal factors while the columns refer to the strategies under consideration. By working row by row, each strategy is considered based on the factor at hand. If one worked column by column, he or she would be evaluating each strategy independently without considering other strategies relative to that factor. 46. Why should one avoid putting double 4’s in a row in preparing a QSPM? Answer: The purpose of the QSPM is to differentiate between/among strategies in terms of relative attractiveness, so it is best to differentiate with regard to each factor. Simply decide for each factor which strategy is best and second best etc. So do not assign two 4’s or for that matter two 3’s or 2’s or 1’s in your assessment. 47. Envision a QSPM with no weight column. Would that still be a useful analysis? Why or why not? What do you lose by deleting the weight column? Answer: YES it would still be useful, actually very useful. Simply sum the AS (attractiveness scores) to determine the best strategy. However, without the weight column, you lose significant information in the analysis by in essence saying all factors are of equal importance to be successful in the industry. 48. Prepare a BCG Matrix for a two-division firm with sales of $5 and $8 versus profits of $3 and $1 respectively. State assumptions for the RMSP and IGR axes to enable you to construct the diagram. Answer: Circle 1 will be smallest but will have the largest pie slice. Circle 1’s pie slice will be 75%, and Circle 2’s 25%. 49. Consider developing a before and after BCG or IE Matrix to reveal the expected results of your proposed strategies. What limitation of the analysis would this procedure somewhat overcome? Answer: The BCG Matrix and IE Matrix do not consider how divisions and industries change over time. They are snapshots of an organization at a single point in time. A before and after analysis would help to overcome this limitation. 50. If a firm has the leading market share in its industry, where on the BCG Matrix would the circle lie? Answer: Firms with high relative market share are plotted as either Stars (Quadrant II) or Cash Cows (Quadrant III) on the BCG Matrix. More specifically, the center of the circle will lie somewhere along the far left axis. 51. If a firm competes in a very unstable industry such as telecommunications, where on the SP axis of the SPACE Matrix would you plot the appropriate point? Answer: -7 would be the most unstable value along the SP axis. 52. Why do you think the SWOT Matrix is the most widely used of all strategy matrices? Answer: The SWOT Matrix lends itself to discussion among managers. It is conceptually simple with no numbers and includes key internal and external factors that provide the basis for alternative strategies. Brainstorming sessions are common in business and the SWOT is a nice framework for such an activity. Answers to the End-of-Chapter Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 6A: PERFORM A SWOT ANALYSIS FOR PEPSICO Answer: From Exercise 1B, the following external opportunities/threats and internal strengths/weaknesses taken directly from the PepsiCo Cohesion Case. The instructions request ten for each category. Make sure students see the difference in internal vs. external factors. Ask students to note the need to be as specific as possible in stating each factor. Ask students to keep this information for use in later exercises. Remind students that: PAB = PepsiCo Americas Beverage PAF = PepsiCo Americas Foods LAF = Latin America Foods AMEA = Asia, Middle East, & Africa QFNA = Quaker Foods North America FLNA = Frito-Lay North America Strengths: 1. FLNA is the largest salty snack provider in the USA. 2. PepsiCo is excellent in innovating/changing products to match local tastes and cultures globally. 3. PepsiCo is the largest food and beverage company in Russia, India, and the Middle East and is number two in Mexico, and is in the top five in Brazil, Turkey, Vietnam, the Philippines, and Thailand. 4. PepsiCo just replaced Coke as the product sold at all Burger Kings in China. 5. PepsiCo has a large, new R&D facility in Shanghai, China. 6. PepsiCo is cutting 8,700 jobs as part of an aggressive cost-cutting program. 7. PAF’s revenues in 2012 increased to 36.6% from 34.8%. 8. PepsiCo’s revenues from Russia increased 2.36% in 2012. 9. PepsiCo’s Europe operating profits increased 9.9% in 2012. 10. PepsiCo’s European revenues rose 5% in Q1 of 2013. 11. About 17% of PepsiCo’s North American revenue comes from Wal-Mart. 12. PepsiCo and Anheuser-Busch InBev cooperate extensively in marketing. 