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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
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2 - Chapter One Notes management is used by today's corporations as one way to make the environment more manageable.
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,
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Chapter One Notes - 3
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 1B (The letter after each item number is the correct answer)
Which is NOT one of the strategic questions that an organization must ask itself? a. b. Where is the organization now? How can functional and operational areas be improved?
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acquiring. Intervention by the organization's bank Entrance of a new competitor into the industry Change in ownership of the organization Copyright © 2011 Pearson Education. d. c. directive consequential rare continuous 3A Strategic planning within a small organization a. may be informal and irregular. 4D An organization that is skilled at creating. is crazy. d. where will the organization be in 10 years? Which of the following is NOT a characteristic of strategic decisions as mentioned in the text? a. is unnecessary and a waste of time. 5B Research suggests that strategic management evolves through four sequential phases in corporations. d. c. 6A Research done by Henry Mintzberg suggests that strategy formulation a. 2D If no changes are made. b.4 . basic financial planning. e. publishing as Prentice Hall . c. d. is worthless. externally-oriented planning. should be formalized and explicitly stated should be done by the president only. is operating in Phase 1 of strategic management. c. d. and transferring knowledge and at modifying its behavior to reflect new knowledge and insights a. is a learning organization. e. b. asks if it should be or not be. e. strategic management. must be elaborate to allow for future growth. should be followed unswervingly to ensure success of the plan. c. b. b. c. is merely a checklist of actions following a logical process. e. should be reviewed after a specific interval of time to make sure it is still applicable. b. d. Inc. The first phase is a. e.Chapter One Notes c. 7B Which of the following is NOT one the five triggering events that are the stimulus for a strategic change? a. is an irregular and a discontinuous process. forecast-based planning. internally-oriented planning. b. what specific actions should management take? If no changes are made. where will the organization be in one year? If the evaluation is negative. has a mechanistic structure.
A statement of corporate objectives. Increase sales by 10% over last year. Develop and sell quality appliances world-wide. a comprehensive master plan stating how a corporation will achieve its mission and objectives. A description of top management's responsibilities. Increase sales by 10% over last year. Diversify product line to appeal to more people. c. provides a time horizon. Increase sales by 10% over last year. A description of the activities carried out by the organization. d. Develop and sell quality appliances world-wide. 10C As defined in this course. b. The philosophy of the founder. Diversify product line to appeal to more people. e. 12A Which of the following is an example of a strategy? a. b. d. d. d. e. a broad guideline for making decisions. Pay highest salaries to keep high quality employees.5 d. b.Chapter One Notes . b. Pay highest salaries to keep high quality employees. d. Divide a sales region into a group of sales districts. Pay highest salaries to keep high quality employees. a statement of a corporation's programs in dollar terms. c. Divide a sales region into a group of sales districts. 11B Which of the following is an example of an objective? a. a policy is a. c. Diversify product line to appeal to more people. c. a statement of activities or steps needed to accomplish a single-use plan. e. 13C Which of the following is an example of a policy? a. 8B New CEO Awareness by management of decreased profitability The corporate mission is best described by which one of the following? a. c. Inc. 9A A goal differs from an objective because it a. c. is open-ended. d. e. specifies measurable results. e. Develop and sell quality appliances world-wide. publishing as Prentice Hall . b. the purpose or reason for a corporation's existence. is quantified. e. The purpose or reason for the corporation's existence. is clearly specified. b. Copyright © 2011 Pearson Education.
