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Chapter One Notes - 1

CHAPTER ONE

BASIC CONCEPTS OF STRATEGIC MANAGEMENT

SUMMARY OF KEY POINTS

• Strategic management starts with three key questions: (1) Where is the organization now? (2) If no changes are made, where will the organization be in a few years? (3) If the answers are not acceptable, what specific actions should management undertake?

• Strategic management is that set of managerial decisions and actions that determines the long-run performance of a corporation. It includes environmental scanning, strategy formulation, strategy implementation, and evaluation and control.

• Strategic management in many organizations tends to evolve in four phases from basic financial planning to forecast-based planning, to what people refer to as strategic planning (strategy formulation only), and finally to full-blown strategic management (including implementation and evaluation and control).

• Research reveals that companies engaging in strategic management tend to outperform those organizations which do not.

• Strategy formulation is typically not a regular, continuous process but is often initiated by triggering events, such as a new CEO or a performance gap.

• The strategic management model proceeds from environmental scanning to strategy formulation (including establishing mission, objectives, strategies, and policies) to strategy implantation (including developing programs, budgets, and procedures) to evaluation and control. This model is made action-oriented through the strategic decision making process depicted in Figure 1.3..

• A large corporation tends to have three levels of strategy (corporate, business, and functional) which form a hierarchy of strategy.

• Strategic decisions are rare, consequential, and directive.

• Top managers tend to use one of three modes of strategy formulation: entrepreneurial, adaptive, planning, or logical incrementalism.

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1. Why has strategic management become so important to today's corporations?

Research indicates that organizations that engage in strategic management generally outperform those that do not. The attainment of an appropriate match or fit between an organization's environment and its strategy, structure, and processes has positive effects on the organization's performance. A firm cannot afford to follow intuitive strategies once it becomes large, has layers of management, or its environment changes substantially. As the world's environment becomes increasingly complex and changing, strategic

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

2 - Chapter One Notes

management is used by today's corporations as one way to make the environment more manageable.

2. How does strategic management typically evolve in a corporation?

Strategic management in a corporation appears to evolve through four sequential phases according to Gluck, Kaufman and Walleck. Beginning with basic financial planning, it develops into forecast-based planning, and then into externally-oriented planning, and finally into a full-blown strategic management system. The evolution is most likely caused by increasing change and complexity in the corporation's external environment. The phases are thus likely to be characterized by a change from primarily an inward-looking orientation in the first phase to primarily an outward-looking orientation in the third phase, and to a more integrative orientation in the final strategic management phase with equal emphasis on both the external and internal environments.

3. What is a learning organization? Is this approach to strategic management better than the more traditional top-down approach in which strategic planning is primarily done by top management?

Traditional top-down strategic planning assumes that top management has all the information and knowledge needed to properly understand the firm’s external and internal environments and to formulate and implement strategic plans. This approach may be appropriate when the organization is in a stable and fairly simple environment, but not when the situation is complex and quickly changing. Increasing environmental uncertainty means that corporations must develop strategic flexibility—the ability to shift from one dominant strategy to another. It also demands that the company become a learning organization: an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights. Learning organizations avoid stability through continuous self-examination and experimentation. People at all levels, not just top management, are involved in strategic management: scanning the environment for critical information, suggesting changes to strategies and programs to take advantage of environmental shifts, and working with others to continuously improve work methods, procedures, and evaluation techniques.

4. Why are strategic decisions different from other types of decisions?

Strategic decisions deal with the long-run future of the entire organization and have three characteristics which differentiate them from other types of decisions: (1) They are rare. Strategic decisions are unusual and typically have no precedent to follow; (2) They are consequential. Strategic decisions commit substantial resources and demand a great deal of commitment; (3) They are directive. Strategic decisions set precedents for lesser decisions and future actions throughout the organization.

5. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive modes?

The planning mode is generally superior to the entrepreneurial and adaptive modes when the organization is fairly large, when knowledge is spread throughout the organization, and when the organization has at least a moderate amount of time to engage in strategic planning. The book proposes that the planning mode is more rational and thus a better way of making most strategic decisions than are the other modes. It may not, however,



always be possible. The entrepreneurial mode can be very useful when time is short, one person or group is able to grasp the essentials of the business and its environment, and that person or group is able to influence the rest of the organization to accept the strategic decision. The adaptive mode is generally not considered to be very effective in most situations, but seems to be the fallback mode when entrepreneurial or planning modes can't operate effectively because of political infighting or lethargy. It is a typical mode in not-for-profit organizations.

ADDITIONAL DISCUSSION QUESTIONS

A1. What is meant by the hierarchy of strategy?

The hierarchy of strategy is a term used to describe the interrelationships among the three levels of strategy (corporate, business, and functional) typically found in large business corporations. Beginning with the corporate level, each level of strategy forms the strategic environment of the next level in the corporation. This means that corporate level objectives, strategies, and policies form a key part of the environment of a division or business unit. The objectives, strategies, and policies of the division or unit must therefore be formulated so as to help achieve the plans of the corporate level. The same is true of functional departments which must operate within the objectives, strategies, and policies of a division or unit.

A2. Does every business firm have business strategies?

Every business firm should have a business strategy for every industry or market segment it serves. A business strategy aims at improving the competitive position of a business firm's products or services in a specific industry or market segment. Firms must therefore have business strategies even if they are not organized on the basis of operating divisions. Nevertheless, it is still possible that some business firms do not have clearly stated business strategies. If they hope to be successful, however, they must have at least some rudimentary (even though unstated) position they take in terms of getting and keeping customers or clients through competitive and/or cooperative strategies.

A3. What information is needed for the proper formulation of strategy? Why?

In order to properly formulate strategy, it is essential to have information on the important variables in both the external and internal environments of the corporation. This includes general forces in the natural and societal environment as well as the more easy-to-identify groups, such as customers and competitors in the task environment. A corporation needs to have this information in order to identify a need it can fulfill via its corporate mission. It is also important to have information on the corporation's structure, culture, and resources. A corporation needs to have this information in order to assess its capabilities to satisfy a customer's need by making and/or distributing a product or service. Information on both the internal and external environments can also help a corporation to predict likely opportunities and threats. Long-term strategies can be designed with these in mind.

MULTIPLE CHOICE QUESTIONS (The letter after each item number is the correct answer)

1B Which is NOT one of the strategic questions that an organization must ask itself?

a. Where is the organization now?b. How can functional and operational areas be improved?



c. If no changes are made, where will the organization be in one year?d. If the evaluation is negative, what specific actions should management take?e. If no changes are made, where will the organization be in 10 years?

2D Which of the following is NOT a characteristic of strategic decisions as mentioned in the text?

a. directiveb. consequentialc. rare d. continuous

3A Strategic planning within a small organization

a. may be informal and irregular.b. must be elaborate to allow for future growth.c. should be formalized and explicitly statedd. should be done by the president only.e. is unnecessary and a waste of time.

4D An organization that is skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights

a. asks if it should be or not be.b. is operating in Phase 1 of strategic management.c. has a mechanistic structure. d. is a learning organization.e. is crazy.

5B Research suggests that strategic management evolves through four sequential phases in corporations. The first phase is

a. externally-oriented planning.b. basic financial planning.c. internally-oriented planning. d. forecast-based planning.e. strategic management.

6A Research done by Henry Mintzberg suggests that strategy formulation

a. is an irregular and a discontinuous process.b. should be followed unswervingly to ensure success of the plan.c. is worthless. d. should be reviewed after a specific interval of time to make sure it is still

applicable.e. is merely a checklist of actions following a logical process.

7B Which of the following is NOT one the five triggering events that are the stimulus for a strategic change?

a. Intervention by the organization's bankb. Entrance of a new competitor into the industryc. Change in ownership of the organization



d. New CEOe. Awareness by management of decreased profitability

8B The corporate mission is best described by which one of the following?

a. A description of the activities carried out by the organization.b. The purpose or reason for the corporation's existence.c. A description of top management's responsibilities. d. A statement of corporate objectives.e. The philosophy of the founder.

9A A goal differs from an objective because it

a. is open-ended.b. is quantified.c. specifies measurable results. d. is clearly specified.e. provides a time horizon.

10C As defined in this course, a policy is

a. the purpose or reason for a corporation's existence.b. a statement of activities or steps needed to accomplish a single-use plan.c. a broad guideline for making decisions.d. a comprehensive master plan stating how a corporation will achieve its

mission and objectives.e. a statement of a corporation's programs in dollar terms.

11B Which of the following is an example of an objective?

a. Diversify product line to appeal to more people.b. Increase sales by 10% over last year.c. Pay highest salaries to keep high quality employees. d. Develop and sell quality appliances world-wide.e. Divide a sales region into a group of sales districts.

12A Which of the following is an example of a strategy?


13C Which of the following is an example of a policy?

a. Diversify product line to appeal to more people.b. Increase sales by 10% over last year.c. Pay highest salaries to keep high quality employees.d. Develop and sell quality appliances world-wide.



e. Divide a sales region into a group of sales districts.

14D Which of the following is an example of a mission?


15E Which of the following is an example of a program?


16A Which of the following is an example of a procedure?

a. Evaluate all personnel annually in January using Form 25-51.b. Pay highest salaries to keep high quality employees.c. Divide a sales region into a group of sales districts.d. Develop and sell quality appliances world-wide.e. Diversify product line to appeal to more people.

17C According to Mintzberg, the entrepreneurial mode of strategy formulation

a. is characterized by reactive solutions to existing problems. b. assumes major responsibilities for strategy formulation. c. is focused on opportunities seen by one person.d. includes the proactive search for new opportunities and reactive solutions to

existing problems.e. assumes the environment is unresponsive to input.

18B The mode of strategy formulation used when top management has a reasonably clear idea of the corporation's mission and objectives, but it chooses to develop a series of tentative or partial strategies instead of developing full-blown strategies is called

a. planning mode. b. logical incrementalism.c. entrepreneurial mode. d. adaptive mode. e. strategic mode.

19A A large, multidivisional business has three levels in its hierarchy of strategy:



a. Corporate -- Business -- Functional. b. Environmental -- Corporate -- Functional.c. Environmental -- Enterprise -- Corporate.d. Business -- Divisional -- Functional.e. Industry -- Corporate -- Divisional.

20B The first step of the strategic decision making process, as given in the book, is to

a. review corporate governance.b. evaluate current performance results.c. analyze strategic factors. d. scan the internal environment.e. scan the external environment.

21B The focus of "functional strategy" is

a. on stability, growth, or retrenchment.b. maximizing resource productivity.c. on overall cost leadership differentiation. d. achieving overall direction.e. scanning the environment.


8 - Chapter Two Notes

CHAPTER TWO

CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY


• Corporate governance is the relationship among the board of directors, top management, and the shareholders in determining the direction and performance of the corporation. The board of directors of the modern corporation is typically responsible for setting corporate direction, hiring and firing top management, monitoring top management and its use of resources, and stockholder interests.

• Boards can be placed on a continuum from passive to active regarding their involvement in the strategic management process through monitoring corporate activities, evaluating and influencing top management, plus initiating and determining a corporation's strategic direction.

• In addition to fulfilling key roles and managing the strategic planning process, top management is responsible for providing executive leadership.

• The concept of social responsibility proposes that a private corporation has responsibilities to society that extend beyond making a profit.

• Even though a business firm has economic and legal responsibilities (in agreement with Friedman's stand), it can be argued (from Carroll) that it also has ethical and discretionary responsibilities.

• Strategists must be aware of the stakeholders within their company's task environment and be prepared to juggle priorities in order to negotiate through a maze of conflicting demands.

• Ethical problems in organizations may be resolved by considering the utilitarian, individual rights, and justice approaches to ethical behavior.


1. When does a corporation need a board of directors?

Given that a number of people do not consider the board of directors to have much of a role in a corporation's strategic management, this is no idle question. A good case can be made that a closely-help corporation has no need of a board. Since the owners are likely to compose both top management and board membership, the board becomes superfluous at best and may even create more problems that it solves by getting in the way of management's quick response to opportunities and threats. Even in a publicly-held corporation, the board may be composed of nothing but a few insiders who occupy key executive positions and few "good old boy" outsiders who go along with the CEO on all major issues. Nevertheless, the rationale for the board of directors seems to be changing from simply one of safeguarding stockholder investments to a broader role of buffering the corporation from its task environment and forcing management to manage strategically. If nothing else, the board can do the corporation a great service by simply offering to top


Chapter Two Notes - 9

management a different point of view. The board's connections to key stakeholders in the corporation's task environment can also provide invaluable information for strategic decision-making.

2. Who should or should not serve on a corporation’s board of directors? What about environmentalists or union leaders?

This is a wide-open question with no simple answer. Some may argue that representatives from each stakeholder group in the corporation's task environment should be included so as to keep top management aware of key environmental considerations. Others may argue that only outsiders with no personal stake in the corporation (i.e., not a member of a local bank or a key supplier, etc.) would be best able to bring the amount of objectivity needed to help make strategic decisions. A good argument can be started by suggesting that a representative from labor be a director. If this makes some sense, who should it be -- an employee of the corporation or an employee of another corporation? If the firm is not unionized, what then? Further discussion can be generated by suggesting that the composition of the board reflect the key demographics of the corporation's workforce in terms of race, sex, and age. Agency theory, in contrast, would suggest that these social considerations should not be reflected in board membership. Since, according to agency theory, the board exists to protect the interests of the stockholders, other constituencies (such as employees) should not be represented on the board.

3. What recommendations would you make to improve corporate governance?

The answer to this question is not provided in the text. Some likely suggestions are the following:

Add more outsiders (people not affiliated with the corporation) to the board of directors. Keep the percentage of insiders (typically top management) to about 25% or less of board membership.

Separate the positions of CEO and Chairman so that top management cannot unduly influence the board's meetings and agenda. This should improve the board's ability to properly evaluate top management.

Use a committee composed of outsiders to nominate potential new directors. This will help to ensure that potential members are not friends of top management who may owe more allegiance to the CEO than to the shareholders.

Nominate to the board those who have knowledge valuable to the board and who have expertise of value to top management. These should be people who will have the respect of top management and who can both advise and criticize top management as needed.

Require board members to own substantial amounts of stock in the corporation to ensure that they have a personal as well as professional stake in the welfare of the corporation.

4. Do you agree with the economist Milton Friedman that social responsibility is a "fundamentally subversive doctrine" that will only hurt a business corporation's long-term efficiency?



Using Carroll's categories, Friedman could be said to argue that the only responsibilities of a business firm are economic and legal. (Friedman does say that business should stay "within the rules of the game." This can be interpreted as meaning legal responsibilities.) If a purely economic justification is used, it may be difficult but still possible to justify ethical and discretionary responsibilities. Carroll points out that a refusal to consider ethical responsibilities is likely to lead to an increase in a firm's legal responsibilities - which considering the usual inefficiencies of government will lead to higher costs and lower long-run business efficiency. If this appeal to financial considerations is not enough to justify socially responsible actions, an appeal to morality may be enough to swing the class toward a justification of ethical and even discretionary responsibilities. Nevertheless, this question should engender a lot of discussion on the topic.

5. Is there a relationship between corporate governance and social responsibility?

Since it is the job of the board to oversee the decisions and actions of top management, the board is the last opportunity of the company to ensure that the firm’s actions do not hurt the environment of which the company is a part. It can be argued that one way to increase a corporation’s social responsibility is to increase the presence and power of outside directors. The board can then be held more accountable for corporate actions. This has been the approach taken in the U.S. through the Sarbanes-Oxley Act to formalize greater board independence and oversight by demanding greater involvement in board decisions by outside directors. There appears to be increasing pressure on boards to balance the economic goal of profitability with the social needs of society.


A1. How appropriate is the theory of laissez-faire in today's world?

Milton Friedman contends that it is very appropriate. The quote from his classic article, "The Social Responsibility of Business Is to Increase its Profits" does suggest a certain modification, however, to pure laissez faire. He states that business should work to increase its profits "so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." These "rules of the game" form the crux of the argument. What should these rules be and who should communicate and enforce them? This leads directly into Archie Carroll's contention that there are four responsibilities of business corporations: economic, legal, ethical, and discretionary. Pure laissez faire argues for economic responsibilities only. Friedman modifies laissez faire by presumably adding legal responsibilities. One could make the point that the "rules of the game" should include ethical responsibilities as well. The problem, of course, is what happens to the concept of laissez faire when one adds all these responsibilities to it and then expects business people at all levels to accept them without outside force? Does laissez faire as proposed by Adam Smith and argued by others include only economic responsibilities? If legal and ethical responsibilities are also expected by society of business corporations, is it still "free enterprise" laissez faire or some other kind of system?

A2. How does a strategic vision differ from a corporation's mission?



As stated in Chapter One, a corporation's mission is its purpose, or the reason for its existence. It provides the fundamental, unique purpose that sets the company apart from other firms of its type and identifies the scope of the company's operations in terms of products/services offered and markets served. It tells who the company is and what it currently does. A corporation's vision, in contrast, is a description of what the company is capable of becoming. It tells not what the company is now (as does the mission), but what it is striving to become. Whereas the mission is present-oriented, the vision is future-oriented. A corporation's mission statement typically includes both the corporation's mission and vision by stating what the company is now and what it wants to become.

A3. Tobacco companies are increasing their marketing efforts in Third World countries. Faced with a decline in tobacco usage in the developed countries, these corporations are using their advertising expertise and political connections to open new markets in Japan, Taiwan, Thailand, and South Korea, as well as in eastern Europe. In light of the accumulating evidence regarding the link between tobacco use and cancer, should the strategic managers in these tobacco companies be criticized for taking socially irresponsible actions? Should the government declare the making and selling of tobacco products illegal?

This question should stir up the class as non-smokers debate against smokers (or chewers)! It may also serve to bring up the issue of self-interest. Why do non-smokers brand tobacco companies irresponsible while smokers do not? Is the concern for social responsibility partly an issue of who gets hurt? Insofar as the non-smokers are concerned, ask them to deal with the question of freedom of choice versus personal health (similar to laws regarding auto seat belts and motorcycle helmets). Is any company making a product (such as guns or knives), which can hurt people, socially irresponsible? Insofar as smokers are concerned, is their personal desire to smoke coloring their view of the tobacco companies' social responsibilities? Although it can be argued that the rights of current users of tobacco should be respected, is it appropriate that firms should try to attract new users who may not be aware of the risks of tobacco? Use the question of outlawing tobacco as a way of getting at the role of government in the relationship of business and society. Do otherwise laissez-faire, free enterprise-oriented students (who happen to be non-smokers) call for government intervention on this issue? Try to get the students to assess the impact of their personal values and opinions on their social responsibility judgments.

A4. Using Carroll's list of four responsibilities, should a company be concerned about discretionary responsibilities? Why or why not?