13. FLNA has 40% of the global salty snack market and 64% of that market in the USA. 14. FLNA generates 40% of PepsiCo’s operating profits. Weaknesses: 1. For Q1 of 2013, PepsiCo’s earnings fell to $1.08 billion from $1.13 billion a year earlier. 2. PepsiCo’s four business units (PAF, PAB, Europe, and AMEA) does not match its six reportable segments (PAB, FLNA, QFNA, LAF, Europe, and AMEA). 3. PAB revenues dropped to 32.7% of the company total in 2012 from 33.7%. 4. PepsiCo’s revenues from Mexico dropped 17.29% in 2012. 5. AMEA’s operating profit dropped 15.9% in 2012. 6. PAB operating profit dropped 10.3% in 2012 to $2.937 B. 7. QFNA operating profit declined 12.8% in 2012. 8. PepsiCo’s non-carbonated drink volume (Gatorade and Tropicana) dropped by 1% in Q1 2013, while Coca-Cola’s comparable products rose 6%. 9. PepsiCo’s AMEA region revenue dropped 14% in Q1 of 2013. 10. PAB revenue dropped 0.6% in Q1 of 2103. Opportunities: 1. Fountain soda accounts for about a quarter of soft drink sales volume in China. 2. Coca-Cola’s sparking beverage volume growth in Q1 of 2013 grew only 2% in Brazil. 3. For Q1 of 2013, Coca-Cola’s revenues dropped 1% in North America, 2% in Europe, and 4% in Pacific. 4. DPS derives 90% of its revenue from North America; 70% of that total comes from carbonated drinks. 5. Mondelez’s top management would support a merger with PepsiCo. 6. The energy drinks category of the beverage industry is growing 8% annually. Threats: 1. Coca-Cola is changing all its plastic bottles to its green Plant Bottle by 2020. 2. Kellogg just acquired P&G’s Pringles business. 3. PepsiCo lags Coca-Cola in revenue per employee, return on investment, and long-term debt. 4. Coca-Cola generates 70% of its revenue and 80% of its operating profit from outside the USA. 5. The carbonated beverage consumption growth rate is about zero in North America and developed markets. 6. Coca-Cola is investing over $4 billion in China between 2012 and 2015. 7. Coca-Cola revenues in Q1 of 2013 grew 8% in both India and Russia, and 18% in Thailand. 8. Coca-Cola’s sparking beverage volume growth in Q1 of 2013 grew 15% in Russia, 30% in India, 38% in Thailand, and 6% in China. 9. DPS has started to distribute its products in Australia, China, Japan, South Korea, and Malaysia. 10. DPS holds the #1 position in the flavored non-cola market in the USA with a market share of 40%. 11. Mondelez has the leading market share in salty snacks outside the USA in every country. 12. Monster Beverage posted 35% growth in Q4 of 2012 in energy drinks and sells its products in 90 countries. 13. Per capita soda consumption of the USA has been declining for years, and is now 44 gallons per person, down from 54 gallons in 1998. The percentage consumption is dropping 1% annually in the USA. 14. USA and many other consumers globally are becoming much more health conscious – shunning sugary, carbonated drinks. The volume of packaged food is declining while the volume of fresh food in increasing. 15. Coca-Cola has reduced the size of its cans from 8.0 ounces to 7.5 ounces to bring the calorie count below 100. SO Strategies 1. Begin distribution of all PepsiCo products in South America (S3, O3) 2. Duplicate Burger King agreement throughout Europe and Russia (S3, S4, S8, O3) 3. Acquire Mondelez International (S7, S13, O5) WO Strategies 1. Go from 4 to 6 divisions to align with reportable segments, and acquire Mondelez (W2, O5) 2. Pursue cost-cutting program more aggressively (W1, W3, W5, W6, W8, O3) 3. Boost advertising 30% outside the USA (W4, W5, W9, O3) ST Strategies 1. Divest of the beverage division to Anheuser-Busch (S1, S12, T5, T14) 2. Acquire Mondelez International (S1, S7, S13, S14, T2) 3. Acquire Monster Beverage (S2, S9, T12, T14) WT Strategies 1. Develop new energy drinks (W5, W6, W8, T5, T12) 2. Develop new flavored non-carbonated drinks (W5, W6, W8, T5, T10) 3. Develop new sports drinks (W5, W6, W8, T5, T13) ASSURANCE OF LEARNING EXERCISE 6B: DEVELOP A SWOT MATRIX FOR GE CAPITAL Answer: GE Capital is a major division/segment of the highly diversified firm, General Electric. As indicated at http://www.gecapital.com/en/industry-expertise.html, GE Capital engages in financing, leasing, investing, trading, and consulting in key areas where the firm develops and manufacturers products or does business, including: aviation, energy, real estate, healthcare, construction & mining, entertainment, banking, food & agriculture, telecommunication, transportation, and