b. e. e. Which of the following is an example of a mission? a. is focused on opportunities seen by one person. c. assumes major responsibilities for strategy formulation. 18B The mode of strategy formulation used when top management has a reasonably clear idea of the corporation's mission and objectives. Increase sales by 10% over last year. b. Divide a sales region into a group of sales districts. Divide a sales region into a group of sales districts. is characterized by reactive solutions to existing problems. c. strategic mode. publishing as Prentice Hall . e. entrepreneurial mode. d. Diversify product line to appeal to more people. Develop and sell quality appliances world-wide. Diversify product line to appeal to more people. d. Inc. the entrepreneurial mode of strategy formulation a. includes the proactive search for new opportunities and reactive solutions to existing problems. Pay highest salaries to keep high quality employees. Increase sales by 10% over last year. Evaluate all personnel annually in January using Form 25-51. assumes the environment is unresponsive to input. 19A A large. 17C According to Mintzberg. c. b. Diversify product line to appeal to more people. b. Divide a sales region into a group of sales districts. 14D Divide a sales region into a group of sales districts. c. d. e. d. logical incrementalism. multidivisional business has three levels in its hierarchy of strategy: Copyright © 2011 Pearson Education. b.6 . 16A Which of the following is an example of a procedure? a. c. e. Pay highest salaries to keep high quality employees. Develop and sell quality appliances world-wide. but it chooses to develop a series of tentative or partial strategies instead of developing full-blown strategies is called a. d. 15E Which of the following is an example of a program? a. adaptive mode.Chapter One Notes e. Pay highest salaries to keep high quality employees. Develop and sell quality appliances world-wide. planning mode.
20B Corporate -. b. or retrenchment. maximizing resource productivity. e. d. Copyright © 2011 Pearson Education.Corporate -. as given in the book. The first step of the strategic decision making process. d. Business -. e. c. b.Corporate.Business -. c. on stability. Industry -. Inc. analyze strategic factors. d. 21B The focus of "functional strategy" is a.Corporate -.Enterprise -.Functional. scanning the environment. publishing as Prentice Hall .Functional. Environmental -. e. c. scan the internal environment. on overall cost leadership differentiation. achieving overall direction.7 a. scan the external environment. b. growth. evaluate current performance results.Divisional -.Divisional. review corporate governance. is to a. Environmental -.Chapter One Notes .Functional.
8 - Chapter Two Notes
CHAPTER TWO CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY SUMMARY OF KEY POINTS • 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. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 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
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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.
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?
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10 - Chapter Two Notes
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.
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. ADDITIONAL DISCUSSION QUESTIONS 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?
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Copyright © 2011 Pearson Education. and South Korea.11 As stated in Chapter One. A4. Do otherwise laissez-faire. The same is not true of discretionary responsibilities. Whereas the mission is present-oriented. In light of the accumulating evidence regarding the link between tobacco use and cancer.it may be the right thing to do. It tells not what the company is now (as does the mission). that there are three good reasons to undertake these kinds of responsibilities. free enterprise-oriented students (who happen to be nonsmokers) 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. publishing as Prentice Hall . 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. a corporation's mission is its purpose. these corporations are using their advertising expertise and political connections to open new markets in Japan. socially irresponsible? Insofar as smokers are concerned. 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. as well as in eastern Europe. Tobacco companies are increasing their marketing efforts in Third World countries. Faced with a decline in tobacco usage in the developed countries.. however. few people would agree that a business firm should fulfill only its economic and legal responsibilities and completely ignore ethical ones. A corporation's vision. 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 second reason is enlightened self-interest. but what it is striving to become. It tells who the company is and what it currently does. Inc. The first reason is the morality rationale . even though the company may not benefit and may even be hurt in the short run. 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. 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. A3. The third reason is also one of enlightened self-interest. which can hurt people. is a description of what the company is capable of becoming. ask them to deal with the question of freedom of choice versus personal health (similar to laws regarding auto seat belts and motorcycle helmets).g. Taiwan. should a company be concerned about discretionary responsibilities? Why or why not? Except for a few die-hard followers of Milton Friedman's philosophy. Using Carroll's list of four responsibilities. 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. Is any company making a product (such as guns or knives). the vision is futureoriented. It provides the fundamental.Chapter Two Notes . Thailand. Since discretionary responsibilities are defined by Carroll as purely voluntary. If a firm undertakes a discretionary activity. in contrast. there is no pressure by anyone for a business firm to fulfill them. nevertheless. 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. it may gain short-run advantages in the market place (e. or the reason for its existence. One can argue. a company offering free day care to its employees may attract more potential workers at lower wages).