Except for a few die-hard followers of Milton Friedman's philosophy, few people would agree that a business firm should fulfill only its economic and legal responsibilities and completely ignore ethical ones. The same is not true of discretionary responsibilities, however. Since discretionary responsibilities are defined by Carroll as purely voluntary, there is no pressure by anyone for a business firm to fulfill them. One can argue, nevertheless, that there are three good reasons to undertake these kinds of responsibilities. The first reason is the morality rationale - it may be the right thing to do, even though the company may not benefit and may even be hurt in the short run. The second reason is enlightened self-interest. If a firm undertakes a discretionary activity, it may gain short-run advantages in the market place (e.g., a company offering free day care to its employees may attract more potential workers at lower wages). It may also serve as a role model for government to legislate if and when that responsibility moves from discretionary to ethical and finally to legal (and thus the firm is able to do things its way instead of the government's way). The third reason is also one of enlightened self-interest. If a company



develops a reputation for voluntarily doing socially useful activities even though it gains little economically in return, it may collect valuable public relations credit in people's minds. This may translate sometime into better sales or a willingness on the part of some government agency to overlook a questionable activity the company might unthinkingly engage in.

A5. Should a company be concerned if some of its suppliers in developing countries are abusing their workers, employing child labor, and paying near starvation wages?

Does a company's responsibilities end at its boundary or does its responsibilities extend to its suppliers and distributors as well? For example, if a firm purchases its raw materials from a company which is a known polluter, is this being socially irresponsible? Should a company sell its goods to a person or another company which misuses its product in a socially irresponsible manner? This very thorny question is a major point of contention in the area of social responsibility. The question includes a basic question in organization theory: What is the boundary of an organization? Certainly, one could argue that a company is composed of its employees and all of its assets, such as land, buildings, and equipment. These can thus define a company's boundary. Given this view, everything else may be called a company's "environment" and therefore outside of a company's control or responsibility. One could thus argue that a purchasing company cannot be held responsible for the actions of a separate and independent supplier company. The very popularity of outsourcing as a substitute for vertical integration means that more firms are contracting with other firms to fulfill functions a company no longer wishes to do on its own. If the contract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplying company, then the hands-length nature of transactions is compromised and it becomes difficult to discern where one firm's boundary begins and another firm's leaves off. Such a relationship suggests that one company does have some influence over another company's actions by nature of the other company's dependency on the first company. One could thus argue that a company's social responsibilities extend beyond what is normally thought of as its boundary to the extent that it has some control and influence over the other company's actions. For example, if one company has an important and long-term relationship with a contracting company that is behaving in a socially irresponsible manner, the first company has an obligation to attempt to change the contractor's behavior. It could certainly be argued that a company should not support a socially irresponsible contractor by continuing the relationship if other more socially responsible contractors are available.


1D The responsibilities of the board of directors vary significantly by country and by state; however, there is a developing consensus as to what the major responsibilities should be. Which of the following is NOT one of the major responsibilities?

a. To oversee the management of the corporation's resources.b. To establish or approve the corporation's mission, objectives, strategy, and

policies. c. To review management's actions in light of the financial performance or the

corporation. d. To become directly involved in managerial decisions.



e. To hire and fire the principal operating officers of the corporation.

2E The concept which states that directors must carry out their responsibilities in a conscientious manner so that the corporation is not harmed by their actions is called

a. codetermination. b. due diligence. c. cumulative voting. d. accountability. e. due care.

3B Which of the following is NOT a task of the board of directors in strategic management?

a. to monitor b. to implementc. to influence d. to initiate and determine e. to evaluate

4B Catalyst board of directors typically

a. are less involved than active participation boards. b. take leading roles in establishing and modifying the company mission.c. are involved in a limited degree of key decision making. d. are held to a greater degree of legal responsibility. e. experience more financial success than less involved boards.

5B Outside directors are defined as

a. those individuals who scan the external environment. b. individuals on the board who are not employed by the board's corporation.c. those individuals with public relations responsibilities. d. board members who are also officers or executives employed by the

corporation. e. individuals who organize and coordinate politically focused activities.

6D Outsiders make up to what percentage of board membership in large U.S. corporations?

a. 10% b. 30% c. 50% d. 80% e. 90%

7A The vast majority of outside directors are all BUT ONE of the following:

a. union representatives.b. CEOs. c. COOs. d. academicians. e. attorneys.



8B Corporate governance deals with the relationship among the board of directors, top management, and

a. key stakeholder groups, such as customers and employees.b. shareholders.c. middle management. d. environmental issues. e. strategic factors.

9C Affiliated directors are

a. employees of the corporation.b. directors in an interlocking directorate.c. outside directors who have a personal or business stake in corporate

activities.d. agents of top management.e. executives of other firms.

10E In a large corporation, the agents in agency theory are

a. shareholders.b. the board of directors.c. employees.d. stakeholder groups.e. top management.

11C Under what circumstances does a DIRECT interlocking directorate exist?

a. When both management and the board establish corporate strategic management.

b. When a corporation's employees serve on its board. c. When one or more individuals on one board also serve on a board of a

second firm. d. Present when all board members are also employed by the corporation. e. Occurs when two corporations have directors who serve on the board of a

third firm.

12E An outside director selected by the board to conduct an evaluation of the CEO is called

a. an auditing director. b. the evaluator.c. the chair of the evaluation committee. d. the chairman of the board. e. a lead director.

13A One result of the U.S. of the Sarbanes-Oxley Act is that



a. boards may no longer grant loans to corporate officers.b. top management must provide a financial expert to serve on the audit

committee.c. boards must be entirely composed of outsiders.d. whistle blowers are no longer protected.e. a CEO can no longer act as a board chairperson.

14D The percentage of CEOs of U.S. Fortune 500 corporations who also serve as chairman of the board is

a. less than 10%. b. 20%. c. 50%. d. 70%. e. over 90%.

15C Which of the following is a trend in corporate governance?

a. Increasing percentage of insiders on the board.b. Less stock ownership by directors and executives.c. Increasing numbers of institutional investors on the board.d. Less willingness of the board to consider issues in social responsibility.e. Increasing use of consultants in formulating strategy.

16E Which of the following is NOT a characteristic of a top manager providing executive leadership?

a. The CEO presents a role for others to identify with and to follow.b. The CEO articulates a strategic vision for the corporation.c. The CEO communicates high performance standards.d. The CEO shows confidence in people's abilities to reach a high level of

performance.e. The CEO personally formulates and implements all strategy.

17D The CEO must successfully handle two responsibilities crucial to effective strategic management -

a. look like a strategist and act like a strategist.b. balance many demands and show initiative.c. think long term and act short term.d. provide executive leadership and manage the strategic planning process. e. articulate a strategic vision and communicate high performance standards.

18B Which one of the following is NOT one of the arguments against social responsibility as used by economist Milton Friedman?

a. Spending money for social responsibility is spending the stockholder's money for a general social interest.

b. Businesses can actually do very little in terms of social responsibility.c. Spending money on social responsibility is acting from motives other than

economic and may, in the long run, cause harm to the very society the firm is trying to help.

d. There is one and only one social responsibility of business -- to use its



resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.

e. Through taking on the burden of social costs, the organization becomes less efficient causing price increases or postponement of growth.

19A Economist Milton Friedman has argued that a business's only responsibility is to

a. maximize profits in a legal manner.b. sustain its market share. c. promote the welfare of society. d. satisfy its employees. e. satisfy its customers.

20E The responsibilities that management of a business organization assumes as purely voluntary obligations are

a. legal responsibilities. b. ethical responsibilities. c. financial responsibilities. d. economic responsibilities. e. discretionary responsibilities.

21A The term "social responsibility" can be viewed as a combination of an

a. organization's ethical and discretionary responsibilities.b. organization's legal and ethical responsibilities. c. organization's economic and ethical responsibilities. d. organization's financial and economic responsibilities. e. organization's legal and discretionary responsibilities.

22B A group of people who affect or are affected by a corporation’s decisions and actions are called

a. stockholders.b. stakeholders.c. shareholders.d. customers.e. affiliates.

23C The ethical approach that proposes that decision makers be equitable, fair, and impartial in the distribution of costs and benefits to individuals and groups is the

a. individual rights approach.b. utilitarian approach.c. justice approach.d. fair approach.e. best approach.


Chapter Three Notes - 17

CHAPTER THREE

ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS


• The natural and societal environments are composed of forces which can be analyzed via STEEP analysis: sociocultural, technological, economic, ecological, and political-legal forces.

• The task environment (industry) contains stakeholder groups that have an impact or are heavily impacted by the organization. These are governments, local communities, suppliers, creditors, employees/labor unions, special interest groups, and trade associations.

• The level of competitive intensity present in an industry is determined by (1) threat of new entrants, (2) rivalry among existing firms, (3) threat of substitute products, (4) bargaining power of buyers, (5) bargaining power of suppliers, and (6) relative power of other stakeholders.

• Strategic groups are important because a company does not compete against everyone in an industry but only against those with similar strategies using similar resources.

• An industry matrix can be used to summarize key success factors within an industry and to analyze competitors.

• Competitive intelligence is one of the fastest growing fields in strategic management.

• Although most people use trend extrapolation in forecasting, many large companies find scenario-writing to be better at helping them identify and integrate a large number of variables.

• The many possible external factors can be analyzed using an EFAS Table in which opportunities and threats are weighted and rated according to their importance to the company under consideration.

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:

1. Discuss how a development in a corporation's societal environment can affect the corporation through its task environment.

Developments or trends in a corporation's societal environment typically do not affect the corporation directly but indirectly through their impact on one or more stakeholder groups in the corporation's task environment. The trend toward dual-career couples is a development in the societal environment of any company operating in the U.S or Canada. Sociocultural forces regarding the changing role of women plus the trend toward single family households combined with the economic forces of high interest rates and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being parents. This development in the societal environment affected companies through


18 - Chapter Three Notes

its impact on employee/union groups (who asked for parental leave and/or company-sponsored day care centers), customers (employed parents who increasingly shop for convenience goods because of time constraints), and special interest groups and even governments (who asked business firms to help support local schools and deal with community social problems).

2. According to Porter, what factors determine the level of competitive intensity in an industry?

The answer to this question can be found in Figure 3.4 of the text. By this time, students should be able to list the five forces presented by Michael Porter plus the sixth force (other stakeholders). They are briefly:

-Threat of new entrants-Rivalry among existing firms-Threat of substitute products or services-Bargaining power of buyers-Bargaining power of suppliers-Relative power of other stakeholders

Once they have listed the forces, push the students to explain how each of the forces can affect the level of competitive intensity within an industry. Use price of the company's product - How will a change in each of the forces affect the average price of the product? Then look at how changes in each force might affect average product quality and other characteristics of the product offered in this particular industry. Arbitrarily select for analysis a well-known product like televisions or automobiles. After examining past and present forces operating in a particular industry, ask the students to try to predict what will happen to each of these forces in the future and how these developments might affect the future competitive intensity of the industry.

3. According to Porter's discussion of industry analysis, is Pepsi Cola a substitute for Coca Cola?

According to Porter, substitute products are those products that appear to be different but can satisfy the same need as another product. The identification of possible substitute products or services means searching for products or services that can perform the same function, even though they may not appear to be easily substitutable. Pepsi and Coke are, therefore, not substitutes for each other. They are merely different brands of the same cola product. The real question here is: what is the product? If the product is colas, then a lemon-lime drink like Seven Up could be a substitute product. If the product is carbonated soft drinks, then other beverages which might perform the same function could be identified, such as coffee, tea, beer, wine, or Kool Aid.

4. How can a decision maker identify strategic factors in the corporation's external environment?

List three or more trends emerging in each of the forces of a firm's societal and natural environments. Then estimate the likely impact of these general trends upon the primary stakeholders, e.g., communities, creditors, competitors, etc. These data form a series of strategic issues - those trends and developments that are very likely to determine the



future environment. Plot these strategic issues on an issues priority matrix (Fig. 3.3). Those issues judged to have a high probability of occurring and a high probable impact on the corporation are strategic factors. Categorize these factors as opportunities or threats. Keep in mind that some strategic factors may be both opportunities and threats depending upon how one views them.

5. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques.

Extrapolation is simply the extension of present trends into the future. It relies on the assumption that the environment is reasonably consistent and changes slowly in the short run. As a result, extrapolation is fairly easy to do - as witnessed by its being the most widely used form of forecasting. Nevertheless, extrapolation is like driving a car backwards without using a mirror or twisting one's head to look backward. Everything will be fine until a sudden turn is reached! Like driving backwards, extrapolation is fine if the time frame to be predicted is short and one is lucky. In contrast, scenario-writing is based upon a series of historical data plus informed hunches from key people in the company who have access to environmental information or from a Delphi panel of outside experts. Like extrapolation, scenario-writing is a very popular forecasting technique, but unlike extrapolation, it can get very complicated and time consuming. One approach to constructing an industry scenario is suggested in the text. It has a least one clear-cut advantage over extrapolation: It encourages forecasters to make their assumptions explicit. One is thus more likely to recognize the dangerousness of driving backwards. Scenario writing, if done conscientiously, could thus be seen as an attempt to construct a mirror to use in such hazardous driving!


A1. Why is environmental uncertainty an important concept in strategic management?

It can be argued that without environmental uncertainty, there would be no need for strategic management. The Arab oil embargo of the 1970s is said to be the single most influential event causing the formation of planning departments in most U.S. corporations. The embargo showed managers just how vulnerable their companies were to environmental change. A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope with an uncertain environment. If the environment was certain and predictable, environmental scanning would be a rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing world, however, those corporations which engage in environmental scanning and strategic planning tend to deal better with environmental uncertainty and to be more successful than their non-planning brethren.

A2. What can a corporation do to ensure that information about strategic environmental factors gets to the attention of strategy makers?

This is a very real problem in most large corporations given the usual obstacles to good communication. The very people who are in the best positions to gather this data are often the ones who either fail to pass it on because it's too much of a chore or they fail to notice it because no one told them how important certain developments are to top management. Since proper information dissemination is an important part of environmental scanning, corporations attempt to schedule a series of analytical reports for top management's information. Some of these reports are depicted in Figure 3.2 in the text. The purchasing



department, for example, might be tasked with the job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market research department might prepare analyses of present and future customers for certain products and services with special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years. Other approaches are, of course, possible to get needed information to the attention of strategy makers. It might be useful to generate some of these ideas in class.

A3. Describe the importance of entry barriers in an industry. Provide an example.

Entry barriers are a key variable determining the threat of new entrants into an industry. To the extent that entry barriers are low, it will be relatively easy for a new company to enter the industry and raise the level of competitive intensity. Some of these barriers are discussed in some detail in the text: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of size, and government policy. Push the students to list and explain each of these possible barriers. Then ask them to consider how a particular company might use these entry barriers to reduce the level of competitive intensity with which it is forced to deal. Keep in mind that these six forces are not just constraints, but are, in effect, variables that can be partially controlled by industry participants.

A4. According to Miles and Snow, competing firms within a single industry can be classified as four basic strategic types. Briefly describe each of the four types.

This is a good question to follow a discussion of the six forces determining competitive intensity and strategic groups. Within each strategic group in which a company operates are key competitors. Many of these can be characterized as a strategic type: defender, prospector, analyzer, or reactor. Each of these types has its own combination of structure, culture, and processes to complement its dominant strategic orientation. If one can categorize a firm into one of these four types, then it will be easier to predict their likely reaction to future environmental changes. Defenders are companies with a limited product line that focus on improving the efficiency of existing operations. Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities. Analyzers are companies that operate in at least two different product-markets and are able to adjust their orientation based on the industry they are in. Reactors are companies that lack a consistent strategy-structure-culture relationship and seem to switch strategies after the fact on a piecemeal basis in an attempt to better adjust to environmental change.

A5. Why is industrial espionage an important issue in strategic management?

Environmental scanning can be very expensive. A company must make a serious commitment to strategic planning in order to justify the large amount of effort and resources needed to stay on top of current developments and to forecast likely strategic issues and factors. One could argue that it is a lot cheaper and easier to simply "spy" on key competitors and "steal" their ideas before they are able to introduce them as new products or innovations. As the environment becomes increasingly uncertain, strategic managers are tempted to take the industrial espionage "shortcut" to proper environmental scanning and forecasting. Instead of waiting until a new product arrives on the market so that a company can purchase it to do legal "reverse engineering" (taking the product apart to see how it's made so that a competitor can get around the patents to imitate the product), it is tempting to steal away the innovation before it can be patented. When the



"cold war" came to an end in 1991, a lot of spy networks began to shift their emphasis from gathering military to industrial intelligence for governments interested in their own country's economic development. With differences in patent and trademark protection as well as differing degrees of enforcement around the world, the "pirating" of information is becoming an important industry in itself. This has a serious impact on the cost of R&D. Protection against industrial espionage can be very expensive.


1C The corporation's societal environment

a. includes those elements or groups within an organization's industry. b. encompasses the physical working areas of the organization. c. includes general forces that do not directly affect an organization.d. must be in perfect fit with the organization's culture. e. includes key stakeholders.

2B The corporation's task environment

a. encompasses the physical working areas of the organization. b. includes those elements or groups within an organization's industry. c. is an advisory committee to top-management. d. is an accounting of the many jobs within an organization. e. is the job requirement specification listing necessary skills and abilities.

3B Which of the following is NOT a factor in the societal environment?

a. political-legal forces b. labor forcesc. economic forces d. technological forces e. sociocultural forces

4E Which factor is part of the natural environment?

a. political-legal forces b. bargaining power of suppliersc. economic forces d. technological forces e. physical resources

5C The issues priority matrix used in environmental scanning is composed of two axis or dimensions which are labeled

a. importance to the industry and likelihood of occurrence. b. industry growth rate and probable competitive position. c. probability of occurrence and probable impact on the corporation.



d. probable industry attractiveness and business strength/ competitive position. e. issue importance and relative power of stakeholder groups.

6A The willingness to reject unfamiliar and negative information in environmental scanning is called

a. strategic myopia.b. strategic incompetence.c. brainstorming.d. logical incrementalism.e. tacit knowing.

7B Industry analysis is primarily concerned with a corporation's

a. societal environment. b. task environment.c. sociocultural environment. d. economic environment. e. internal environment.

8C The collective strength of the interaction of potential entrants, buyers, substitutes, suppliers, firm rivalry, and other stakeholders determines

a. the level of government action in an industry. b. the probable industry attractiveness and business strength position.c. the ultimate profit potential in the industry measured in terms of long-run

return on invested capital.d. the aggregate level of demand for a product line. e. the amount of pressure from the societal environment.

9D According to the Porter model, a strong force can be regarded as a(n)

a. benefit. b. opportunity. c. advantage. d. threat.e. risk.

10E Which barrier to entry uses cost advantages associated with large size?

a. rivalry among existing firms b. switching costs c. cost disadvantages independent of size d. capital requirements e. economies of scale

11B Which force places a ceiling on the price firms in an industry can probably charge?

a. threat of new entrants b. threat of substitutesc. bargaining power of buyers



d. bargaining power of suppliers e. rivalry among existing firms

12B According to the text, the strength of each of the six driving forces of industry competition varies according to the

a. effectiveness of the strategic planning. b. stage of industry evolution. c. industry growth rate and competitive position. d. changes in the political environment. e. amount of government regulation.

13C An industry that operates world-wide with MNCs making only small adjustments for country-specific circumstances is called a

a. very big industry.b. multi-domestic industry. c. global industry.d. multi-national industry. e. a mega-industry.

14A What is a set of business units or firms that "pursue similar strategies with similar resources?"

a. strategic groupb. collective collaboration c. cooperative d. integral association e. strategic assembly

15E Plotting the market position of industry competitors on a two-dimensional graph using two strategic variables as the vertical and horizontal axes is used to identify

a. entry barriers. b. most important competitors. c. strategic types. d. market gaps. e. strategic groups.