government & not-for-profit. GE Capital services/finances customer purchases of its products/services across 19 divisions/segments: Appliances for Businesses, Appliances for Consumers, Aviation, Consumer Electronics, Energy Management, Healthcare, Home Improvement, Lighting for Business, Lighting for Consumers, Housewares, Intelligent Platforms, Industrial Solutions, Oil & Gas, Software, Personal Healthcare, Power & Water, Transportation, Mining, and GE Capital. The SWOT analysis for GE Capital will largely be based on the SWOT for each of the company’s other 18 divisions/segments. The primary strategic decision for highly diversified firms such as GE is to determine the extent and degree that its various divisions/segments should be funded, promoted, and supported. This decision oftentimes is based on analyses such as the SWOT, which would be developed by each of the 19 segments, and submitted to corporate, along with a request to be funded/promoted/supported. Then a corporate level SWOT (and IE Matrix) would be developed at GE headquarters, in order to make effective resource allocation decisions across the divisions/segments. For calendar year 2012, GE Capital had earnings of $7.4 billion, up 12%. GE Capital reduced the firm’s exposure to commercial real estate assets, which were $46 billion at year-end, down from almost $100 billion at its peak. Operating much like a large commercial bank, GE Capital continues to outperform regional and money center banks in important areas like net interest margins and losses. Some threats facing GE Capital are the faltering economic situation in Europe, political turmoil in the Middle East, and disputes over land and islands in the Pacific Ocean. Opportunities facing GE Capital include the stable and growing economies of the USA, Australia, Canada, Brazil, China, and India. Other opportunities include the healthcare industry growing 12 percent annually, and the historically low interest rate environment in the USA. Factors such as these mentioned could be arrayed in a SWOT as follows: Strengths – S 1. Weaknesses – W 1. Opportunities – O 1. SO Strategies 1. WO Strategies 1. Threats – T 1. ST Strategies 1. WT Strategies 1. ASSURANCE OF LEARNING EXERCISE 6C: DEVELOP A SPACE MATRIX FOR PEPSICO Answer: Financial Position (FS) Ratings Stability Position (SP) Ratings Leverage (debt to equity) 2.0 Price elasticity of demand -4.0 Liquidity (current ratio) 4.0 Competitive pressure -4.0 Return on assets 5.0 Barriers to entry into market -3.0 Earnings per share 6.0 Seasonality -3.0 Net income 3.0 Technological changes -3.0 Financial Strength Average 22 Stability Position Average -17.0 Competitive Position (CP) Ratings Industry Position (IP) Ratings Diversified -2.0 Industry regulation 4.0 Control over suppliers and distributors -2.0 Profit potential 3.0 Market Share -3.0 Ease of entry into market 5.0 Technological know-how -2.0 Growth potential 3.0 Competitive Position Average -9.0 Industry Position Average 15.0 Conclusion SP Average is -17 / 5 = -3.4 IP Average is 15 / 4 = 3.75 CP Average is -9 / 4 = -2.25 FP Average is 22 / 5 = 4.4 X-axis: -2.25 + 3.75 = 1.5 Y-axis: 4.4 + -3.4 = 1.0 PepsiCo’s SPACE coordinate (1.5, 1.0) and vector is in the upper right quadrant, meaning the firm should pursue Aggressive strategies. Thus, perhaps all the SWOT strategies outlined in Exercise 6A could be implemented. ASSURANCE OF LEARNING EXERCISE 6D: DEVELOP A BCG MATRIX FOR PEPSICO Answer: PAB = PepsiCo Americas Beverage PAF = PepsiCo Americas Foods = QFNA & FLNA QFNA = Quaker Foods North America. FLNA = Frito-Lay North America LAF = Latin America Foods AMEA = Asia, Middle East, & Africa Conclusion: PepsiCo has three STAR divisions (FLNA, QFNA, AMEA), and those three are snack related, so acquiring Mondelez International is recommended. LAF and EUROPE are QUESTION MARK divisions, which suggests that the snack portion of those divisions should be segmented out and treated independently, so that a potential sale of PepsiCo’s beverage segment could be more easily made to Anheuser-Busch InBev. ASSURANCE OF LEARNING EXERCISE 6E: DEVELOP A QSPM FOR PEPSICO Answer: Note in the analysis below that the authors isolated the snacks vs. beverage key factors and utilized a 1 vs. 4 rating scale to perform the analysis. Factors not rated were determined not to significantly impact the decision being made. QSPM Strategies: Strategy 1) Acquire Mondelez International, a large snack company Strategy 2) Acquire Monster Beverage, a