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. 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. 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. One could thus argue that a purchasing company cannot be held responsible for the actions of a separate and independent supplier company. everything else may be called a company's "environment" and therefore outside of a company's control or responsibility. To review management's actions in light of the financial performance or the corporation. and equipment. For example. there is a developing consensus as to what the major responsibilities should be. objectives. To oversee the management of the corporation's resources. 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. To establish or approve the corporation's mission. b. however. if a firm purchases its raw materials from a company which is a known polluter. If the contract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplying company. To become directly involved in managerial decisions. Should a company be concerned if some of its suppliers in developing countries are abusing their workers.12 . employing child labor. publishing as Prentice Hall . one could argue that a company is composed of its employees and all of its assets. Given this view. buildings. if one company has an important and long-term relationship with a contracting company that is behaving in a socially irresponsible manner. and policies. Which of the following is NOT one of the major responsibilities? a.Chapter Two Notes If a company develops a reputation for voluntarily doing socially useful activities even though it gains little economically in return. d. These can thus define a company's boundary. Inc. 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. 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. strategy. The question includes a basic question in organization theory: What is the boundary of an organization? Certainly. Copyright © 2011 Pearson Education. 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. it may collect valuable public relations credit in people's minds. the first company has an obligation to attempt to change the contractor's behavior. 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. c. such as land. MULTIPLE CHOICE QUESTIONS 1D (The letter after each item number is the correct answer) The responsibilities of the board of directors vary significantly by country and by state. A5.
c. academicians. b. are involved in a limited degree of key decision making. individuals on the board who are not employed by the board's corporation. b. 10% 30% 50% 80% 90% 7A The vast majority of outside directors are all BUT ONE of the following: a. attorneys. 5B Outside directors are defined as a. d. publishing as Prentice Hall . c. c. d. 6D Outsiders make up to what percentage of board membership in large U. c. corporations? a. individuals who organize and coordinate politically focused activities. e. codetermination. those individuals who scan the external environment. d. experience more financial success than less involved boards. to to to to to monitor implement influence initiate and determine evaluate 4B Catalyst board of directors typically a. 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. b. c. CEOs. b. b.13 e. d. b.S. e. cumulative voting. due care. are held to a greater degree of legal responsibility. c. d. Inc. are less involved than active participation boards. accountability. e. due diligence. those individuals with public relations responsibilities.Chapter Two Notes . take leading roles in establishing and modifying the company mission. 2E To hire and fire the principal operating officers of the corporation. e. Copyright © 2011 Pearson Education. board members who are also officers or executives employed by the corporation. COOs. union representatives. e. 3B Which of the following is NOT a task of the board of directors in strategic management? a. d. e.
13A One result of the U. c. 10E In a large corporation. c. Inc. the agents in agency theory are a. When a corporation's employees serve on its board. b. c. middle management. directors in an interlocking directorate. When one or more individuals on one board also serve on a board of a second firm. employees. strategic factors. b. such as customers and employees. employees of the corporation. d. e. 12E An outside director selected by the board to conduct an evaluation of the CEO is called a. When both management and the board establish corporate strategic management. publishing as Prentice Hall . environmental issues. 9C Affiliated directors are a. d.Chapter Two Notes 8B Corporate governance deals with the relationship among the board of directors. the board of directors. a lead director. e. b. top management. d. key stakeholder groups. b. e. agents of top management. of the Sarbanes-Oxley Act is that Copyright © 2011 Pearson Education. c. executives of other firms. an auditing director. e. Occurs when two corporations have directors who serve on the board of a third firm. 11C Under what circumstances does a DIRECT interlocking directorate exist? a. the chair of the evaluation committee. the evaluator.14 . and a. shareholders. d. c. Present when all board members are also employed by the corporation. e. shareholders. outside directors who have a personal or business stake in corporate activities. d. stakeholder groups. the chairman of the board. b. top management.S.