16A Which of the following is NOT one of the general Miles & Snow strategic types?

a. initiatorsb. reactors c. analyzers d. prospectors e. defenders

17E Which strategic type are companies that have a limited product line and focus on improving the efficiency of their existing operations?

a. initiators



b. reactorsc. analyzers d. prospectors e. defenders

18D Companies with fairly broad product lines that focus on product innovations and market opportunities are what strategic type?

a. initiators b. reactors c. analyzers d. prospectorse. defenders

19B Corporations that lack a consistent strategy-structure-culture relationship are what strategic type?

a. initiators b. reactorsc. analyzers d. prospectors e. defenders

20A When an industry undergoes an ever-increasing level of environmental uncertainty in which competitive advantage is only temporary, this is called

a. hypercompetition.b. the chaos scenario.c. industry consolidation.d. industry fragmentation.e. global competition.

21B In an Industry Matrix, those variables that can affect significantly the overall competitive positions of companies within any particular industry are called

a. strategic factors.b. key success factors.c. critical success factors.d. SWOT variables.e. competitive variables.

22D The percentage of companies engaging in competitive intelligence activities is

a. 10%.b. 30%.c. 50%.d. 80%.e. 90%.

23E The most popular form of forecasting is

a. statistical modeling.



b. scenario-writing.c. Delphi technique. d. brainstorming.e. trend extrapolation.

24B What is trend extrapolation?

a. The process of converting intuition and hunches into reality. b. The extension of present trends into the future. c. Process of asking some authorities in the area to make an "informed guess"

about the future. d. Given a large amount of historical data on certain interrelated factors, one

attempts to conceptualize alternative futures. e. Detecting faulty underlying assumptions before forecasting errors can occur.

25D A non-quantitative approach to forecasting that requires simply the presence of people with some knowledge of the situation to be predicted is called

a. simulations. b. the Delphi technique. c. signal monitoring. d. brainstorming. e. scenarios.

26C The most widely used forecasting technique used after trend extrapolation is

a. statistical modeling. b. simulations. c. scenario-writing.d. relevance trees. e. signal monitoring.

27B The technique recommended by the text to summarize an analysis of external factors is called

a. IFAS.b. EFAS.c. SFAS.d. SWOT.e. the issues priority matrix.


26 - Chapter Four Notes

CHAPTER FOUR

INTERNAL SCANNING: ORGANIZATIONAL ANALYSIS


• According to the resource-based view of the firm, a company's sustained competitive advantage is primarily determined by its resource endowments. A firm’s distinctive competencies can be identified using the VRIO framework in terms of a competency’s value, rareness, imitability, and organization.

• The two basic characteristics of a company's resources and capabilities that determine the sustainability of its distinctive competencies are durability and imitability.

• Value chain analysis can be used at both the industry level and at the corporate level to assess a corporation's strengths (competencies) and weaknesses.

• The basic organizational structures are simple, functional, divisional, SBU, and conglomerate.

• Corporate culture is the collection of beliefs, expectations, and values learned and shared by a corporation's members and transmitted from one generation of employees to another.

• The analysis of a corporation's internal environment includes not only an assessment of a firm's structure and culture, but also of its functional areas such as marketing, finance, research & development, operations, human resources, and information systems.

• An IFAS Table helps strategic managers to summarize their analysis of internal factors and forces them to prioritize each strength and weakness in terms of its importance to the future of the corporation.


1. What is the relevance of the resource-based view of the firm to strategic management in a global environment?

The resource-based view of the firm is an attempt to bring attention to the importance of a corporation's resources in strategic management. For much of the 1980s, Porter's concepts of industry analysis and competitive strategy dominated the field of strategic management to such an extent that many felt that industry structure alone seemed to determine a firm's profit potential. Unfortunately, this emphasis on the industry tended to ignore a firm's core skills and competencies. What good is the knowledge that a niche in the market exists that can be reached through a focused differentiation competitive strategy if a corporation doesn't have the resources to implement such a strategy? As noted in the text, experts on the resource-based view suggest that differences in performance among companies may be explained best, not through differences in industry structure identified by industry analysis, but through differences in corporate assets and resources and their application.


Chapter Four Notes - 27

The resource-based view of the firm is compatible with the traditional concepts of S.W.O.T. and distinctive competence popular in the field since the 1960s. The only danger with the resource-based approach is that people may go overboard again and tend to put too much emphasis on internal factors and not enough on external factors. Nevertheless, the idea that the durability and imitability of corporate resources determine competitive advance is a very useful one. The movement toward a more global environment simply accentuates the need to assess and to build a firm’s competencies so that it can successfully compete world-wide. A competency may be distinctive in one’s home country, but only be a core competency (or less) in another location in the world.

2. How can value chain analysis help identify a company’s strengths and weaknesses?

A value chain is a linked set of value-creating activities beginning with basic raw materials coming from suppliers, to a series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer. Industry value-chain analysis can identify which firms are strongest (and weakest) in each stage of the industry’s value chain. Assuming the firm under consideration operates at various stages of the industry value chain, a comparison with other firms at each stage can help identify a firm’s strengths and weaknesses. The systematic examination of an individual firm’s value activities in corporate value-chain analysis can lead to a better understanding of a corporation’s strengths and weaknesses - thus identifying any core or distinctive competencies. According to Porter, “Differences among competitor value chains are a key source of competitive advantage.”

3. In what ways can a corporation’s structure and culture be internal strengths or weaknesses?

If a corporation's structure is compatible with present and potential strategies, it can be viewed as an internal corporate strength. If, however, the structure is not compatible with either present or potential strategies, it is a definite weakness and will act to constrain strategy formulation. For example, if a corporation is structured on the basis of function, this may be a weakness if the firm wishes to grow by acquiring other profitable corporations. In order to implement such a strategy, the strategy formulators may have to reorganize on a divisional basis. To the extent that top and middle managers have no experience with such a structure, a lot of unforeseen problems can emerge which may seriously effect the success of the strategy.

Corporate culture, a collection of beliefs, expectations, and values shared by a corporation's members, acts to shape the behavior of people in a corporation. Since corporate culture has a powerful influence on the behavior of managers as well as other employees, it may strongly affect a corporation's ability to shift its strategic direction. Acting in a manner similar to structure, to the extent that a corporation's culture is compatible with present and potential strategies, it can be viewed as an internal corporate strength. To the extent that it is not compatible, it may spell disaster for a strategic change in the implementation stage. A strategy with contradicts an entrenched culture may find itself being quietly (or not so quietly) sabotaged by the corporation's most loyal and competent employees.

4. What are the pros and cons of management's using the experience curve to determine strategy?

Bruce Henderson of the Boston Consulting Group popularized the experience (or learning) curve concept in strategic management. Based on the assumption underlying the BCG



growth-share portfolio matrix, Henderson argues that the key to profits lies in market share. Results from PIMS research supports this notion. If a corporation is able to sell a very large number of new products by offering them at a very low price (actually below unit cost unless vast quantities are sold), it will gain a dominant market share and pre-empt competition by keeping the price too low for potential competitors to earn profits. This forms a formidable entry barrier. The corporation successfully using the experience curve will earn large profits either as a star or when it eventually becomes a cash cow. Certainly a glance at history supports Henderson's argument. Model-T Fords and Bic ball point pens are just two examples. The experience curve is thus a basis for using financial and operating leverage to achieve a low cost business-level strategy.

The experience curve concept does have its limitations, however. For one thing, it does not consider that a corporation can be very profitable with very low leverage by occupying a dependable niche in the marketplace based upon some differentiating strategy such as quality or snob appeal. Rolls Royce automobiles and Maytag washers are just two examples of firms ignoring the experience curve by pricing at a cost above the market price and still achieving solid profits. Differentiation and focus strategies can be very successful without using the experience curve. Another limitation of the experience curve is that much of its success is based upon economies of scale. The use of computers and robots, however, negates much of the experience curve advantages. The curve in a CAD/CAM plant might be so steep that all the experience advantages are learned in the production of two thousand instead of two million units. The implication is that a firm following Henderson's strategy of cost leadership based on an assumed experience curve might find it very difficult to reach the required high market share break-even point when its competitors using CAD/CAM can quickly meet its price in the marketplace by going quickly down their own experience curves. Although it is possible to have a number of successful niches in a given product/service market, only one star position is available in Henderson's growth-share matrix. The risk is therefore very high to a corporation contemplating a low cost strategy by using an assumed experience curve.

5. How might a firm's management decide whether it should continue to invest in current known technology or in new, but untested, technology? What factors might encourage or discourage such a shift?

Although technological discontinuity is discussed in the chapter, the answer to this question is not provided. Igor Ansoff recommends that strategic managers deal with the issue of technology substitution by (1) continuously searching for sources from which new technologies are likely, (2) as the technology surfaces, making a timely commitment either to acquire the new technology or to prepare to leave the market, and (3) reallocating resources from improvements in the older process-oriented technology to investments in the newer, typically product-oriented, technology as the new technology approaches commercial realization. In his book, The Innovator’s Dilemma, Christensen explains how difficult it is for a firm to continue to build and market its current products to its current customers using current, well-understood technology when it is trying to create new products for new customers using new, untested technology. The cost and time requirements to stay up to date with new and old technologies can bankrupt a company, especially given that a company’s culture, structure, and processes are primarily built around the old known technology.


A1. What is the difference between industry and corporate value chain analysis? What are their value in strategic planning?



The focus of value-chain analysis is to examine the corporation in the context of the overall chain of value-creating activities, of which the firm may be only a small part. In industry value-chain analysis, the value chain is split into two segments, upstream and downstream parts with the corporation under examination being the focal point. In analyzing the complete value chain of a product, note that even if a firm operates up and down the entire industry chain, it usually has a center of gravity - an area of primary expertise where its primary activities (and core competencies) lie. One goal of industry value-chain analysis is to identify where on the chain is the activity providing the greatest return on investment. This might be an activity which a corporation might want to expand when doing strategic planning.

In corporate value-chain analysis, each corporation has its own internal value chain of activities. Each of a company’s product lines has its own distinctive value chain. Because most corporations make several different products or services, an internal analysis of the firm involves analyzing a series of different value chains. The systematic examination of individual value activities can lead to a better understanding of a corporation’s strengths and weaknesses - thus supporting strategic planning.

A2. To gain competitive advantage, should a company invest in its core competencies (strengths) to make them distinctive competencies or should it invest in improving its weaknesses so that they are no longer a liability?

This is one of the toughest questions in strategic management. Unfortunately, there is no one best answer to this question. Most of the literature in strategy does not even deal with this issue, yet it is a crucial one. The heavy emphasis on building distinctive competencies in the literature seems to assume that the company has no significant weaknesses. A weakness, in itself, is not a problem unless it prevents the company from successfully implementing its strategy. One solution to this question is to argue that a company must do both: build distinctive competencies and eliminate core weaknesses. However, if there is insufficient money to do both, what then? If the weakness is an obstacle to effective strategy implementation, either the weakness must be fixed or the strategy changed. This should be a good discussion question - especially for grad students.

A3. What kind of internal factors help managers determine whether a firm should emphasize the production and sales of a large number of low-priced products or a small number of high-priced products?

The number of factors which can be discussed in answering this question are enormous. A few of the most important factors can be brought out by going through each functional area. For example, under marketing, a strong market research group may be able to identify the kinds of niches available to the products or services under consideration. In terms of finance, the production of a large number of low-priced products suggests a large capital intensive manufacturing facility. It may be possible, however, to produce a few high quality goods with a small amount of capital because the needed manufacturing facilities may be small, utilizing craft labor. R&D may be an important consideration also. In order to produce high-quality products, a fairly sophisticated applied R&D effort may be needed. An expensive engineering staff may be needed, in contrast, to design the assembly line needed to keep costs as low as possible for a low-priced product. The type of manufacturing system in place will, of course, be a dominant factor in choosing either approach. If the facilities are primarily job shop, for example, a plan to produce a large number of low-priced products would not be feasible in the short run. Costs would be extremely high because of the need for overtime and the lack of automated equipment. In terms of human resource management, a fairly unskilled and low paid workforce cannot normally be expected to produce a high quality product on old assembly line machinery. Either the workforce would need to be replaced or an extensive job training and job enrichment program would need to be established. Either approach costs both time and



money.


1A The VRIO framework evaluates a firm’s competencies by examining the variables of value, rareness, imitability, and

a. organization. b. objective.c. operating cash flow.d. outsourcing.e. ownership.

2D According to the resource-based view of the firm, which of the following is one of the two characteristics of resources and capabilities that are important in sustaining competitive advantage?

a. timeliness.b. certainty.c. translucence.d. durability.e. permeability.

3C The particular strengths and weaknesses that will help determine the future of the company are called

a. SWOT. b. competitive forces. c. internal strategic factors. d. quality accounting. e. factor analysis.

4C A core competency can be easily imitated to the extent that it is transparent, transferable, and

a. durable.b. cheap. c. replicable. d. tautological.e. qualitative.

5B The business model in which a company sells products, such as razors, at break-even pricing in order to sell higher-margin products, such as razor blades, is called the

a. time model.b. multi-component system.c. customer solutions model.d. switchboard model.e. efficiency model.



6C That part of an industry’s value chain that is most important to a company and the point where its greatest expertise and capabilities lay is called the company’s

a. distinctive competency.b. technological competence.c. center of gravity.d. core competency.e. key capability.

7A The structure of a corporation is often defined in terms of communication, authority, and work flow. Which of the following describes a typical functional structure?

a. Work is divided into subunits on the basis of areas like manufacturing and marketing.

b. Most appropriate for large corporations with many product lines in several related industries, with employees acting as specialists attempting to gain synergy among divisional activities.

c. Most appropriate for small, entrepreneur-dominated company with one or two product lines that operates in a small niche market, with employees acting as jack-of-all trades.

d. Employees having two or more superiors, a project manager and a functional manager.

e. Most appropriate for large corporations with many product lines in several unrelated industries, with employees acting as specialists but with no attempt at gaining synergy among the divisions.

8C Which of the following best describes a simple structure?

a. Work is divided into subunits on the basis of such functions as manufacturing and marketing.

b. Most appropriate for large corporations with many product lines in several related industries, with employees acting as functional specialists attempting to gain synergy among divisional activities.



e. Most appropriate for large corporations with many product lines in several unrelated industries, with employees acting as functional specialists but with no attempt at gaining synergy among the divisions.

9D Which one of the following is NOT one of the components that a SBU of any size or level must have?

a. unique mission b. identifiable competitors c. external market focus d. a coordinator of all SBUse. control of its business functions



10B Which one of the following best describes a divisional structure?






11E Which one of the following best describes a conglomerate structure?






12A What is the attribute of corporate culture that promotes the extent to which units within an organization share a common culture?

a. integration (p.63)b. strength c. intensity d. coordination e. unity

13C What is the attribute of corporate culture that is the degree to which members of a unit accept the norms, values, or other culture content associated with the unit?

a. integrationb. strength c. intensity d. coordination e. unity

14D The particular combination of product, place, promotion, and price is called



a. marketing position. b. product life cycle. c. market segmentation. d. marketing mix.e. marketing leverage.

15B A graph showing time plotted against the dollar sales of a product as it moves from introduction through growth and maturity to decline is called

a. marketing position. b. product life cycle. c. market segmentation. d. marketing mix. e. marketing leverage.

16C As compared to a firm with low financial leverage, a firm with a high amount of financial leverage in an expanding market should have

a. lower profits. b. higher profits c. higher earnings per share. d. lower earnings per share. e. higher sales revenue.

17E The analysis and ranking of possible investments in terms of additional outlays and additional needed receipts is called

a. financial leverage. b. investment evaluation. c. strategic study. d. break-even analysis. e. capital budgeting.

18E The process of taking a new technology from the laboratory to the marketplace is called

a. economies of scope versus operating leverage. b. the R & D mix. c. technological competence. d. technological discontinuity. e. technology transfer.

19B The concept that refers to a manufacturing facility's ability to reduce unit production costs of a new product by some fixed percentage as production increases is referred to as

a. the R & D mix. b. the experience curve.c. technological competence. d. break-even analysis. e. technology transfer.



20D Flexible manufacturing emphasizes

a. high-volume output of mass produced products. b. the cost advantages of intermittent system with the customer-oriented

advantages of continuous system. c. the learning curve is longer since technology is automated. d. economies of scope over economies of scale.e. economies of scale over economies of scope.

21D The term that describes putting once isolated specialists together to work and compare notes in a collective design effort is called

a. simultaneous strategy. b. participatory planning. c. jointly-designed objectives. d. concurrent engineering.e. cooperative design.

22B According to the text, the current trend regarding unions is that

a. they are experiencing a renewed sense of power. b. U.S. membership is declining. c. they have less significance for the management of multinational

corporations. d. they are maintaining an adversarial position to try to hold onto their

membership. e. corruption and scandal still taint their existence.

23A The technique recommended by the text to summarize an analysis of internal factors is called

a. IFAS. b. EFAS.c. SFAS.d. SWOT.e. the issues priority matrix.

24B Weight in column 2 of the IFAS Table refers to

a. management's current response to a particular factor.b. a particular factor's probable impact on that company's strategic position.c. the significance of a particular company within a particular industry.d. how well a company is performing in the industry.e. whether a factor is important in the long or short term.


Chapter Five Notes- 35

CHAPTER FIVE

STRATEGY FORMULATION: SITUATION ANALYSIS AND BUSINESS STRATEGY


• The basis of strategy formulation is S.W.O.T. analysis, an in-depth consideration of a company's Strengths, Weaknesses, Opportunities, and Threats. A Strategic Factors Analysis Table summarizes and condenses the external and internal factors identified earlier as EFAS and IFAS into strategic factors.

• After situation analysis and before considering alternative strategies, it is important to take the time to review the company's current mission and objectives. If they are inappropriate, change them.

• The TOWS (SWOT) Matrix combines Opportunities and Threats with Strengths and Weaknesses to suggest four possible alternative sets of strategies.

• Business strategy is concerned with improving the competitive position of a company's or business unit's products or services within a specific industry or market segment.

• Porter proposes differentiation and lower cost as the two basic competitive strategies. If the strategies are aimed at a specific market segment or niche, they are called focus strategies and designated as differentiation focus or cost focus.

• A tactic is a specific operating plan specifying how a strategy is to be implemented in terms of when and where it is to be put into action. These may be timing or location tactics.

• Cooperative strategy is usually conducted via strategic alliances. Mutual service consortia, joint ventures, licensing arrangements, and value-chain partnerships are types of strategic alliances.


1. What industry forces might cause a propitious niche to disappear?

The argument for a propitious niche implies that a corporation with such a niche will be successful so long as it fills that niche. This niche is the specific competitive role held by a corporation, division, or product/service. A "propitious" niche is that which is so well-suited to the firm's internal and external environment that competitors are not likely to challenge or dislodge it. In terms of automobiles, both Rolls Royce and Morgan fill two very different niches in the auto industry.

The key to answering this question is understanding that a propitious niche exists not only because of environmental opportunities, but also because a company has the resources to take advantage of these opportunities. Therefore a niche can disappear because of changes within a company as well as because of environmental changes. Some of the possible changes are:


36 - Chapter Five Notes

a. The environment/industry changes. The company/SBU continues to make its products or services, but the size of the market changes.