large beverage company Conclusion: PepsiCo should acquire the snacks company, Mondelez International, as indicated by the sum total attractiveness score of 3.00. ASSURANCE OF LEARNING EXERCISE 6F: FORMULATE INDIVIDUAL STRATEGIES Answer: ASSURANCE OF LEARNING EXERCISE 6G: THE MACH TEST Answer: This is an especially fun exercise that takes only about 10 minutes. Scoring is provided in the text and is repeated here for convenience. Below 16: Never uses manipulation as a tool. 16 to 20: Rarely uses manipulation as a tool. 21 to 25: Sometimes uses manipulation as a tool. 26 to 30: Often uses manipulation as a tool. Over 30: Always uses manipulation as a tool. A National Opinion Research Center poll found that the average score for Americans is 25. When discussing the Mach Test in class, consider using the following questions to guide the class discussion. 1. How is a person’s Mach score relevant to their ability to plan strategically? Explain. 2. What type of person would you want leading a company – a high or low Mach? Why? 3. By show of hands, see the # of men vs. # of women who had high vs. low mach scores. 4. What are the potential benefits of working with mostly high mach coworkers? 5. What are the potential benefits of working with mostly low mach coworkers? ASSURANCE OF LEARNING EXERCISE 6H: DEVELOP A BCG MATRIX FOR YOUR UNIVERSITY Answer: Let the circles stand for schools/colleges at your institution, such as the School or College of Business. The relative market share position is the number of students enrolled in each school compared to the number enrolled in the largest peer institution in the state. The industry growth rate is the % increase/decrease in the number of new students state-wide seeking to major in that discipline. Ask the students what implications arise for disciplines at the university in the different quadrants–how should the university address dogs, question marks, stars, and cash cows? If the university chose to address these disciplines using this perspective, what implications would exist for the role and mission of the university? Color of Circle Relative Market Share Position Industry %Growth Rate School of Business Pink 0.8 +03 School of Education Green 0.25 +10 School of Arts Blue 0.4 -15 School of Science and Humanities Yellow 0.4 +08 According to the BCG Matrix, the School of Business is a star but could be moving towards a position of cash cow. The School of Education in this example is a question mark. The School of Arts is a dog and the School of Science and Humanities is a question mark. Notice that the business school is one of the largest in the state, but the School of Arts is one of the smallest in the state. The School of Arts also has the least growth in majors statewide. Notice that all four schools have about the same number of students, as indicated by the size of the circles. ASSURANCE OF LEARNING EXERCISE 6I: THE ROLE OF THE BOARDS OF DIRECTORS Answer: This exercise sends students into the community to speak with an individual who is a member of some board of directors, and to report back to class on their findings. This endeavor is well worth the class time and is great experience for the student. Other questions that could be asked of the presenting student(s) are: 1. To what extent is the board member personally liable for performance of the firm? 2. Does the board member have insurance to protect him/her from potential lawsuits? 3. Is the chair of the board the CEO? 4. How many “insiders” are on the board? 5. Is there a requirement that the board member own a certain # of shares of stock of the firm? 6. Are there interlocking directorates among the board members? 7. ASSURANCE OF LEARNING EXERCISE 6J: LOCATE COMPANIES IN A GRAND STRATEGY MATRIX Answer: The basic premise behind this exercise is that 1) higher industry numbers reveal a higher market growth since the vertical axis relates to the industry, and 2) higher company numbers reveal a stronger competitive position, since the horizontal axis relates more to the company. The only questionable placement is for Nestle, but with an industry average EPS of 0.32, Nestle could be placed in Quadrant 1 or IV. The first matrix below illustrates the appropriate strategies for each quadrant. The second matrix illustrates the quadrant in which each sample company is located. Solution Manual for Strategic Management: A Competitive Advantage Approach, Concepts and Cases Fred R. David, Forest R. David 9780133444797, 9780135173947, 9780134167848, 9780135199978