b. Spending money on social responsibility is acting from motives other than economic and may. Increasing percentage of insiders on the board. 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.Chapter Two Notes . The CEO communicates high performance standards. Less stock ownership by directors and executives. c. Businesses can actually do very little in terms of social responsibility.to use its Copyright © 2011 Pearson Education. Increasing numbers of institutional investors on the board. d. 20%. e. c. whistle blowers are no longer protected. e. boards must be entirely composed of outsiders. 14D boards may no longer grant loans to corporate officers. b. Spending money for social responsibility is spending the stockholder's money for a general social interest. c. Less willingness of the board to consider issues in social responsibility. less than 10%. The percentage of CEOs of U. b. Inc. The CEO presents a role for others to identify with and to follow. There is one and only one social responsibility of business -. d. cause harm to the very society the firm is trying to help. publishing as Prentice Hall . e. a CEO can no longer act as a board chairperson. d. 15C Which of the following is a trend in corporate governance? a. b.15 a. c. top management must provide a financial expert to serve on the audit committee. d. balance many demands and show initiative. provide executive leadership and manage the strategic planning process.S. The CEO shows confidence in people's abilities to reach a high level of performance. 70%. The CEO personally formulates and implements all strategy. c. 16E Which of the following is NOT a characteristic of a top manager providing executive leadership? a. Increasing use of consultants in formulating strategy. c. in the long run. b. think long term and act short term. The CEO articulates a strategic vision for the corporation. d. 17D The CEO must successfully handle two responsibilities crucial to effective strategic management a. 50%. look like a strategist and act like a strategist. e. b. e. Fortune 500 corporations who also serve as chairman of the board is a. d. over 90%.
e. b. customers.16 . Through taking on the burden of social costs. b. shareholders. Inc. economic and ethical responsibilities. publishing as Prentice Hall . 19A Economist Milton Friedman has argued that a business's only responsibility is to a. e. 21A The term "social responsibility" can be viewed as a combination of an a. b. c. and impartial in the distribution of costs and benefits to individuals and groups is the a. financial responsibilities. 22B A group of people who affect or are affected by a corporation’s decisions and actions are called a. stockholders. stakeholders. individual rights approach. legal responsibilities. d. d. legal and discretionary responsibilities. organization's organization's organization's organization's organization's ethical and discretionary responsibilities. 20E The responsibilities that management of a business organization assumes as purely voluntary obligations are a. e. fair. 23C The ethical approach that proposes that decision makers be equitable. legal and ethical responsibilities. maximize profits in a legal manner. c. satisfy its customers. affiliates. c. promote the welfare of society. Copyright © 2011 Pearson Education. c. utilitarian approach. d. e. b.Chapter Two Notes e. b. resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. best approach. sustain its market share. justice approach. financial and economic responsibilities. economic responsibilities. satisfy its employees. discretionary responsibilities. fair approach. c. e. d. ethical responsibilities. the organization becomes less efficient causing price increases or postponement of growth. d.
This development in the societal environment affected companies through Copyright © 2011 Pearson Education. employees/labor unions. • Competitive intelligence is one of the fastest growing fields in strategic management. 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. 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. special interest groups.S or Canada. These are governments. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS: 1. (2) rivalry among existing firms. • 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. (4) bargaining power of buyers. (5) bargaining power of suppliers. ecological. • 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. publishing as Prentice Hall . and (6) relative power of other stakeholders.17 CHAPTER THREE ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS SUMMARY OF KEY POINTS • The natural and societal environments are composed of forces which can be analyzed via STEEP analysis: sociocultural. creditors. • An industry matrix can be used to summarize key success factors within an industry and to analyze competitors. Inc. • The task environment (industry) contains stakeholder groups that have an impact or are heavily impacted by the organization. economic. • Although most people use trend extrapolation in forecasting. The trend toward dual-career couples is a development in the societal environment of any company operating in the U. • The level of competitive intensity present in an industry is determined by (1) threat of new entrants. and political-legal forces. local communities. suppliers. and trade associations.Chapter Three Notes . Discuss how a development in a corporation's societal environment can affect the corporation through its task environment. many large companies find scenario-writing to be better at helping them identify and integrate a large number of variables. technological. (3) threat of substitute products.