1) Contracts - The market gets smaller because of factors beyond the control of the company/SBU. For example, the increasing price of gasoline in 2008 contracted the market for gas-guzzling performance-oriented automobiles. The niche could then only support the strongest companies/SBUs.

2) Expands - The company/SBU, through its own efforts, not only fills a demand in the market but actually causes the market to expand. Unless the company/SBU can manufacture sufficient products to meet growing demand or is able to defend a patented process (as Proctor & Gamble did with Crest-Fluoride toothpaste for years), profit opportunities will cause competitors with sufficient internal resources to join the niche. Such competitors may be stronger and drive the original company/SBU out of the market, thus causing it to lose its niche.

b. The company/SBU Changes. The same market demand continues for specific products or services, but the company/SBU itself changes so that there is no longer a synchronization between itself and the market.

1) Contracts - Due to demands for resources elsewhere in the corporation, the company/SBU may be forced to cut back its activities. It is unable to satisfy market demand. Customers either leave the market by buying a substitute product or stay in the market by buying a competitor's product. Such unfulfilled demand encourages competitors which may drive the original company/SBU out of the niche.

2) Expands - Its own success in the niche may cause the company/SBU to move into nearby niches. The need for resources in the battle for new niches may cause the company/SBU to take its original niche for granted. Small competitors may take advantage of the lack of concern by fighting to expand their piece of the market, thereby squeezing the company/SBU out of the original market and thus out of its niche.

If a company/SBU loses its niche, it is likely to become much less profitable unless it can find a new niche. The specifics of what might happen depends upon how the company/SBU originally lost its niche. The possibilities for class discussion can be almost endless.

2. Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously? Why or why not?

Michael Porter argues that a business unit which is unable to achieve one of the competitive strategies is likely to be "stuck in the middle" of the competitive marketplace with no competitive advantage. That unit, according to Porter, is doomed to below-average performance. (See Porter's Competitive Advantage, page 16.) Research by Greg Dess and Peter Davis as well as by Rod White, suggests however, that this may not be the case. Examples can be found of businesses which have been able to jointly follow overall low cost and high quality differentiation strategies. Japanese companies such as Toyota in automobiles and Panasonic in consumer electronics are good examples. Their offer of low price and high quality created serious problems for those companies following only one competitive strategy in the U.S.



3. Is it possible for a company to have a sustainable competitive advantage when its industry becomes hypercompetitive?

In his book Hypercompetition, D’Aveni proposes that it is becoming increasingly difficult to sustain a competitive advantage for very long. Consequently, a company or business unit must constantly work to improve its competitive advantage or else it will not be sustainable. It is not enough to be just the lowest cost competitor. Through continuous improvement programs, competitors are usually working to lower their costs as well. Firms must find new ways not only to reduce costs further, but also to add value to the product or service being provided. The same is true of a firm or unit that is following a differentiation strategy.

According to D'Aveni, companies in a hypercompetitive industry learn to quickly imitate the successful strategies of market leaders - making it increasingly difficult to sustain any competitive advantage. Competitive advantage in a hypercompetitive industry comes from an up-to-date knowledge of environmental trends and competitive activity coupled with a willingness to risk a current advantage for a possible new advantage. Companies must thus be willing to cannibalize their own successful products in order to sustain their competitive advantage. Since hypercompetitive industries go through escalating stages of competition, the only real sustainable competitive advantage lies not in a corporation's product line, but in its ability to learn and to adapt to constantly changing conditions.

4. What are the advantages and disadvantages of being the first mover in an industry? Give some examples of first mover and late mover firms. Were they successful?

The first company to manufacture and sell a new product or service is called the first mover or pioneer. Research indicates that pioneers in industries not only tend to obtain higher market shares than do later entrants, but that they tend to enjoy a long-term advantage over their rivals. This occurs because the first mover has certain advantages: (1) The company is able to establish a reputation as a leader in the industry. (2) The company is able to move down the experience curve to gain economies of scale which it can use to under price the competition, plow into R&D to improve the product, or skim off good profits early by keeping the price high before competition moves into the industry. A good example of a first mover firm is Apple Computer - for all practical purposes the inventor of the personal computer. It was the first computer to be "user friendly." Consumers could learn how to use the PC quickly and they were fascinated with Apple's graphic capabilities. By continuing to emphasize "user friendly" personal computers using its own specially-developed software, Apple was able to keep and build the home and school markets while other competitors flailed unsuccessfully against IBM for the business market.

Late mover firms can have certain advantages as well. Like IBM in the 1980s and Dell in the 1990s, they can wait until demand has been developed by the pioneer. They can evaluate which product ideas work and which tend to fail. They can look for weaknesses in the current competition and develop a product to get around these weaknesses. IBM, for example, noted Apple Computer's difficulty in being accepted in business firms - a market where IBM had tremendous strength and customer loyalty. Instead of having to develop everything internally, IBM was able to use a large number of outside vendors, like Microsoft and Intel among others, to supply almost everything it needed (in terms of software and hardware) to make and market its IBM PC. IBM and Dell were successful because of their ability to envision trends in personal computers. Dell was able to foresee the trend toward



low cost computers and was able to replace IBM as industry leader through value chain efficiencies.

5. Why are most strategic alliances temporary?

The temporary nature of most strategic alliances comes from their rationale for being established. Alliances are usually formed in order to remedy a weakness or to generate a new strength. It is thus an admission that a firm cannot achieve an objective on its own. Alliances may be formed in order to obtain access to a new technology or manufacturing facilities, enter a new market, reduce financial or political risk, and/or achieve competitive advantage. It is thus likely that many firms enter alliances with the primary goal of learning from the alliance how to overcome an identified weakness or how to build a competitive advantage. Once a firm learns what it needs, it has less reason to continue with the alliance. Why share with a partner profits that a company now can earn on its own? This is likely to be especially true to the extent that the environment is highly uncertain. Strategic alliances became especially popular during the 1990s when too much vertical integration kept a firm from adapting successfully to changing conditions.


A1. How does the Strategic Factors Analysis Summary (SFAS) aid in strategy formulation?

The basic building block of strategy formulation is S.W.O.T. analysis. The Strategic Factors Analysis Summary (SFAS) Matrix is one suggested way to summarize and combine a corporation's external and internal strategic factors. It pulls the most important factors from the EFAS and IFAS Tables. The SFAS Matrix requires the strategic manager to condense the many internal and external factors into less than 10 factors to be more manageable. The SFAS Matrix thus contains only the most important factors and provides the basis for strategy formulation. It is an advanced form of situation analysis in that it enables a strategist to do a second "cut" at identifying strategic factors after doing a first "cut" when generating EFAS and IFAS Tables.

A2. What is the value of the TOWS Matrix in strategy formulation? Do you agree with this way of generating strategic alternatives? Why or why not?

The TOWS Matrix illustrates how management can match the external opportunities and threats facing a particular corporation with its internal strengths and weaknesses to yield four sets of strategic alternatives. The real value of this technique is not to suggest a particular strategy the firm should follow, but to act as a brainstorming tool to help create a series of alternative strategies management might not otherwise consider. It forces strategic managers to develop both growth and retrenchment strategies, even though they might not believe at first that both sets of strategies are applicable to their corporation's situation. The TOWS Matrix is a logical extension of SWOT Analysis and helps keep strategic managers flexible in terms of possible options.

A3. How can a company overcome the limitations of being in a fragmented industry?

As pointed out in the text, a fragmented industry is an industry with many small and medium-sized companies competing for relatively small market shares. No one firm or group of firms is able to dominate the industry in any way. Businesses tend to be local and oriented to market segments. This may occur because the industry is relatively new -



based upon a product in the early stage of its product life cycle. Entry barriers are probably low and new entrants are constantly moving into the industry as others leave or go bankrupt. If there are few economies to be gained from size or no one design ever reaches the point of consumer acceptance, the industry may remain in this stage indefinitely. Often, however, the trick to be a successful firm in this kind of industry is to find the key to standardization which allows economies.

Before IBM entered the personal computer marketplace, that industry was relatively fragmented. Apple Computer had successfully carved out a niche, but had not been widely adopted for business tasks. Market share was divided among a large number of products. The problem of entry and exit into the industry was so bad that experts advised people to beware of buying an "orphan" - a PC that would soon be discontinued when its manufacturer left the PC business! IBM broke the cycle by working with Microsoft to develop a well-designed disk operating system (DOS) for its own PCs. Microsoft's MS-DOS soon became the standard of the industry behind IBM's marketing clout.

Domino's Pizza achieved similar success in fast food by providing standardized pizza throughout North America and by guaranteeing delivery time faster than competition. Before Pizza Hut and Domino's settled upon standardized pizza appealing to a wide variety of tastes across North American, the pizza business was a fragmented industry characterized by many small pizza "parlors" serving small market segments in cities throughout America.

A4. How might the resource-based view influence decisions seeking the advantage of being a first mover?

The resource-based view of the firm proposes that a firm's competitive advantage is primarily determined by its resource endowments. These resource endowments enable a company to develop distinctive or core competencies which provide relatively long-term competitive advantage to the extent they are durable and are not imitable. These are slow-cycle resources. To the extent that the resources and competencies are not so durable and are relatively imitable, they are fast-cycle resources. When a company is competing in an industry where it is possible to develop slow-cycle resources, it makes sense to strive to be a first mover. Being a first mover takes time and money. A first mover needs plenty of time after a product is introduced to earn the money to pay off its investment in R & D and earn a profit. Slow-cycle resources which are durable and enduring are likely to provide the long-term competitive advantage needed to recoup that investment. In an industry where the resources are primarily fast-cycle, competitive advantage is relatively short-lived. Since there is much less time for a firm to recoup its investment, there is less advantage to being a first mover. In this kind of situation, being a flexible late mover may be more profitable.


1C An acronym for the assessment of the external and internal environments of the business corporation in the process of strategy formulation/strategic planning is

a. P.E.T. b. M.B.O. c. S.W.O.T.d. S.B.U. e. R.O.I.



2B A SFAS Matrix differs from the EFAS and IFAS Tables by adding a new column called

a. weight.b. duration.c. rating.d. comments.e. weighted score.

3A A corporation's specific competitive role, which is so well-suited to the firm's internal and external environment that other corporations are NOT likely to challenge or dislodge it, is called a

a. propitious niche.b. strategic fit. c. common thread. d. business screen. e. implicit strategy.

4D The technique that illustrates how management can match the external opportunities and threats with its strengths and weaknesses to yield four sets of strategic alternatives is called a (an)

a. IFAS Table.b. EFAS Table.c. SFAS Table.d. TOWS Matrix.e. Issues Priority Matrix.

5B Business strategy focuses on

a. ensuring that the company maintains the existing market share that it has historically enjoyed.

b. improving the competitive position of a corporation's products or services within a specified market segment.

c. providing adequate shareholders' return on investment. d. preventing the competition from gaining a competitive edge by undermining

their marketing plan. e. recovering the competitive lead by using all available resources that the

company can provide.

6E According to Porter, the competitive strategy that applies to the ability of the corporation or its business unit to design, produce, and market a comparable product more efficiently than its competitors is called

a. competitive scope. b. differentiation. c. concentration. d. diversification. e. lower cost.

7B According to Porter, the competitive strategy that applies to the ability to provide unique and superior value to the buyer in terms of product quality, special features,



or after-sale service is called

a. competitive scope. b. differentiation.c. concentration. d. diversification. e. lower cost.

8A According to Porter, the term that applies to the breadth of a company's target market is called

a. competitive scope.b. differentiation. c. concentration. d. diversification. e. lower cost.

9C When lower cost and differentiation strategies have a narrow focus on a market niche they are simply called

a. cost leadership and differentiation. b. concentration and differentiation. c. cost focus and differentiation focus. d. competitive scope and focused differentiation. e. diversification and concentration.

10E Which of Porter's competitive strategies recommends that a company emphasize a particular buyer group or geographic market and attempts to serve only this niche market in order to be more efficient?

a. differentiation b. cost leadership c. differentiation focus d. competitive advantage e. cost focus

11C Which of Porter's competitive strategies concentrates on a particular buyer group, product line segment, or geographic market so that a company can serve its market more effectively?

a. differentiation b. cost leadership c. differentiation focusd. competitive advantage e. cost focus

12C According to Porter, a business unit in a competitive marketplace with no competitive advantage is

a. achieving synergy. b. practicing innovative leadership. c. stuck on the middle.d. not goal directed. e. last in line.



13D Midamar Corporation, the maker of halal foods, successfully follows a strategy of

a. cost leadership.b. cost focus.c. differentiation. d. differentiation focus. e. cost differentiation.

14B Focus strategies will likely predominate when many small and medium-sized local companies compete for relatively small shares of the total market in a(n)

a. united industry. b. fragmented industry.c. consolidated industry. d. isolated industry. e. integrated industry.

15C As an industry matures while overcoming fragmentation and becomes dominated by a small number of large companies, it tends to become a(n)

a. united industry. b. fragmented industry. c. consolidated industry.d. isolated industry. e. integrated industry.

16A A tactic is defined by the text as

a. a specific operating plan specifying how a strategy is to be implemented in terms of how, when, and where it is to be put into action.

b. the first company to manufacture and sell a new product or service. c. any action by a company or business unit that provides a direct or indirect

indication of its intentions, motives, goals, or internal situation. d. policies which link formulation and implementation of the strategy. e. the ability to adapt a product or delivery system more closely to buyers' needs.

17D Which offensive tactic utilizes a head-to-head approach with the firm's competitor by matching every category of competition from price to promotion to distribution channel?

a. flanking maneuver b. bypass attack c. encirclement d. frontal assault e. guerilla warfare

18A Which offensive tactic advocates attacking a part of the market where the competitor is weak?

a. flanking maneuverb. bypass attack c. encirclement



d. frontal assault e. guerilla warfare

19B Which offensive tactic proposes an indirect approach against the established competitor such as changing the rules of the game?

a. flanking maneuver b. bypass attackc. encirclement d. frontal assault e. guerilla warfare

20D Which defensive tactic acts to block a challenger's logical avenues of attack such as exclusive agreements with distributors or an increase scale economies to reduce unit costs?

a. guerilla warfare b. lower the inducement for attack c. encirclement d. raise structural barriers e. increase expected retaliation

21D The kind of strategic alliance in which there is a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too expensive to develop alone is the

a. joint venture.b. licensing agreement.c. value-chain partnership.d. mutual service consortia.e. holding company.

22C The kind of strategic alliance in which a company forms a strong and close long-term relationship for mutual advantage with a key supplier or distributor is the

a. joint venture.b. licensing agreement.c. value-chain partnership.d. mutual service consortia.e. holding company.

23E Which of the following is NOT a reason for forming a strategic alliance?

a. obtain access to specific marketsb. reduce financial riskc. reduce political riskd. achieve competitive advantagee. develop secret proprietary technology.


44 - Chapter Six Notes

CHAPTER SIX

STRATEGY FORMULATION: CORPORATE STRATEGY


• Corporate strategy deals with three key issues facing the corporation as a whole: the firm's overall orientation toward growth (directional strategy), the industries in which the firm competes (portfolio analysis), and the manner in which management coordinates activities, transfers resources, and cultivates capabilities among units (parenting strategy).

• Directional strategies may be growth, stability, or retrenchment.

• Directional growth strategies are composed of concentration via vertical or horizontal growth and diversification via concentric or conglomerate means.

• Stability strategies are composed of pause, no change, and profit. These are typically temporary.

• Retrenchment strategies are composed of turnaround, captive company, selling out/divestment, and bankruptcy or liquidation.

• Portfolio analysis (specifically the BCG Growth Share Matrix and the GE Business Screen) is a useful technique for evaluating the contributions of various business units to corporate performance. It can also be useful to coordinate multiple strategic alliances.

• Parenting strategy deals with what businesses the company should own and with what structure, management processes, and philosophy it should foster superior performance from the company's business units.


1. How does horizontal growth differ from vertical growth as a corporate strategy? From concentric diversification?

Students often confuse these three strategies. Horizontal growth is the expanding of a firm's activities into other geographic regions and/or by increasing the range of products and services offered to current markets. It often involves the acquisition of another firm in the same industry (an example of external growth), but it could also be through the expansion of a firm's products in its current markets (e.g., through line extensions) or expansion into another geographic region (an example of internal growth). One example of external horizontal growth was Delta Airlines’ purchase of Northwest Airline. An internal example was Lowe’s expansion out of the southern U.S. into the rest of North America. Vertical growth, in contrast, involves a firm's taking over a function previously performed by a supplier or a distributor. This would typically involve the addition of activities in other industries either forward (downstream) or backward (upstream) on the value chain of current products or services. The additions are primarily justified in terms of support of the current product lines regardless of their being in other industries (and thus can be argued


Chapter Six Notes- 45

to be diversification). Concentric diversification, in contrast, is the addition of products or divisions which are related to the corporation's main business, but are added because of the attractiveness of other industries rather than because they support the activities of the current product lines. The additions may be through acquisition or through internal development. The firm buys or develops another division which is similar to its present product-line. PepsiCo's diversification into snack foods to complement its line of soft drinks is an example of concentric diversification. The products are not alike, but have a "common thread" in distribution channels relating them. If Coca Cola bought PepsiCo, it would be an example of horizontal growth in the same industry. If it purchased its current distributors, this would be an example of forward vertical growth. Coca Cola’s acquisition of Taylor Wines, however, was an example of concentric diversification out of the soft drink industry.

2. What are the tradeoffs between an internal and an external growth strategy? What approach is best as an international entry strategy?

Research suggests that there is no significant sales or profit advantage to either external or internal growth. There are, however, some tradeoffs for each approach. Here are some of them:

INTERNAL GROWTH

Pros

More likely to be based on some proprietary development giving competitive advantage.

More likely to fit well with current business units/products Can finance slowly out of retained earnings. If plan no good, can always cut losses before in too deep.

Cons

May take a long time to develop a new product or new concept. May be hard to get current managers to try something new. May ignore other uses of money with quicker return. Favored program may take time away from current businesses

EXTERNAL GROWTH

Pros

Can grow quickly. Good way to use financial leverage to boost EPS. Don't have to build anything from scratch. Can generate a lot of excitement on Wall Street and boost stock price.

Cons

All or nothing gamble. Need a lot of money and/or financial moxie to do it right. Can purchase someone else's problems. 50% of all acquisitions fail to achieve the purchaser's objective.



In terms of international entry strategies, internal growth through green field development is usually expensive and time consuming, but allows the firm to use its own competencies to achieve success. Joint ventures, licensing, and acquisitions take less time and are often less expensive at first, but may end up being more expensive if the other firm has a lot of problems.

3. Is stability really a strategy or is it just a term for no strategy?

An argument can be made that stability is not really a strategy in itself, but is just a pause between strategies. Since one way to view strategy is as a direction the corporation is taking in order to reach its objectives, standing still has no direction and thus is not a strategy. The text takes the position, however, that stability is a strategy in itself. Just as no decision is the same as making a decision, it is argued that even though stability may be viewed as not choosing a strategy, it is therefore a strategy by default. Stability may be a very appropriate long-term strategy for a small business in which the owner/manager does not want the corporation to grow beyond his/her abilities to manage it personally and is very happy with the level of life style the business provides. Typically, however, stability is perceived only as a viable short-term strategy while management is waiting for key factors needed for growth to fall into place. Nevertheless, to the extent that stability helps explain the movement of a corporation toward its objectives, it deserves to be called a strategy.

4. Compare and contrast S.W.O.T analysis with portfolio analysis.

These two approaches are alike in a number of ways. They are both attempts to summarize the key strategic factors coming out of an in-depth analysis of the external and internal environment of a corporation or business unit. They are also memorable buzz-words for use in the situational analysis. Terms like S.W.O.T., cash cows, and dogs help remind the student that the basis of strategic management is environmental assessment.

They are different in terms of what they stand for. S.W.O.T. is merely an acronym for Strengths, Weaknesses, Opportunities, and Threats. It is not really a technique to aid in situation analysis. It merely is a buzz-word to help a person remember to search for strategic variables. Portfolio analysis, in contrast, is a term for a whole series of different techniques for analyzing internal and external environmental factors. Neither is really a substitute for the other and can actually complement each other.

5. How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in a global industry?

The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer. According to the text, portfolio analysis attempts to answer the following two questions:

• How much of our time and money should we spend on our best products and business units in order to ensure that they continue to be successful?

• How much of our time and money should we spend developing new costly products, most of which will never be successful?

The basic theme of portfolio analysis its emphasis on cash flow. Portfolio analysis puts corporate headquarters into the role of an internal banker. In portfolio analysis, top management views its product lines and business



units as a series of investments from which it expects to get a profitable return. The product lines/business units form a portfolio of investments which top management must constantly juggle to ensure the best return on the corporation's invested money.

Corporate parenting attempts to answer two similar, but different questions:

• What businesses should this company own and why?

• What organizational structure, management processes, and philosophy will foster superior performance from the company's business units?

Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by managing business units for cash flow, that is, by using cash generated from mature units to build new product lines. Unfortunately, portfolio analysis fails to deal with the question of what industries a corporation should enter or with how a corporation can attain synergy among its product lines and business units. As suggested by its name, portfolio analysis tends to primarily take a financial point of view and views business units and product lines as if they were separate and independent investments. Corporate parenting, in contrast, views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units. The central job of corporate headquarters is not to be a banker, but to coordinate diverse units to achieve synergy. This is especially important in a global industry in which a corporation must manage interrelated business units for global advantage. Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse product lines/business units to achieve better overall corporate performance.


A1. Must a corporation have a common thread running through its many activities in order to be successful? Why or why not?

The concept of a corporate mission implies that throughout a corporation's many activities, there should be a "common thread" or unifying theme, and that those corporations with such a common thread are better able to direct and administer their many activities. This is one way to achieve a "strategic fit" so that overall corporate effectiveness and efficiency are achieved. There are, however, a number of corporations which do not have a common thread connecting their divisions, yet are successful. These corporations are often referred to as conglomerates because they are an assemblage of separate firms having different products in different markets but operating together under one corporate umbrella. Operating in effect as holding companies, they typically have no real common thread other than return on investment (i.e., financial synergy). Berkeley Hathaway and General Electric are just two of the many examples of successful conglomerates. They can be very successful because their operations in many diverse businesses allow them to spread their risks over many different markets. Just as the common thread concept implies a heavy marketing orientation, the conglomerate approach implies a heavy finance orientation. The lack of concern for a common thread enables a conglomerate to acquire and sell off divisions without regard to any synergy other than financial. Corporate strategy makers are thus able to focus entirely on ROI. They only need to involve themselves in divisional (business) strategies to the extent that funds are requested to support the strategies. The problem with this approach, however, is that corporate top management typically does not understand divisional problems in any sense other than financial and is thus strongly tempted to sell off troubled divisions rather than help them recover. One could therefore conclude that a common thread is not necessary for corporate success, at least in the short run. The classic article by Hayes and Abernathy ("Managing Our Way to Economic Decline," HBR, July-August, 1980), does imply, however, that such a heavy financial orientation leads to short-run thinking and may actually cause long-run decline.



A2. What is the value of portfolio analysis? Its dangers?

Portfolio analysis is the most recommended approach to aid the integration and evaluation of environmental data. It is just as useful for a single business corporation with a number of separate products as it is for a large corporation with autonomous operating divisions. By carefully examining both market or industry factors and business strengths or market share, it is possible to pinpoint factors of strategic importance to corporate or divisional success. Portfolio analysis thus serves as a convenient technique for comparing external opportunities and threats with internal strengths and weaknesses.

A3. What concepts or assumptions underlie the BCG growth-share matrix? Are these concepts valid? Why or why not?

The product life cycle and the experience curve underlie the BCG growth-share matrix. The development of question marks into stars and then into cash cows suggests the introduction, growth, and maturity stages of the product life cycle. Dogs appear to be those products or units on the decline stage of the product life cycle. The experience curve is certainly key to understanding the implications of the BCG matrix. The experience curve is based on the idea that unit production costs decline by some fixed percentage as the accumulated volume of production in units doubles. In order in make a question mark product a star, the suggested manufacturing strategy is to build capacity ahead of demand in order to achieve the lower unit costs that develop from the experience curve. On the basis of some future point on the experience curve, the idea is to price the product very low to preempt competition and quickly increase market demand and thus market share. The resulting high number of units sold and high market share should result in high profits when overall market growth slows and the company reduces its investment in the product - thus a cash cow is born.

Both of these concepts are well known and useful ways to conceptualize the useful lives of specific products and of the relation of unit costs to volume. Unfortunately, they lose some of their value when they are taken too much at face value and generalized too far. Different products have different product life cycles. What applies to one product probably will not apply to another. Examples can be shown of companies which have supported their products to extend their lives by "putting a tail" on the maturity part of the curve. As the text points out, the experience curve of the industry as a whole or of one company might not hold true for a particular company. The experience curve does not "just happen"; a firm has to invest a lot of time and money into getting that experience. The trend toward computerized robot technology and flexible manufacturing means that learning times (and thus experience time) are becoming shorter and products can now be economically manufactured in small, customized batches instead of in large assembly-line production. This potential quick movement down the experience curve coupled with the ability to target an increasing number of market niches may mean that the strategy of building large mass-production facilities ahead of demand may be doomed to failure. Future market share may be composed of a series of market segments - each with their own specialized (and thus low volume) product. In this instance, the prescriptions of the BCG matrix will not be useful and may in fact hurt a company if applied as given.

A4. Is the GE Business Screen matrix just a more complicated version of the BCG growth-share matrix? Why or why not?

The answer to this question should be yes and no. At a basic level, the answer is certainly affirmative. Both the GE and the BCG matrixes list the external environment on one axis of a matrix and the internal environment on the other. The GE matrix expands the number of



cells from four to nine and uses a series of measures instead of just one to specify the value of the variable given for each axis. The terms given to each cell are very comparable to those given to the cells in the BCG matrix.

At a deeper level of analysis, the answer may also be negative. The GE Business Screen is much more than just a complicated version of the BCG growth-share matrix. Whereas the BCG matrix is based on some assumptions concerning the experience curve and the link of market share with cash flow and profitability, the GE matrix contains no such assumptions. In fact, one is given the opportunity to use whatever assumptions one feels are valid to generate the various criteria, weights, and ratings to calculate the value for each axis of the GE matrix. It makes no statement, as does the BCG matrix, that market share is the same as competitive position (with all that that assumes) or that a product line's growth rate is the same as industry attractiveness (with all that that assumes).

A5. What determines whether a company should make or buy key inputs for its products?

The decision to make key inputs (vertical growth strategy) may be done in order to reduce costs, gain control over a scarce resource, guarantee quality of a key input, or obtain access to potential customers. This growth can be achieved either internally by expanding current operations or externally through acquisitions. Henry Ford, for example, used internal company resources to build his River Rouge Plant outside Detroit. The manufacturing process was integrated to the point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot. In contrast, Cisco Systems, the maker of Internet hardware, chose the external route to vertical growth by purchasing Radiata, Inc., a maker of chip sets for wireless networks. This acquisition gave Cisco access to technology permitting wireless communications at speeds previously only possible with wired connections. Vertical growth is a logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry - especially when technology is predictable and markets are growing. To keep and even improve its competitive position, the company may use backward integration to minimize resource acquisition costs and inefficient operations as well as forward integration to gain more control over product distribution. The firm, in effect, builds on its distinctive competence by expanding along the industry’s value chain to gain greater competitive advantage.

Transaction cost economics proposes that vertical growth (integration) is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great. When highly vertically integrated firms become excessively large and bureaucratic, however, the costs of managing the internal transactions may become greater than simply purchasing the needed goods externally - thus justifying outsourcing over vertical growth.


1A Which strategy specifies the firm's overall direction in terms of its general orientation toward growth, the industries or markets in which it competes, and the manner in which it coordinates activities and transfers resources among business units?

a. corporateb. functional



c. divisional d. organizational e. business

2B Which kind of corporate strategy deals with the firm's overall orientation toward growth?

a. portfolio strategyb. directional strategy c. parenting strategyd. cooperative strategye. functional strategy

3A Which kind of corporate strategy deals with the industries or markets in which the firm competes through its products and business units?

a. portfolio strategyb. directional strategyc. stability strategyd. cooperative strategye. functional strategy

4C Which kind of corporate strategy deals with the manner in which the firm coordinates activities and transfers resources and cultivates capabilities among product lines and business units?

a. portfolio strategyb. directional strategyc. parenting strategyd. cooperative strategye. functional strategy

5E Which is the opposite of a vertical growth strategy?

a. horizontal growth.b. concentrationc. diversification d. acquisitione. outsourcing

6B Which one of the following strategies is most frequently used in corporations?

a. stability b. growth c. consolidation d. retrenchment e. renewal

7A A disadvantage of vertical growth is that it



a. creates exit barriers. b. improves coordination of activities. c. increases the cost of improvement of coordination and control. d. creates entry barriers. e. avoids time consuming tasks.

8E A firm's expansion into other geographic locations and/or increasing the range of products and services offered to current markets is called

a. forward vertical growth. b. diversification c. backward vertical growth. d. captive company strategy. e. horizontal growth.

9C Adding a related or complementary product to a corporation's business units is called

a. concentration. b. horizontal growth. c. concentric diversification. d. vertical growth. e. conglomerate diversification.

10E Growth through diversification out of an industry into an unrelated industry is called

a. concentration. b. horizontal growth. c. concentric diversification. d. vertical growth. e. conglomerate diversification.

11D Which international entry strategy involves constructing a manufacturing facility for a fee?

a. franchisingb. joint venture c. green-field development d. turnkey operatione. management contract

12C Which international entry strategy involves building a manufacturing facility and distribution system from scratch?

a. franchisingb. joint venture c. green-field developmentd. turnkey operation



e. management contract

13A Which strategy is most appropriate as a temporary strategy to enable a corporation to consolidate its resources after prolonged rapid growth in an industry now facing an uncertain future?

a. pause strategy b. no change strategy c. retrenchment strategy d. horizontal strategy e. profit strategy

14E Which strategy is descriptive of a corporation in a mature industry facing a drop in its attractiveness, opting to decrease short-term discretionary expenses to maintain profits at a certain level?

a. pause strategy b. no change strategy c. retrenchment strategy d. growth strategy e. profit strategy

15B Which strategy involves giving up management of the firm to the courts?

a. liquidation b. bankruptcyc. diversification d. divestment e. consolidation

16C What is a turnaround strategy?

a. A form of divestment and is appropriate when corporate problems can be traced to the poor performance of an SBU or product line.

b. Occurs when the corporation becomes "captive" to another firm. c. Emphasizes improving operational efficiency and is appropriate when a

corporation's problems are pervasive, but not yet critical. d. Occurs when a corporation liquidates all its assets. e. It involves adding different products or divisions to the corporation.

17E In the Boston Consulting Group's growth-share matrix, the relative competitive position of a product, division, or corporation is defined as

a. its market share. b. its gross sales divided by its market share. c. its market share multiplied by that of its nearest competitor. d. its market share divided by that of the smallest other competitor. e. its market share divided by that of the largest other competitor.

18B The growth-share matrix of the Boston Consulting Group suggests that the excess cash being generated by "cash cows" should be used to fund

a. "dogs."



b. "question marks." c. "stars." d. "white knights." e. "buckets."

19D New products which are typically introduced in a fast-growing industry are called

a. cash cows. b. lost leaders. c. dogs. d. question marks. e. stars.

20E According to the BCG growth-share matrix, the key to success is

a. effective management. b. competitive positioning. c. innovative initiative. d. R&D. e. market share.

21E Which of the following is defined by GE as one of the variables forming business strength/competitive position?

a. industry profitability b. competitive diversity c. market growth rate d. market size e. market share

22B Which of the following is NOT one of the advantages of portfolio analysis?

a. The graphic depiction facilitates communication. b. It provides the basis for impartial objectivity from which to make decisions.c. It encourages top management to evaluation each of the corporation's

businesses individually. d. It raises the issue of cash flow availability for use in expansion and growth. e. It stimulates the use of externally oriented data to supplement management's

judgment.

23A Corporate parenting generates corporate strategy by focusing on

a. the core competencies of the parent corporation and on the value created from the relationship between the parent and its units.

b. the cash flow among its business units.c. whether a business unit should be growing, stabilizing, or retrenching.d. acquiring distinctive competencies in the marketplace.e. differentiating its activities into separate units and integrating these activities

through complex integrating mechanisms.

24B A corporate strategy that cuts across divisional boundaries to build synergy across



business units to improve the competitive position of one or more business units is called

a. vertical strategy. b. horizontal strategy. c. hierarchical strategy. d. portfolio strategy. e. pyramid strategy.

25C Business firms that compete with each other not only in one business unit, but in a number of related business units are said to be engaging in

a. oligopolistic competition. b. strategic competition. c. multipoint competition d. laissez-faire competition. e. horizontal competition.


Chapter Seven Notes- 55

CHAPTER SEVEN

STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE


• Functional strategy maximizes resource productivity so that a distinctive competence will develop to provide a company or business unit a competitive advantage. Among the many functional strategies are marketing, financial, R&D, operations, human resource management, and information technology strategies.

• Outsourcing is purchasing from someone else a product or service that had been previously provided internally. Purchase only those activities that are not key to the company's distinctive competence.

• Corporate scenarios use spreadsheets to develop pro forma financial statements as a decision aid in choosing the best alternative strategy.

• Strategic decision-makers must keep in mind questions of acceptable risk levels, pressures from stakeholders and the corporate culture, as well as the needs and desires of key managers when selecting an alternative.

• Once a set of strategies are formulated, policies must be established to define the ground rules for those charged with implementing the strategies.


1. Are functional strategies interdependent, or can they be formulated independently of other functions?

Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. Each company or business unit has its own set of functional departments, each with its own functional strategy. Because the orientation of each functional strategy is dictated by its parent unit’s business strategy, functional strategies must interrelate if they are to be successful. For example, a company’s business competitive strategy of differentiation through high quality means that each functional strategy must support high quality. Distribution (part of marketing strategy) will probably be through quality distributors and retailers that emphasize customer service and support. Operations will probably emphasize highly skilled employees and flexible manufacturing to adjust production to customer requests. Even though both of these functional strategies can be formulated independently, they will need to mesh with each other if the competitive strategy is to be properly supported. Although this has traditionally been a job of the general manager in charge of the parent SBU, it is increasingly being managed by cross-functional teams composed of managers from each of the functional areas.

2. Why is penetration pricing more likely than skim pricing to raise a company's or a business unit's operating profit in the long run?

This question is especially important for pioneers/first movers into a new market. When


56 - Chapter Seven Notes

pricing a new product, a company or business unit can follow a marketing strategy of skim pricing or penetration pricing. For new product pioneers, skim pricing offers the opportunity to skim the cream from the top of the demand curve while the product is novel and competitors are few. Penetration pricing offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry. Skim pricing is purely a short-term phenomenon and is used to gain high profits quickly in order to pay for expensive R&D and marketing costs before new entrants engage in price competition. It therefore cannot be used to raise long term operating profits unless the firm follows a differentiation strategy of continually entering markets early through exceptional R&D and exiting before the heavy-hitting late movers like IBM or Procter & Gamble force margins down.

3. How does mass customization support a business unit's competitive strategy?

Mass customization is an operations functional strategy. According to the text, mass customization requires flexibility and quick responsiveness. Appropriate for an ever-changing environment, mass customization requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it. The result is low-cost, high quality, customized goods and services. Mass customization is one way to support a differentiation strategy in a hypercompetitive market in which customers are demanding a highly differentiated product at a reasonable price. The customer is primarily interested in purchasing a product designed to its own specifications and delivered where and when it needs them. Even though price may be secondary to specific product characteristics, it cannot be significantly higher than the price for a mass produced good.

4. When should a corporation or business unit outsource a function or activity?

Outsourcing is purchasing from someone else a product or service that had been previously provided internally. As such, it is an example of reverse vertical integration. According to the text, the key to outsourcing is to purchase from outside only those activities that are not key to the company's distinctive competencies. Otherwise, the company may give up the very capabilities that made it successful in the first place - thus putting itself on the road to eventual decline. An outsourcing decision will depend upon the fraction of total value added that is represented by the activity under consideration and by the amount of potential competitive advantage in that activity for the company or business unit.

A firm should consider outsourcing an activity or function whenever it has low potential for competitive advantage. If that activity comprises only a small part of the total value of the firm's products or services, it should be purchased on the open market (assuming that quality providers of the activity are plentiful). If, however, the activity contributes highly to the company's products or services, the firm should purchase it through long-term contracts with trusted suppliers or distributors. A firm should always produce at least some of the activity or function (taper vertical integration) if that activity has the potential for providing the company some competitive advantage. Full vertical integration should only be considered, however, when that activity or function adds significant value to the company's products or services in addition to providing competitive advantage.

5. What is the relationship of policies to strategies?

Generally speaking, the text views policies as the link between strategy formulation and implementation. They are the broad guidelines to be used in the implementation of



strategy. The text takes the position that the dividing line between formulation and implementation is the difference between the planning activities of formulation and the action-oriented activities of organizing, directing, and controlling. Since the development of policies are primarily planning, not action-oriented, they more properly belong within strategy formulation.


A1. What are the pros and cons of R&D leadership versus R&D followership as a functional strategy?

This question deals with first versus late movers. The R&D leader strategy is a functional strategy which is necessary for a company to be a first mover in an industry. R&D can help a company to pioneer an innovation and reap the first mover advantages. The leader strategy is normally expensive. In contrast, the follower R&D strategy can be fairly cheap in comparison. This functional strategy is appropriate for those firms choosing to reap the benefits of late movers.

A2. Should functional strategies be categorized under strategy formulation or under strategy implementation?

The answer to this question depends upon one's position in the hierarchy of strategy. At the top management level of a corporation both divisional (business-level) and functional strategies could be viewed as ways of implementing corporate strategy. For example, suppose a corporation decides to concentrate in one industry as its corporate growth strategy. This strategy would need to be implemented by a business strategy oriented to improving the company's competitive position. The same can be said of functional strategy. Strategy formulation and implementation can be interchangeable terms based on one's location in a corporate hierarchy. This text categorizes all strategies under the heading of strategy formulation because of their common planning orientation. Implementation begins when one moves from planning into organizing and directing activities.