not substitutes for each other. students should be able to list the five forces presented by Michael Porter plus the sixth force (other stakeholders). what factors determine the level of competitive intensity in an industry? The answer to this question can be found in Figure 3. 4. Then estimate the likely impact of these general trends upon the primary stakeholders. then other beverages which might perform the same function could be identified. etc. 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.18 . Inc.those trends and developments that are very likely to determine the Copyright © 2011 Pearson Education. Pepsi and Coke are. or Kool Aid. The real question here is: what is the product? If the product is colas. These data form a series of strategic issues . If the product is carbonated soft drinks. 3.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.Chapter Three Notes its impact on employee/union groups (who asked for parental leave and/or companysponsored day care centers). 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. Use price of the company's product . According to Porter. beer. After examining past and present forces operating in a particular industry. e. They are merely different brands of the same cola product. publishing as Prentice Hall . and special interest groups and even governments (who asked business firms to help support local schools and deal with community social problems). substitute products are those products that appear to be different but can satisfy the same need as another product.. 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. 2. is Pepsi Cola a substitute for Coca Cola? According to Porter. even though they may not appear to be easily substitutable. push the students to explain how each of the forces can affect the level of competitive intensity within an industry. By this time. According to Porter's discussion of industry analysis. then a lemon-lime drink like Seven Up could be a substitute product.4 of the text.g. customers (employed parents who increasingly shop for convenience goods because of time constraints). Arbitrarily select for analysis a well-known product like televisions or automobiles. communities. The identification of possible substitute products or services means searching for products or services that can perform the same function. tea. creditors. such as coffee. competitors. wine. therefore.
Categorize these factors as opportunities or threats. environmental scanning is a tool used to help avoid strategic surprise and cope with an uncertain environment.S. The purchasing Copyright © 2011 Pearson Education. 3. 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.Chapter Three Notes .as witnessed by its being the most widely used form of forecasting. corporations attempt to schedule a series of analytical reports for top management's information. Like extrapolation.2 in the text. however. In a complex and changing world. Everything will be fine until a sudden turn is reached! Like driving backwards. publishing as Prentice Hall . 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.19 future environment. Simple extrapolation would be the only type of forecasting needed. Extrapolation is simply the extension of present trends into the future. if done conscientiously. 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. Those issues judged to have a high probability of occurring and a high probable impact on the corporation are strategic factors. Keep in mind that some strategic factors may be both opportunities and threats depending upon how one views them. extrapolation is like driving a car backwards without using a mirror or twisting one's head to look backward. 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. it can get very complicated and time consuming. 5. A key part of strategic management. Why is environmental uncertainty an important concept in strategic management? It can be argued that without environmental uncertainty. As a result. but unlike extrapolation.3). scenario-writing is a very popular forecasting technique. extrapolation is fairly easy to do . It has a least one clear-cut advantage over extrapolation: It encourages forecasters to make their assumptions explicit. The embargo showed managers just how vulnerable their companies were to environmental change. could thus be seen as an attempt to construct a mirror to use in such hazardous driving! ADDITIONAL DISCUSSION QUESTIONS A1. One approach to constructing an industry scenario is suggested in the text. Inc. In contrast. It relies on the assumption that the environment is reasonably consistent and changes slowly in the short run. If the environment was certain and predictable. One is thus more likely to recognize the dangerousness of driving backwards. 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. Nevertheless. environmental scanning would be a rather easy chore. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques. extrapolation is fine if the time frame to be predicted is short and one is lucky. Plot these strategic issues on an issues priority matrix (Fig. Scenario writing. A2. Since proper information dissemination is an important part of environmental scanning. corporations. there would be no need for strategic management. Some of these reports are depicted in Figure 3.
analyzer. Defenders are companies with a limited product line that focus on improving the efficiency of existing operations.20 . A5. Entry barriers are a key variable determining the threat of new entrants into an industry. To the extent that entry barriers are low. 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. According to Miles and Snow. for example. competing firms within a single industry can be classified as four basic strategic types. A3. and government policy. Push the students to list and explain each of these possible barriers. 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. Some of these barriers are discussed in some detail in the text: economies of scale. product differentiation. If one can categorize a firm into one of these four types. 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). then it will be easier to predict their likely reaction to future environmental changes. switching costs. publishing as Prentice Hall . 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. but are. prospector. Describe the importance of entry barriers in an industry. When the Copyright © 2011 Pearson Education. Analyzers are companies that operate in at least two different productmarkets and are able to adjust their orientation based on the industry they are in. Keep in mind that these six forces are not just constraints. Provide an example. culture. Inc. of course. and processes to complement its dominant strategic orientation. This is a good question to follow a discussion of the six forces determining competitive intensity and strategic groups. Why is industrial espionage an important issue in strategic management? Environmental scanning can be very expensive. As the environment becomes increasingly uncertain. or reactor. possible to get needed information to the attention of strategy makers.Chapter Three Notes department. cost disadvantages independent of size. strategic managers are tempted to take the industrial espionage "shortcut" to proper environmental scanning and forecasting. it is tempting to steal away the innovation before it can be patented. It might be useful to generate some of these ideas in class. Briefly describe each of the four types. Other approaches are. A4. Within each strategic group in which a company operates are key competitors. variables that can be partially controlled by industry participants. in effect. Many of these can be characterized as a strategic type: defender. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years. it will be relatively easy for a new company to enter the industry and raise the level of competitive intensity. capital requirements. 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. access to distribution channels. 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. Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities. Each of these types has its own combination of structure.