1E Which strategy is developed to pull together the various activities and competencies of each department so that corporate and business unit performance improves?

a. business strategy b. competitive strategy c. generic strategy d. enterprise strategy e. functional strategy

2E Which of the following is an example of a marketing functional strategy?

a. To increase profits by 10%. b. To maximize shareholders wealth. c. To achieve overall cost leadership. d. To diversify into related markets. e. To increase advertising expenditures to emphasize market "pull" over "push."



3D Which type of pricing attempts to hasten market development and offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry?

a. demand pricing b. competitive pricing c. skim pricing d. penetration pricinge. loss-leader pricing

4C The type of marketing strategy in which a company develops new products for new or existing markets is

a. market development.b. push strategy.c. product development.d. pull strategy.e. skimming the cream.

5A The type of marketing strategy in which a company captures a larger share of an existing market for current products through market saturation or market penetration or develops new markets for current products is called

a. market development. b. push strategy.c. product development.d. pull strategy.e. skimming the cream.

6D A popular financial strategy in which a company is acquired in a transaction financed largely by debt - eventually paid off with money generated from the acquired company's operations or sale of its assets is

a. illegal in most countries.b. a good way to build a core competency.c. an application of the capital asset pricing model.d. the leveraged buyout.e. an example of internal financing.

7C According to Porter, to achieve a cost advantage by following the functional strategy of technological followership a business unit should

a. pioneer the lowest-cost product design. b. innovate in other activities to increase buyer value. c. imitate the products pioneered by others. d. create low-cost ways of performing value activities. e. be the first firm down the learning curve.

8C The flexible manufacturing system is defined by the text as

a. one-of-a-kind production using skilled labor.



b. highly automated assembly lines making one mass-produced product using little human labor.

c. parts grouped into manufacturing families to produce a wide variety of mass-produced items.

d. a process utilizing the just-in-time (JIT) method of manufacturing. e. standardization of components with each machine functioning like a job shop,

but is positioned in the same order as the parts are processed.

9D The manufacturing strategy which requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it is called

a. continuous improvement. b. mass production. c. job shop. d. mass customization. e. just-in-time.

10B The HRM functional strategy in which input for performance appraisal is gathered from multiple sources is

a. the behaviorally anchored rating scale.b. 360-degree appraisal. c. bottom-up performance evaluation.d. strategic performance feedback.e. tactical performance looping.

11C A recent trend in information systems strategy is

a. computerizing accounting. b. automating customer service. c. forming closer relationships with customers and suppliers through extranets. d. replacing Fortran with Cobol in order to boost productivity. e. replacing main frame computers with robots.

12D Purchasing a product or service from an outside contractor is called

a. vertical integration. b. horizontal integration. c. transaction costing. d. outsourcing. e. the hokey pokey.

13A The key to outsourcing is to purchase from the outside only those activities that

a. are not central to the company's distinctive competence. b. are very expensive. c. provide the company competitive advantage. d. are provided by an important supplier. e. are not very expensive.

14B A company which has previously found great success pioneering an extremely successful product presently trying to turn another "long-shot" into a like success would be an example of which strategy to avoid?



a. follow the leader b. hit another home runc. arms race d. do everything e. losing hand

15C A company which enters into a spirited battle for market share by cutting prices and offering special deals would be an example of which strategy to avoid?

a. follow the leader b. hit another home run c. arms race d. do everything e. losing hand

16D A company which invests in many interesting opportunities without deciding which of them should have priority would be an example of which strategy to avoid?

a. follow the leader b. hit another home run c. arms race d. do everything e. losing hand

17B When considering acceptable alternative strategies, the most important criterion is the ability of the proposed strategy to deal with

a. cash flow. b. the specific strategic factors developed in the S.W.O.T. analysis. c. defining the competitive environment in which the firm is competing. d. the future long-term prospects of the industry. e. governmental regulations and requirements placed on the industry.

18D The technique used to help strategists choose among alternative choices by defining the task environment, developing a set of various forecasts, and using proforma financial statements is called

a. decision trees. b. S.W.O.T. analysis. c. industry scenarios. d. corporate scenarios. e. Capital Asset Pricing Model.

19E The first step in constructing a corporate scenario is to

a. develop common-sized financial statement. b. construct detailed pro forma financial statements. c. decide upon how much risk management is willing to accept. d. analyze the societal environment. e. use industry scenarios to develop a set of assumptions about the task

environment.

20C A strategy aimed at influencing key stakeholders is a



a. corporate strategy.b. business strategy.c. political strategy.d. functional strategy.e. horizontal strategy.

21A In order to avoid reaching consensus before all the issues have been examined, which decision-making technique assigns a group or individual to identify potential problems with an alternative?

a. devil's advocateb. Sloan's judgment c. sales presentation d. dialectical inquiry e. scenario construction


62 - Chapter Eight Notes

CHAPTER EIGHT

STRATEGY IMPLEMENTATION: ORGANIZING FOR ACTION


• Changes in a corporation's structure, according to Chandler, follow significant changes in strategy. As a company grows and develops, it tends to move from a stage I simple structure to a stage II functional structure and finally to a stage III divisional structure.

• The organizational life cycle helps explain why companies, which have successfully progressed through the stages of birth, growth, and maturity, eventually go into decline and die.

• More flexible advanced forms of organizational structure are being used to implement strategies. Some of these are the matrix, network, and cellular organization structures.

• Reengineering is the radical redesign of business processes to achieve major gains in cost, service, or time. It is an implementation program because it asks, "If this were a new company, how would we run this place?"

• Six sigma is a quality improvement program used to reduce costs and increase quality by reducing product variance. Its aim is to reduce manufacturing defects to only 3.4 per million.

• The job characteristics model of job design is a very useful way to rethink the way work is done at the employee level.

• Multinational corporations tend to organize themselves either into product groups, by geographic areas, or in a matrix structure to balance the needs of the corporation (satisfied through centralization) with those of the local situation (satisfied through decentralization).


1. How should a corporation attempt to achieve synergy among functions and business units?

The text points out that one of the goals to be achieved in strategy implementation is synergy between and among functions and business units. This is one reason why corporations commonly reorganize after an acquisition. If some sort of synergy cannot be achieved, there is no real reason to acquire another firm - other than trying to exit one business and enter another. The extent to which synergy should be achieved depends upon the strategy being pursued. A lot of synergy is needed in vertical and horizontal growth as well as in concentric diversification. The corporation pursues these strategies in order to achieve the benefits of efficiency coming from marketing, operating, investment, or management synergy. The firm is looking for advantages of scale or scope. If, however, the corporation is pursuing conglomerate diversification as a strategy, top management


Chapter Eight Notes- 63

may only wish financial synergy in which high cash flow from one unit makes up for low cash flow from another unit. In this case, there is no attempt to combine any activities across business units (in this case usually called subsidiaries) because of the holding company nature of the corporation. Management's philosophy is one of buying and selling companies without much attempt to gain the benefits of synergy.

2. How should an owner-manager prepare the company for its movement from Stage I to Stage II?

The corporation reaches the transition point from Stage I to Stage II when it gets too big for the owner-manager and his/her team of do-everything managers and workers to effectively keep track of all of the firm's activities. They lack the necessary in-depth knowledge of functional areas. To prepare the firm for this transition, the owner-manager needs to train those in the company who are willing to learn functional skills and knowledge. Some may take night courses at a local community college or university. Others may participate in various management development programs offered by organizations like the American Management Association. In some instances, specialists in certain areas may need to be hired from outside the company. The owner-manager will also need to start changing his/her style from one of making all the important decisions to one of delegating some areas of responsibility to others with more in-depth knowledge and experience. As others in the company build their expertise in certain areas, the owner-manager needs to begin giving them increasing decision-making autonomy.

3. How can a corporation keep from sliding into the decline part of the organizational life cycle?

The concept of the organizational life cycle proposes that, like the product life cycle, organizations tend to move through the stages of birth, growth, maturity, decline, and death. According to Danny Miller in his book, The Icarus Paradox, companies go into decline because the very characteristics that helped make them successful tend to be taken to extremes over time and eventually cause a decrease in performance. (See the additional teaching module at the end of this discussion question section.) The noted sociologist, Robert Merton, referred to this phenomenon as "trained incapacity" in which one's abilities can function as "blind spots" when those abilities are pushed too far. This tendency to do things the "company way" can lead to an inability to adapt appropriately to changing conditions. A company may need to "unlearn" its traditions and policies in order to revitalize itself. The is referred to by Miller and Friesen as the revival stage. One way to keep from getting in a rut like this is for top management in particular to frequently question its mission, objectives, strategies, and policies, as well as its programs, budgets, and procedures. People within the organization need to be told to always be looking at other companies for better ways of doing things (discussed in Chapter 10 under benchmarking). Reengineering has been touted as one way for a corporation to renew itself by rethinking and redesigning its business activities.

4. Is reengineering just another management fad or does it offer something of lasting value?

Reengineering is the radical redesign of business processes to achieve major gains in cost, service, or time. It involves a fundamental rethinking of the way work is done, the use of cross-functional work teams, a new information and management system, and a new value system with greater emphasis on the customer. It is an effective way to implement a



turnaround strategy and can thus be a part of the revival stage of the organizational life cycle. Cynics point out that management tends to be "fad driven." Just as zero defects, management by objectives, and zero-based budgeting were hot topics in the 1960s and 1970s, total quality management and reengineering were the hot topics of the 1990s. Like other fads, reengineering goes through the various stages of discovery, successful application by a few well-known firms, followed quickly by oversaturation by the business media, research studies showing mixed results, and finally the stage when business firms view the concept as "out of fashion" and move on to the next emerging fad - leaving the concept to live on only as a paragraph in textbooks.

As of 2010, reengineering was beyond the oversaturation stage. Authorities had pointed out instances where reengineering failed or had no real impact on performance. Just as it had taken total quality management only a couple years for it to lose support in the business world (and ironically to then become popular in not-for-profit organization like universities!), reengineering is no longer in favor within the business world. Adherents of reengineering argue, however, that it offers something of lasting value because it is the first management concept to emphasize the redesigning of both the organization and jobs in light of environmental and technological changes. As such, this concept may find still a permanent place in the literature on organizational change. Reengineering is important because it looks at job design as the building block to organization design - something that org theorists have been slow to do. Traditional org theory views org design from the outside in. Structure is thus viewed as a response to environmental change. Job design tends to be ignored by org theorists in favor of the "macro" approach. Reengineering, in contrast, views org design from the inside out. Job design comes first, then org design. Reengineering thus tends to combine the "macro" approach of org theory and the "micro" approach of org behavior. This is one reason why traditional academics who like to segment their areas of study have difficulty with the more integrative and practitioner-oriented concept of reengineering. Unless these academics are able to see reengineering as a useful way to bridge the gap between organization and job design, they may help cynics ridicule it as another fad and thus bury an otherwise useful approach to strategy implementation and organizational change.

5. How is the cellular/modular organization different from the network structure?

Miles and Snow, et al propose in this chapter that the evolution of organizational forms is leading from the matrix and the network to the cellular. According to them, "a cellular organization is composed of cells (self-managing teams, autonomous business units, etc.) that can operate alone but that can interact with other cells to produce a more potent and competent business mechanism." It is this combination of independence and interdependence which allows the cellular organizational form to generate and share the knowledge and expertise to produce continuous innovation. The cellular/modular form includes the dispersed entrepreneurship of the divisional structure, customer responsiveness of the matrix, and self-organizing knowledge and asset sharing of the network. As proposed, the cellular/modular structure is similar to a current trend in industry of using internal joint ventures to temporarily combine specialized expertise and skills within a corporation to accomplish a that task individual units alone could not accomplish.

In contrast, the network structure is really a sort of non-structure by its virtual elimination of in-house business activities. Long-term contracts with suppliers and other strategic alliances replace the services the company could provide for itself.




A1. What responsibilities do top managers have in strategy implementation?

This is an open-ended question with no clear-cut answer. One could easily argue that feasible strategies cannot be formulated unless top management takes a long and careful look at how the strategies might be implemented. The choice of a particular strategy, therefore, is partially based upon an assumption of how it will be carried out by people at lower levels in the corporation. Taking this view, one would conclude that top management must be as heavily involved in strategy implementation as it is in formulation.

One could also argue that top management should only have a general role in the development of implementation plans. If the assumption is correct that key strategy decisions made at the top will be carried out by those below to the best of their ability, it is logical to allow the implementers at the lower levels to "flesh out" general implementation plans made by top management. Since lower level managers are close to the "action", they have the knowledge necessary to decide specific programs, budgets, and procedures given general guidelines (policies) from the top. One can contend that neither top management nor the board has the time to get involved in details concerning sales peoples' commissions or the relocation of an assembly line in a plant.

A2. Does structure follow strategy or does strategy follow structure? Why?

Although Chandler and others have made convincing arguments that a change in strategy tends to be followed by a change in structure, a good argument can be made for strategy following structure as well. To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative, they will have to assess the compatibility of a desired strategy with the present corporate structure. If the desired strategy cannot be implemented given the present structure, how much time, money, and effort will be needed to change the structure? Such a cost-benefit analysis may find the desired strategy to be too costly to implement.

Research does support the contention that structure follows strategy. The reverse also appears to be true. Logic suggests that responsible strategy makers will consider present corporate structure as a serious consideration in the choice of a strategic alternative. Chandler himself implies that one of the problems of strategy formulation in the past has been a lack of serious consideration of structural issues. This is suggested in the text when Chandler proposes that the creation of new strategy is followed by the appearance of new administrative problems which contribute to a decline in economic performance. One is left wondering why the strategy makers in the corporations Chandler studied failed to foresee the need for structural changes at the time they created their strategy. Perhaps if they had been able to foresee all the needed implementation problems, the chosen strategy might have been quite different and more in line with their present structure. All this is merely conjecture, of course. Hindsight is always clearer than foresight.

A3. What are the advantages and disadvantages of the network structure?

The network structure is really a sort of non-structure by its virtual elimination of in-house business activities. Long-term contracts with suppliers and other strategic alliances replace the services the company could provide for itself.

Pros: This structure provides increased flexibility and adaptability to cope with rapid environmental change. Since a corporation does not need to invest in acquiring or developing the wide range of functional activities it needs to operate, this structure is very cheap. It is a good structure for an entrepreneurial venture. It allows a firm to specialize in those activities that are essential to its competitive advantage.



Cons: Depending almost completely on outside vendors for important functions can make the firm very vulnerable to outside pressures. The company can be at the mercy of a few key suppliers or distributors. The amount of staff necessary to oversee contracts and to constantly work with vendors to guarantee a certain level of quality and delivery times may be more than needed if the functions were handled in-house. This structure can only operate if there is a certain level of trust in the network and information lines are always kept open.

A4. According to the job characteristics model, how should task activities be organized in order to improve product quality and productivity?

The job characteristics model of Hackman and Oldham is an approach to job enrichment based on the concept that increasing employee motivation can lead to higher job satisfaction and improved performance. The model proposes that managers follow five principles in redesigning work:

- Combine tasks to increase task variety and to enable workers to identify with what they are doing;

- Form natural work units to make a worker more responsible and accountable for the performance of the job;

- Establish client relationships so the worker will know what performance is required and why;

- Vertically load the job by giving workers increased authority and responsibility over their activities; and,

- Open feedback channels by providing workers information on how they are performing.

ADDITIONAL TEACHING MODULE

(Use when discussing the organizational life cycle)

Trajectories of Decline

In The Icarus Paradox, Miller proposes that companies go into decline because the very characteristics that helped make them successful tend to be taken to extremes over time and eventually cause a decrease in performance. A successful firm develops a theme based on a mission and a mutually supportive configuration composed of strategies, policies, structure, and culture. Success creates momentum, causing organizations to keep extending their theme and configuration until they push too far and eventually start to



decline. Based on studying over 100 companies, Miller found four very common "trajectories" of decline.

• Focusing trajectory turns quality-driven "Craftsmen" with masterful engineers and excellent operations into rigidly controlled, detail-obsessed "Tinkerers" making perfect products with little appeal to the marketplace. By focusing on perfection and not on the marketplace, they alienate customers. By the end of World War II and before Daniel Krumm revitalized the company, Maytag was probably well on its way to becoming a tinkerer.

• Venturing trajectory converts growth-driven, entrepreneurial "Builders" with imaginative leaders and brilliant financial staffs into impulsive, greedy "Imperialists" who squander their resources by expanding helter-skelter into businesses they know nothing about. ITT under Harold Geneen was first a brilliant success in conglomerate diversification, but eventually could not keep track of all its acquisitions and went into decline.

• Inventing trajectory turns "Pioneers" with unexcelled R&D and state-of-the-art

products into utopian "Escapists," dominated by cults of free-spirited scientists in pursuit of interesting inventions with little market appeal. Polaroid under Dr. Land became an escapist firm when it continued to develop wonderfully innovative products, but forgot about the marketplace.

• Decoupling trajectory converts "Salesmen" with superior market skills and

prominent brand names into aimless, bureaucratic "Drifters" whose sales orientation ignores product development and produces a stale and disjointed line of "me-too" products. Procter & Gamble in the 1970s and 1980s continued to emphasize its powerful marketing brilliance, but was no longer developing innovative products to sell.

Source: D. Miller, The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall (New York: Harper Business. 1990).


1D Which statement below is NOT true of "strategy implementation?"

a. It is the process by which strategies and policies are put into action through the development of programs, budgets, and procedures.

b. Implementation is often considered after strategy has been formulated. c. Strategy implementation is the sum total of the activities and choices required

for the execution of a strategic plan. d. Strategy implementation is not an important part of strategic management.e. Strategy formulation and strategy implementation are two sides of the same

coin.

2C Synergy can take place in all but which one of the following?

a. Shared know-howb. Coordinated strategies c. Six sigma



d. Shared tangible resources e. Pooled negotiating power

3E Who typically implements strategy in large, multi-industry corporations?

a. the board of directors b. top management c. middle management d. first level management e. everyone in the organization.

4C It is advisable to have management from all levels participate in the strategy formulation process

a. because it is a legal requirement. b. because collective bargaining agreements often mandate worker participation. c. to gain an insight as to what work needs to be done and to gain cooperation in

the implementation of the strategy.d. it is part of their job responsibilities to provide input regarding their respective

area of expertise.e. it helps boost the self-image and ego of all managers to be asked for advice.

5A The term used in strategy implementation that describes a statement of activities or steps needed to accomplish a single-use plan and whose use is to make the strategy action-oriented is

a. program. b. guidelines. c. budgets. d. course of action. e. procedures.

6E The term used in strategy implementation that describes a system of sequential steps or techniques that describe in detail how a particular task or job is to be done is

a. program. b. guidelines. c. budgets. d. course of action. e. procedures.

7C Alfred Chandler, known for his study of large American corporations, concluded that

a. organic structure is best for firms in a changing environment. b. mechanistic structure is best for firms in a changing environment. c. structure follows strategy. d. strategy follows structure. e. strategic business units are the key to effective decentralization.

8C According to Chandler and others, which factors MUST be closely aligned or else face



the consequences of poor organizational performance?

a. management, workforce, and customers b. operations, marketing, and finance c. strategy, structure, and environment d. rules, goals, and tasks e. hierarchy, contacts, and integrators

9B A corporation run by a team of managers with functional specializations and which successfully operates in one industry is said to be a

a. Stage I company. b. Stage II company. c. Stage III company. d. Stage IV company. e. Stage V company.

10A Objectives which are personal and subjective and are typified by an entrepreneurial spirit describe what stage of corporate development?

a. Stage I company.b. Stage II company. c. Stage III company. d. Stage IV company. e. Stage V company.

11C In what stage does a corporation typically decentralize into profit or investment centers?

a. Stage I company. b. Stage II company. c. Stage III company.d. Stage IV company. e. Stage V company.

12C Stage III in the organizational life-cycle is the

a. birth stage. b. growth stage. c. maturity stage. d. decline stage. e. death stage.

13E Which structure simultaneously combines functional and product forms at the same level of the organization?

a. strategic business units b. functional structure c. network structure d. divisional structure e. matrix structure



14C Which structure is described as a "non-structure" by its virtual elimination of in-house business functions?

a. strategic business units b. functional structure c. network structured. divisional structure e. matrix structure

15B The radical redesign of business processes to achieve major gains in cost, service, or time is called

a. total quality management.b. reengineering.c. management by objectives.d. action planning.e. statistical process control.

16A Which management program asks the question: "If this were a new company, how would we run this place?"

a. Reengineering b. Total quality managementc. Management by objectivesd. Six sigmae. Strategic planning

17D Which management program aims to reduce manufacturing defects to only 3.4 per million?

a. Reengineeringb. Total quality managementc. Management by objectivesd. Six sigma e. Strategic planning

18C What term refers to the study of individual tasks in an attempt to make them more relevant to the company and to the employee(s)?

a. position matching b. functional duties c. job designd. task conversion e. responsibility shift

19D To combat the adverse consequences of task specialization, what function does job enrichment perform?

a. By training the workers to do one job over and over again, they become experts on the one best way to do that job.

b. By moving workers through several jobs, they are exposed to increased variety. c. By combining different tasks, a worker is given more of the same type of duties

to perform. d. By giving the worker more autonomy, the worker has control over job activities.



e. none of these

20C Which type of structure enables a company to introduce and manage a similar line of products around the world?

a. geographic-area structure b. matrix structure c. product-group structure d. international structure e. functional structure

21A Which type of structure enables a company to tailor products to regional differences and to achieve regional coordination?

a. geographic-area structure b. matrix structure c. product-group structure d. international structure e. functional structure


72 - Chapter Nine Notes

CHAPTER NINE

STRATEGY IMPLEMENTATION: STAFFING AND DIRECTING


• A change in strategy will probably mean that staffing needs will change. Growth strategies often require new people or new skills. If the new strategy is one of retrenchment, less people will be needed.

• Match the manager to the strategy in executive succession. The most appropriate type of manager needed to effectively implement a strategy depends on the strategy of the firm or business unit.

• Successful downsizing programs include training remaining employees to implement new strategies and programs.

• Multinational corporations need to be careful when managing international assignments and when staffing foreign subsidiaries.

• After a change in strategy, the strategic manager must (1) evaluate what a particular change in strategy will mean to the corporate culture, (2) assess if a change in culture will be needed, and (3) decide if an attempt to change the culture will be worth the costs.

• After an acquisition, a corporation can manage the culture of the newly-acquired company in one of four ways: integration, assimilation, separation, or deculturation.

• Action planning, MBO, and TQM are techniques used to implement a new strategy.

• Hofstede proposes that the success or failure of certain management practices can be explained internationally using five cultural dimensions: power distance, uncertainty avoidance, individualism-collectivism, masculinity-femininity, and long-term orientation.


1. What skills should a person have for managing a business unit following a differentiation strategy? Why? What should a company do if no one having these skills is available internally and the company has a policy of promotion from within?

Research does appear to support the proposition that the manager of a corporation or business unit should be matched to the strategy for successful implementation. Those executives who successfully implement a differentiation business strategy tend to have a high internal locus of control and have more experience in R&D. Because of the likely growth orientation of the strategy, managers should probably have a greater willingness to take risks, a higher tolerance for ambiguity, and sales/marketing experience. These characteristics make sense because of the product/market orientation needed of any unit interested in setting its products or services apart in the competitive marketplace. If this


Chapter Nine Notes- 73

type of person is not available internally, then the company must recruit an appropriate outsider. Under the condition of a promotion from within policy, the policy should be reconsidered and an exception made. Otherwise, the company must take a chance on promoting one of its own - a good reason for proceeding cautiously. In this case, it is essential to have an effective management development training program.

2. When should someone from outside a company be hired to manage the company or one of its business units?

Research suggests that firms in difficulty can improve their chances for success if they bring in an outsider who does not have the same devotion to past management practices as do most internal candidates. Many examples can be provided of corporations turning to external turnover specialists (sometimes called "hatchet men") to regain their past success by firing "deadwood" and eliminating popular, but unprofitable divisions, units, and projects. The probability of hiring an outsider to lead a firm in difficulty increases if there is no heir apparent, the last CEO was fired, and if the board of directors is composed of a large percentage of outsiders. The insider/outsider distinction may not really be the important issue. The best answer may lie in finding the right person to implement the needed strategy regardless of where the person is found.

3. What are some ways to implement a retrenchment strategy without creating a lot of resentment and conflict with labor unions?

The text discusses some of the problems involved in "downsizing" - a program usually used in implementing a retrenchment strategy. Unless staffing issues are dealt with appropriately in retrenchment, a situation can develop in which retrenchment feeds on itself and acts to further weaken instead of strengthening the company. The text proposes six guidelines for successful downsizing:

-Eliminate unnecessary work instead of making across-the-board cuts;-Contract out work that others can do cheaper;-Plan for long-run efficiencies;-Communicate the reasons for actions;-Invest in the remaining employees; and,-Develop value-added jobs to balance out job elimination.

4. How can corporate culture be changed?

The text points out that communication is key to the effective management of change in culture. Top management must be committed to a culture change and communicate that commitment to everyone in the organization. The new culture must be part of a "strategic vision" which can capture the emotions of the employees. A series of programs need to be established to move the corporation from one culture to another and a strong rationale given to justify such a radical change. Progress toward the goal must be measured at intervals and results communicated widely. A system of incentives also must be developed to reward those who support and encourage the culture change.

5. Why is an understanding of national cultures important in strategic management?

An understanding of different national cultures is important in all aspects of strategic management. Since international trade is becoming increasingly important, knowledge of national cultures is important to environmental scanning. One must scan not only key forces in one's industry, but also different societal forces in other parts of the world where the company might do business. An understanding of national cultures is also important to the formulation of strategy. Many cultures are very ethnocentric and do not like foreigners



controlling key parts of their country. In Saudi Arabia, for example, non-Saudis cannot own land - they can only rent it. Most countries have rules regarding ownership of companies in industries which are deemed important to that country's welfare (for example, the U.S. defense industry). A company must have an understanding of these differences if it is to formulate various entry strategies into different countries or regions. An understanding of different cultures is especially important in strategy implementation. Because of cultural differences, managerial style and human resource practices must be tailored to fit the particular situations in other countries. Hofstede found in his research that national culture is so influential that it tends to overwhelm even a strong corporate culture. In measuring the differences among five national dimensions from country to country, he was able to explain what a certain management practice might be successful in one nation, but fail in another. Knowledge of these kinds of differences is crucial for any multinational corporation. An understanding of national cultures is also important to evaluation and control (covered in Chapter Ten).


A1. What type of person should be selected to manage a company or business unit when no clear strategy has been formulated?

Unfortunately, there is little available advice to help top management or the board of directors select the most appropriate manager when a corporation or SBU does not have a specific strategy formulated for the manager to implement. In this instance, top management or the board has no choice; it must search for a person with a proven capability to exercise initiative and leadership in the industry, and hope that the person selected can lead other strategic managers in formulating and implementing the best strategy.

A2. How can MBO help improve the implementation of strategy?

Management by Objectives is a powerful implementation technique because it is a system that links plans with performance. It forces managers to communicate to their subordinates the objectives of the overall business unit so that a subordinate is better able to see how he/she fits into the company's goal accomplishment. MBO, therefore, acts to tie together corporate, business, and functional objectives, as well as the strategies developed to achieve them. This tying together forms a hierarchy of objectives similar to the hierarchy of strategy mentioned in Chapter One. The mutual give and take plus the sense of personal responsibility exemplifying a successful MBO program serves to motivate employees to help implementation activities succeed.

A3. How might manager-strategy fit be accomplished short of firing current managers?

If the current manager of an SBU is capable, but does not appear to have the skills and experiences necessary to implement a particular strategy, the company might wish to either provide him/her with additional training or an assistant having some of those skills/experiences. Unfortunately, since most companies want to get implementation moving quickly and don't want two managers to do the job of one, a better option is to transfer existing managers from one unit to another. Another approach is to consider the skills and experiences of the existing manager in the process of strategy formulation when choosing among strategic alternatives. If there is little difference in the expected results from two different strategies, it makes sense to select the strategy which best fits the existing manager's skills and experiences.

A4. Does culture follow strategy or does strategy follow culture? Why?



This question derives from the question raised in Chapter 8 regarding the relationship between structure and strategy. The answer here is much the same. To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative, they will have to assess the compatibility of a desired strategy with the present culture. If the desired strategy cannot be implemented given the present culture, a lot of time, money, and effort will be needed to change the culture. Culture follows strategy, but the reverse also appears to be true. The type of culture within a corporation will act to influence the selection of feasible alternative strategies. To the extent that the culture derives from the "distinctive competence" of the company, this may be very appropriate. Don't throw away a good culture just because the current strategy is not as successful as it could be. Some might even say that a good culture is more important than is a good strategy. Clearly, both strategy and culture are very important and need to be carefully evaluated before any significant change in either is recommended. Both strategy and culture affect each other simultaneously.

A5. Compare and contrast Action Planning with Management By Objectives.

An action plan states what actions are going to be taken, by whom, during what time frame, and with what expected results. Action plans are the primary means by which programs are developed for the implementation of strategy. Management by Objectives is also a technique useful for the development of programs. Like action planning, MBO pinpoints individual responsibilities for each unit objective and specifies a time frame when that objective is to be achieved. Unlike action planning, however, MBO takes a more organization-wide approach to planning implementation programs and budgets. For MBO to work, it should be a complete system. Action planning can be done, in contrast, at the individual level only. The key difference is that MBO is a system of hierarchical objectives beginning at the top of the corporation and cascading down through the divisions and work units. MBO also encourages the superior to negotiate the subordinate's objectives with the subordinate's input. MBO includes action planning as part of the discussions between a manager and his/her subordinate. Action planning alone, however, can be done strictly on a top down basis with little to no input from the subordinate.

A6. What value does Total Quality Management have in implementing strategy?

Total Quality Management (TQM) is an operational philosophy that stresses commitment to customer satisfaction and continuous improvement. It aims at improving quality, increasing flexibility, and reducing costs in order to better satisfy the customer. Because TQM aims to reduce costs as well as improve quality, it can be used as a program to implement both an overall low cost or a differentiation business strategy. Like MBO, Total Quality Management helps keep employees' minds on a crucial objective of strategic management - increasing sales and profits by pleasing the customer. Since the mission of most business firms is customer driven, TQM helps to clarify and fine-tune the company's mission statement. TQM makes the key point that since competitive advantage is usually only temporary, the organization must emphasize continuous improvement to improve product quality and reduce costs. According to TQM, customers can be internal as well as external to the organization. To the extent that a company is able to continually improve its service to its internal customers, it is more likely to keep internal transaction costs low and thus be in a better position to reap the benefits and avoid the disadvantages of vertical integration.


1A According to the text, Enterprise Rent-A-Car follows a staffing policy of



a. promotion from within.b. recruiting outside the company for upper level management positions.c. outsourcing its staffing functions.d. hiring a hatchet man/woman to implement its turnaround strategy.e. downsizing to be "lean and mean".

2B Which type of chief executive officer would be appropriate for a corporation following a concentration strategy emphasizing vertical or horizontal growth with a great deal of experience in that particular industry?

a. professional liquidator b. dynamic industry expertc. turnaround specialist d. analytical portfolio manager e. cautious profit planner

3C Which type of chief executive officer would be appropriate for a weak corporation in a relatively attractive industry, having a challenge-oriented ability useful for saving a company?

a. professional liquidator b. dynamic industry expert c. turnaround specialist d. analytical portfolio manager e. cautious profit planner

4A That part of strategy implementation which focuses on the selection & utilization of employees is

a. staffing.b. directing.c. organizing.d. planning.e. controlling.

5B What did a study of 173 firms over a 25-year period reveal about CEOs of successful corporations?

a. They tended to have less loyalty than former CEOs, switching companies as a faster pace.

b. They tended to have the same functional specialization as the former CEO.c. They tended to be more aggressive in their risk-taking than former CEOs. d. They tended to rely more on skills developed through group decision-making. e. They tended to make decisions with no input from others.



6D What term is used to describe the approach used by human resource managers to identify good performers within an organization with promotion potential?

a. abilities identifier b. job evaluation c. the 5-E systemd. performance appraisal systeme. responsibility centers

7D Which one of the following is NOT one of the activities and techniques used in an assessment center to evaluate a person's suitability for advancement?

a. leaderless group discussions b. management games c. in-basket exercises d. IQ testse. case analyses

8A Which one of the following is NOT a problem associated with inappropriate downsizing?

a. Produces no short-term benefits.b. Morale declines. c. Surviving employees experienced decreased morale. d. Surviving employees had to do extra work in addition to their own. e. Overall productivity declines.

9C Which guideline for successful downsizing encourages an organization to spend the time to research where money is going and to eliminate the task that does not add value to what the firm is producing?

a. Develop value-added jobs to balance out job elimination. b. Plan for long-run efficiencies. c. Eliminate unnecessary work.d. Invest in remaining employees. e. Outsource everything.

10B If a planned strategy is fully compatible with the company's current culture, what should the company do?

a. Find a joint-venture partner or contract with another company to carry out the strategy.

b. Implement new strategy and identify how it is superior to the old strategy. c. Move forward very carefully by introducing small steps and modifications before

implementation. d. Manage around the culture by establishing a new structural unit to implement

the new strategy. e. none of these.

11C If a planned strategy is not compatible with the current culture, but the culture can



be easily modified to make it more compatible with the new strategy, what should the organization do?


b. Implement new strategy and identify how it is superior to the old strategy. c. Move forward very carefully by introducing small modifications before

implementation.d. Manage around the culture by establishing a new structural unit to implement


12A If a planned strategy is not compatible with the company's current culture, and management is not willing to make major organizational changes required to manage around the culture, what should the organization do?


b. Implement new strategy and identify how it is superior to the old strategy. c. Move forward very carefully by introducing small steps and modifications before

implementation. d. Manage around the culture by establishing a new structural unit to implement


13C Which method of managing disparate cultures involves a relatively balanced give-and-take of cultural and managerial practices between the merger partners, and no strong imposition of cultural change on either?

a. separation b. deculturation c. integrationd. assimilation e. segmentation

14D Which method of managing disparate cultures involves one firm's domination over another willing firm?

a. separation b. deculturation c. integration d. assimilation e. segmentation

15B Which method of managing disparate cultures is the most common and the most destructive method of dealing with two different cultures because one company imposes its demands at the expense of another company's culture?

a. separation b. deculturationc. integration d. assimilation e. segmentation



16D Strategic goals can be accomplished through defining an action plan. Which one of the following is NOT one of the components which make up an action plan?

a. states what action is going to be taken b. states by whom the action will be done c. states during what time frame the action will be done d. states where the action will be done e. states what are the expected results of the action

17E What does "MBO" stand for?

a. Market Buy-Out b. Mergers, Buy-outs, and Options c. Multinational Business Organization d. Manufacturing Backlog Order e. Management by Objectives

18D "TQM" refers to

a. Total Questioning Methods.b. Terrible Quantitative Management.c. Tremulous Qualitative Methodology.d. Total Quality Management.e. Total Quality Methods.

19B The concept of continuous improvement is part of

a. Management By Objectives.b. Total Quality Management. c. Action Planning.d. Reengineering.e. Resource-based View of the Firm.

20C According to research by Hofstede on various national cultures, the dimension which measures the extent to which the society is oriented toward money and things or toward people is called

a. long-term orientation.b. power distance.c. masculinity-femininity. d. uncertainty avoidance.e. individualism-collectivism.


80 - Chapter Ten Notes

CHAPTER TEN

EVALUATION AND CONTROL


• The basic evaluation and control process is a five-step model requiring the strategist to (1) determine what to measure, (2) establish standards for performance, (3) measure actual performance, (4) compare actual performance with the standard, and (5) take corrective action.

• Behavior controls are most relevant for those situations in which performance results are hard to measure and there is a clear cause-effect relationship between activities and results. Output controls are most appropriate when there are agreed-upon output measures and there is no clear cause-effect relationship between activities and results. Input controls are most appropriate when performance results are hard to measure and when there is no clear-cut relationship between activities and results.

• Although corporations are typically evaluated on the basis of ROI and EPS, one should also consider shareholder value measures (like EVA and MVA) and the balanced scorecard.

• Divisions and functional units are often evaluated as responsibility centers in terms of standard cost , revenue, expense, profit, and/or investment centers.

• Activity-based costing (ABC) and enterprise resource planning (ERP) are increasingly being used to provide better data for monitoring and evaluating performance.

• Benchmarking is an excellent way to compare a company's or business unit's products, services, or practices against the toughest competitors or best-in-class firms.

• In terms of international considerations, the control and reward systems used by a global multinational corporation should be different from those used by a multidomestic MNC.

• Controls should follow strategy. The text proposes six guidelines to help ensure the proper use of controls.

• The weighted-factor, long-term evaluation, and strategic-funds methods reward managers for effectively formulating and implementing strategy.


1. Is Figure 10.1 a realistic model of the evaluation and control process?

Figure 10.1 is certainly not a complete model of the control process. For example, it does not include the development of an information system so that performance can be


Chapter Ten Notes- 81

measured in step 3. Nevertheless, the model is adequate as a simple representation of the basic steps in evaluation and control. It is slightly misleading to the extent that it suggests that all control is post hoc, i.e., after the fact. As pointed out in the text, a corporation will often need "steering" or feed-forward controls to assess slight deviations before they become performance break-downs. These controls really provide feedback to the manager. If a process is going slightly off the desired course, the manager in charge will have to decide if the deviation is important enough to correct. If left alone, the deviation may correct itself. If the manager intercedes, she/he may cause a reaction - throwing the process off track in the other direction. These activities are not included in Figure 10.1.

2. What are some examples of behavior controls? Output controls? Input controls?

Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through the use of objectives and performance targets or milestones. Some examples of behavior controls are company procedures, quotas of sales calls to potential customers, and rules regarding attendance and tardiness. Some examples of output controls are sales quotas, cost reduction or profit objectives, and surveys of customer satisfaction. Although output controls, with their emphasis on the "bottom line" are generally considered superior to behavior controls, behavior controls are very appropriate when results are hard to measure and a clear cause-effect exists between activities (behaviors) and results. Input controls are the least useful and are most appropriate when output is difficult to measure and there is no clear cause-effect relationship between behavior and performance (such as in college teaching).

3. Is EVA really an improvement over ROI, ROE, or EPS?

Economic value added (EVA) is being increasingly recommended as an improvement over traditional measures because of EVA's strong relationship to a company's stock price. It uses stock price to measure the difference between the pre-strategy and post-strategy value of a corporation. However, EVA is often difficult to calculate. It is for this reason that more simpler measures like ROI, ROE, and EPS continue to have widespread usage. Like the traditional measures, shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. Another limitation of EVA is this its concern with only one aspect of the task environment - the stockholder. The conclusion seems clear. There is no one best measure or group of measures. The key is to use those measures which have the most value to those most affected by corporate performance and to keep them in perspective by understanding their advantages and limitations.

4. How much faith can a manager place in a transfer price as a surrogate for a market price in measuring a profit center's performance?

The use of a transfer price allows a corporation to convert a cost or expense center into a profit center. In theory, this sounds like a good way to avoid the kind of suboptimization often occurring in large corporations when a unit or division thinks only of achieving its own goals to the detriment of the corporation as a whole. To the extent that the transfer price reflects the true market price of the items in question, this approach can improve efficiency within a corporation. If, however, it is difficult to decide upon a "fair market price" (because the item in question is rarely sold on the open market or because the market is regulated by government or manipulated by cartels), the exact amount of the transfer price is open to manipulation by powerful, interested parties within the corporation. Corporate politics may dictate a certain price which gives advantage to the president's favorite project or division and unfairly penalizes another division which happens to be out of favor.

5. Is the evaluation and control process appropriate for a corporation that



emphasizes creativity? Are control and creativity compatible?

This is a wide-open question meant to generate a lot of discussion. The text does not mention this issue at all. There is some feeling that a large number of controls do constrain creative impulses. The argument seems to be that a person's mind must be able to run free without constraint in order to generate new innovative concepts. Data from advertising agencies and R&D labs do suggest that corporations emphasizing creativity tend to reduce the number of controls used. Control is not ignored, however. Data is just not collected on intermediate activities such as time in the office or manner of dress. The emphasis tends to be on the end-result of activities rather than upon the activities themselves. Control and creativity are thus compatible if the controls are appropriate and used properly. Creative types may be like artists. To be successful, they need both talent and discipline. Most creative types, however, choose to impose their own form of discipline on themselves. To the extent that managers attempt to regulate the activities which go into creativity, they may destroy the very thing they are trying to nurture. For further discussion, see “Creativity Loves Constraints,” by Marissa Ann Mayer in the February 13, 2006 (p.102) issue of Business Week.

ADDITIONAL DISCUSSION QUESTION

A1. Is benchmarking just another fad or is it really useful for all firms? Why?

Benchmarking involves learning how other successful companies do something and imitating or perhaps even improving on their techniques. Pioneered in the U.S. by Xerox Corporation, benchmarking is similar to the time-tested practice of "reverse engineering" in which a company buys the product of another company to take it apart in order to learn how it is made. Given that Xerox developed the concept of competitive benchmarking in the early 1980s, it appears that the concept is here to stay. It is especially useful for companies which find themselves falling behind others in the industry. Xerox developed the concept when management realized that Japanese companies were slowly taking over the copier market by making and selling products superior to those of Xerox at a cheaper price. Since this is a situation which is bound to affect various companies in the future, benchmarking is bound to be increasingly adopted. Unlike MBO, TQM, or reengineering, almost everyone who uses benchmarking finds it to be very useful and well worth the time and money to do it.


1A Which one of the following is NOT a part of the evaluation and control of performance?

a. Establish objectives and strategies.b. Determine what to measure. c. Establish standards for performance. d. Measure actual performance. e. Take corrective actions.

2B Return on investment (ROI) is appropriate for evaluating the corporation's or division's

a. level of social responsibility commitment. b. ability to achieve a profitability objective.c. present profitability potential



d. prospects for favorable future earnings. e. commitment to employee development.

3D Which is the MOST commonly used measure of corporate performance in terms of profit?

a. EVA b. Gross Margin c. DPS d. ROI e. ROVA

4C Activity-Based Costing is very useful in making outsourcing decisions by doing

a. total quality management.b. reengineering. c. value-chain analysis.d. MBO. e. benchmarking.

5D A limitation of ROI as a measure of performance is that

a. it is a single comprehensive figure examining only one facet of the firm. b. it provides an disincentive to use existing assets efficiently. c. it provides a disincentive to acquire new assets. d. it can be computed only after profits are totaled for a period.e. it does not provide the basis for common comparison.

6B An advantage of ROI as a measure of performance is that

a. it is sensitive to book value. b. it provides an incentive to use existing assets efficiently.c. the time span of concern in short range. d. the business cycle strongly affects ROI performance often despite managerial

performance. e. it is a steering control.

7A Because of the belief that accounting-based numbers such as ROI, ROE, and EPS are not reliable indicators of a corporation's economic value, which method of corporate performance is now touted?

a. shareholder valueb. basic earning power c. price/earnings ratio d. profit margin on sales e. return on assets

8D The measure of corporate performance in which financial measures are combined with operational measures of customer satisfaction, internal processes, and innovation and improvement activities is called



a. activity based costing. b. market value-added. c. the shareholder value. d. the balanced scorecard. e. the return on investment.

9E A type of responsibility center which is used primarily in manufacturing facilities based on historical cost data is a(an)

a. investment center. b. revenue center. c. expense center. d. profit center. e. standard cost center.

10B A type of responsibility center which is primarily used in sales regions is a(an)

a. investment center. b. revenue center.c. expense center. d. profit center. e. standard cost center.

11C A responsibility center which measures resources in dollars without consideration of service or product costs is called a(an)

a. investment center. b. revenue center. c. expense center.d. profit center. e. standard cost center.

12D A type of responsibility center which is typically established whenever an organizational unit has control over both its resource costs and the selling price of its products or services is a(an)

a. investment center. b. revenue center. c. expense center. d. profit center. e. standard cost center.

13A Which type of responsibility center will a stage III company with multiple product lines emphasize?

a. investment center.b. revenue center. c. expense center. d. profit center. e. standard cost center.



14B The continual process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders is

a. total quality management.b. benchmarking. c. action planning.d. reengineering.e. management by objectives.

15C Which of the following is NOT one of the steps followed in the benchmarking process?

a. Develop tactical programs for closing performance gaps.b. Implement tactical programs, measure and compare the results with the best-in-

class company.c. Link parallel activities instead of integrating their results.d. Identify the area or process to be examined.e. Calculate the differences among the company's measurements with those of the

best-in-class company.

16A Transfer pricing is heavily used by multinational corporations not only to calculate ROI, but also

a. to reduce taxes.b. to locate suppliers. c. for marketing reasons.d. for manufacturing location decisions. e. for outsourcing.

17D The type of multinational corporation which should use loose controls on its foreign units is a

a. global MNC.b. a company which primarily exports.c. purely domestic company.d. multidomestic MNC. e. not-for-profit MNC.

18D Which of the following is NOT a guideline for proper control?

a. Control should involve only a minimum of information. b. Long-term as well as short-term controls should be used. c. Controls should be timely so that corrective actions can be taken before it is too

late. d. Controls should measure all activities in order to be comprehensive.e. Emphasize the reward of meeting or exceeding standards rather than

punishment for failing to meet standards.

19E Which method of matching rewards to the accomplishment of strategic objectives is particularly appropriate for measuring and rewarding the performance of top SBU managers and group-level executives when performance factors and their importance vary from one SBU to another?



a. strategic-funds method b. segmentation method c. long-term evaluation method d. individual evaluation method e. weighted-factor method

20C Which method of matching rewards to the accomplishment of strategic objectives compensates managers for achieving objectives set over a multi-year period?


21A Which method of matching rewards to the accomplishment of strategic objectives encourages executives to look at developmental expenses as being different from those expenses required for current operations?



Chapter Eleven Notes- 87

CHAPTER ELEVEN

SUGGESTIONS FOR CASE ANALYSIS


• A case can be analyzed using a number of organizing frameworks. Keep in mind that there is no one right way to analyze a case. A particular recommendation is less important than the process of analysis and decision-making used in making that recommendation.

• Once a student has read the case to get a sense of the situation, calculate ratios and generate common-size statements over a five-year period. Calculate changes individual categories from one year to another. The figures will very likely point out some symptoms of underlying problems that should be addressed.

• A student may wish to do some outside research to get a feel for what was happening in the environment at the time the case took place. Various resources are listed in Appendix B. After calculating ratios for the company, compare them to average ratios for the industry and key competitors during that time period.

• Use the Strategic Audit presented in Appendix C as a checklist for case analysis. Consider following the methodology described in Appendix A. This case analysis methodology combines many of the analytical techniques found in earlier chapters of the text, such as the EFAS and IFAS Tables, and the SFAS Matrix.


1. Why should you begin a case analysis with a financial analysis? When are other approaches appropriate?

Starting with a financial analysis of a case is a good way to assess the seriousness of the situation. Since one of the key objectives of any business corporation is to earn a profit, a lot can be learned by considering how it is doing financially. If the firm is doing badly financially, the student will need to consider short term problems ("How does it avoid bankruptcy?" as well as long term problems ("How can it position itself in the market to take advantage of its strengths?". If the firm is doing well financially, the student has free reign to take a long range viewpoint and consider how a good firm can do better. Nevertheless, the best place to begin a case is to assess the firm's current performance. This may be quickly done by using financial data usually given in the case from annual reports. If not available, a logical starting point is whatever problems are given in the case. This would be especially appropriate when the case under consideration focuses on only one aspect of a corporation's functioning, such as conflict between a board of directors and top management. The basic rule of thumb for beginning a case analysis is to look for problem areas - wherever they may be.

2. What are common-size financial statements? What is their value to case analysis? How are they calculated?

A useful approach to the analysis of financial statements is to convert both the income statement and balance sheet into common-size statements. Convert every category from


88 - Chapter Eleven Notes

dollar terms to percentages. For the income statement, net sales represent 100%. Calculate each category’s percentage of net sales so that the categories sum to 100%. For the balance sheet, give the total assets a value of 100%, and calculate other asset and liability categories as percentages of the total assets. (Individual asset and liability items, such as accounts receivable and accounts payable, can also be calculated as a percentage of net sales.) To more easily note category changes, plot the annual percentages over a five year period for each of the categories, such as cost of goods sold and accounts receivable. Connect the dots to view trends in each category. A poor trend indicates an underlying problem needing attention.

When you convert statements to this form, it is relatively easy to note the percentage that each category represents of the total. Comparisons of these percentages over the years can point out areas for additional analysis. To get a proper picture, however, make comparisons with industry data, if available, to see if fluctuations are merely reflecting industry-wide trends. If a firm's trends are generally in line with those of the rest of the industry, there is a lower likelihood of problems than if the firm's trends are worse than industry averages. These statements are especially helpful in developing corporate scenarios and pro forma statements, since they provide a series of historical relationships (for example, cost of goods sold to sales, interest to sales, and inventories as a percentage of assets).

3. When should you gather information outside a case by going to the library or using the Internet? For what should you look?

The book suggests that students undertake outside research into the environmental setting of the case. It is suggested that students check each case to find out the date when the case situation occurred and then screen the business periodicals for that time period. The key is to stay within the time frame of the case. This background should provide students an appreciation for the situation as it was experienced by the participants in the case. A company's annual report and 10-K form from that year can be very helpful. An understanding of the economy during that period will help students avoid making a serious error in analysis - for example, suggesting a sale of stock when the stock market is at an all-time low or taking on more debt when the prime interest rate is over 15%. Information on the industry will provide insights on its competitive activities. This research is especially useful when preparing for group oral presentations.

Many instructors do not want students to obtain outside information on a company described in an assigned case. They want everyone in the class to have the same information so that in an open class discussion or a written paper, analyses by different people will be comparable. Everyone is, in effect, analyzing the same case. Other instructors want students to go the library in order to update the case and analyze the company's current situation rather than the situation described in the case. This is, however, a special situation. It is the obligation of the instructor to tell the students what level of outside research is allowable for the purpose of assignments.

4. When is inflation an important issue in conducting case analysis?

The impact of inflation upon daily life strikes a person when watching old movies on television. For example, in the movie "The Man in the Grey Flannel Suit," the character played by Gregory Peck works in public relations for a corporation located in New York City in the mid-1950s. He was earning $7,000 and was being interviewed by the president of a large radio/television network for an important job paying $9,000. By the mid-1990s, earning only $9,000 in New York City would probably not keep a family above the poverty level! If the movie were done now, the character played by Gregory Peck would be



demanding ten to twenty times that amount! Sixty years of inflation makes a big difference.

Adjusting for inflation is very useful when the case being analyzed takes place over a time period when a great deal of inflation was taking place. The danger in ignoring inflation when doing financial analysis is that one can miss key data signaling a corporation's slow decline over time. Chief executive officers wish to keep their jobs and will tend to bias figures in their favor - especially in annual reports. Sales and profits stated in current or historical dollars (or whatever currency is being used) may seem to show substantial growth, but when they're converted to constant dollars (or whatever currency is being used), they may show a steady decline.

There are two methods of adjusting for inflation. One is to use whatever base year is being used in that country. In the U.S., 1967 has been used as the base year for many years. It equaled 100 and other years were adjusted around it. Given that in the U.S. (like any other country) politicians dislike people seeing how much inflation has been occurring, a new, more recent base year (1982-84) has been selected to replace 1967 - a simple, but insidious disguise. Dividing sales and net income by the CPI factor in Table 11.2 for a particular year will change the reported figures to 1982-84 constant dollars. Another approach is to adjust previous years in a financial statement using the most recent year as the base year - again using an index of inflation like the Consumer Price Index (CPI). Divide the CPI factors for the other years by the one for the most recent year to obtain the appropriate adjustment factors to use in dividing into the reported figures for the previous years.

5. How can you learn what date a case took place?

The student needs to place him/herself into the timeframe of the case. This is especially important when the student is going to do some outside research. Most instructors want the student to stay within the timeframe of the case and not to do research on what actually happened after the case. Check the beginning and ending paragraphs of the case to see if a date is mentioned. If no date is given, check to see the date of the financial statements given in the case. The date of the case is NOT the same as the date the case was written or copyrighted (as listed at the bottom of the first page of the case).

ADDITIONAL DISCUSSION QUESTION

A1. What are the pros and cons of using the strategic audit as a framework for case analysis?

The advantages of using the strategic audit are presented clearly in the text. Its limitations are, however, not so obvious. Like everything else in the world, a technique's strengths can also serve as it's weaknesses. For example, the text states that the strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis of various corporate activities to be made. The problem with any checklist is that the user may tend to use it almost automatically. Even though all the questions in the audit may not be relevant to a specific situation, a person may unthinkingly use them without considering that there may be other, perhaps more important questions which need to be raised, but are not on the list of questions.

The value of asking this question is to get students to realize that the strategic audit is only a tool to help them organize their analysis. Use this question as an opportunity to remind them that it is up to them to develop whatever questions are most appropriate to the case



under consideration and not to do their analysis on "automatic pilot."


1C What is the main purpose of conducting outside research into the environmental setting of the case?

a. It is a requirement of this course. b. It provides a learning experience on library usage which is helpful in all courses. c. It gives a realistic background of the industry during specified period.d. It gives you clues as to what the organization should be doing in the future. e. It furnishes large amount of data, both pertinent and extraneous.

2D Which of the following is NOT one of the categories of important financial ratios that is mentioned in the text to help assess an organization's overall financial situation?

a. leverage ratios b. liquidity ratios c. activity ratios d. asset management ratios e. profitability ratios

3B Ratios which measure the corporation's ability to meet its financial obligations are

a. leverage ratios. b. liquidity ratios.c. activity ratios. d. asset management ratios. e. profitability ratios.

4E Ratios which measure the degree of the corporation's success in achieving desired profit level are

a. leverage ratios. b. liquidity ratios. c. activity ratios. d. asset management ratios. e. profitability ratios.

5C Ratios which measure the effectiveness of the corporation's use of resources are called

a. leverage ratios. b. liquidity ratios. c. activity ratios.d. asset management ratios. e. profitability ratios.

6A Ratios which measure the contributions of owners' financing compared with creditors' financing are



a. leverage ratios.b. liquidity ratios. c. activity ratios. d. asset management ratios. e. profitability ratios.

7E "Earnings per share" is an example of a(n)

a. leverage ratio. b. liquidity ratio c. activity ratio. d. asset management ratio. e. profitability ratio.

8C "Days of inventory" is an example of a(n)

a. leverage ratio. b. liquidity ratio c. activity ratio.d. asset management ratio. e. profitability ratio.

9A "Times interest earned" is an example of a(n)

a. leverage ratio. b. liquidity ratio c. activity ratio. d. asset management ratio. e. profitability ratio.

10C Converting categories on financial statements from dollar terms to percentages results in

a. inflation-adjusted statements. b. diverse rates of returns. c. common-size statements. d. constant dollar denominations e. equivalency comparison

11E The formula which predicts the likelihood of a corporation going bankrupt is called

a. the return on investment. b. the CAPM. c. the correlation coefficient. d. the risk factor. e. the Z-value.

12A At what Z-value level is a firm considered in serious trouble?



a. below 1.81b. above 1.82 c. greater than 5.0 d. between 2.2 and 3.1 e. between 3.2 and 4.1

13A The ratio that indicates how much of the anticipated growth rate of sales can be sustained by internally generated funds is the

a. index of sustainable growth. b. z-value.c. operating cash flow. d. free cash flow. e. debt to equity ratio.

14E To get a proper picture of the position of the organization, common-size statements and ratios should be compared to

a. the organization's future historical performance. b. the leading competitor in the industry. c. the financial performance of the overall U.S. gross domestic production (GDP). d. the direct competitor least like the organization. e. industry-wide average trends.

15C What benefit does converting sales and profits to constant dollars in times of inflation offer when analyzing a case?

a. It is helpful in predicting the future potential of the organization. b. It contributes to determining the risk factors when computing the Z-value. c. It shows the true performance of the corporation in comparison with that of the

industry or the economy in general.d. It is easier for the financial analyst to judge the effectiveness of management's

decision-making. e. It provides a method which is familiar and easy to understand.

16D To adjust for general inflation in the U.S., what index does the text suggest?

a. Dow-Jones Industrial Average b. New York Stock Exchange Index c. Wiltshire 500 Equity Index d. Consumer Price Index e. NASDAQ Series

17A What purpose does analyzing the prime interest rates serve in case analysis?

a. For better assessment of strategic decisions to borrow money to build new facilities.

b. It serves as documentation for the case analyst for their evaluation. c. It acts as a means to compare an organization's performance with other direct



competitors. d. It acts as a means to compare an organization's performance with the entire

industry. e. It acts as a means to compare an organization's performance with the entire

economy.

18D The function of the Strategic Audit is to

a. serve as documentation when a group of students are assigned a case analysis. b. gather data which can be entered onto a computerized program for easier

analysis. c. determine if an organization's managerial decisions have been successful. d. provide a systematic method to organize a student's analysis. e. provide the basis by which a teacher of a strategy and policy course can judge a

student's performance.

19A In the Strategic Audit, which of the following is included in a corporation’s Strategic Posture?

a. Objectivesb. Programsc. Budgetsd. Procedurese. Performance

20B In the Strategic Audit, the recommended strategy should be

a. a revised mission statement.b. one of the strategic alternatives.c. internally-oriented.d. externally-oriented.e. include appropriate programs and a budget.


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