encompasses the physical working areas of the organization. publishing as Prentice Hall . With differences in patent and trademark protection as well as differing degrees of enforcement around the world. d. e. is the job requirement specification listing necessary skills and abilities. b. 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. Inc. includes key stakeholders. Protection against industrial espionage can be very expensive. political-legal forces bargaining power of suppliers economic forces technological forces physical resources 5C The issues priority matrix used in environmental scanning is composed of two axis or dimensions which are labeled a. c. importance to the industry and likelihood of occurrence. includes those elements or groups within an organization's industry. c. d. Copyright © 2011 Pearson Education. c.Chapter Three Notes . b. c. political-legal forces labor forces economic forces technological forces sociocultural forces 4E Which factor is part of the natural environment? a. b. e. industry growth rate and probable competitive position. 3B Which of the following is NOT a factor in the societal environment? a. This has a serious impact on the cost of R&D. d. is an accounting of the many jobs within an organization. d. the "pirating" of information is becoming an important industry in itself. encompasses the physical working areas of the organization. e.21 "cold war" came to an end in 1991. c. 2B The corporation's task environment a. includes general forces that do not directly affect an organization. is an advisory committee to top-management. b. b. must be in perfect fit with the organization's culture. e. MULTIPLE CHOICE QUESTIONS 1C (The letter after each item number is the correct answer) The corporation's societal environment a. includes those elements or groups within an organization's industry. probability of occurrence and probable impact on the corporation.
economic environment. e.22 . probable industry attractiveness and business strength/ competitive position. risk. the ultimate profit potential in the industry measured in terms of long-run return on invested capital. sociocultural environment. threat of new entrants threat of substitutes bargaining power of buyers Copyright © 2011 Pearson Education. 6A The willingness to reject unfamiliar and negative information in environmental scanning is called a. the aggregate level of demand for a product line. internal environment. d. b. b. strategic incompetence. d. issue importance and relative power of stakeholder groups. firm rivalry. and other stakeholders determines a. logical incrementalism. e. c. c. tacit knowing. advantage. the probable industry attractiveness and business strength position. 9D According to the Porter model. e. brainstorming. 8C The collective strength of the interaction of potential entrants. d. benefit. opportunity. suppliers. c.Chapter Three Notes d. e. the amount of pressure from the societal environment. 7B strategic myopia. buyers. publishing as Prentice Hall . c. d. b. Inc. b. Industry analysis is primarily concerned with a corporation's a. rivalry among existing firms switching costs cost disadvantages independent of size capital requirements economies of scale 11B Which force places a ceiling on the price firms in an industry can probably charge? a. threat. substitutes. e. b. d. the level of government action in an industry. b. c. c. a strong force can be regarded as a(n) a. e. societal environment. 10E Which barrier to entry uses cost advantages associated with large size? a. task environment.
c. c. a mega-industry. e. Inc. b. multi-national industry. industry growth rate and competitive position. effectiveness of the strategic planning. initiators reactors analyzers prospectors defenders 17E Which strategic type are companies that have a limited product line and focus on improving the efficiency of their existing operations? a. c.Chapter Three Notes . the strength of each of the six driving forces of industry competition varies according to the a. global industry. stage of industry evolution. publishing as Prentice Hall . strategic groups. 13C An industry that operates world-wide with MNCs making only small adjustments for country-specific circumstances is called a a. c. b. 16A Which of the following is NOT one of the general Miles & Snow strategic types? a. very big industry. e. multi-domestic industry. b. strategic group collective collaboration cooperative integral association 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. c. b. market gaps. entry barriers. 12B bargaining power of suppliers rivalry among existing firms According to the text. initiators Copyright © 2011 Pearson Education. e. d. 14A What is a set of business units or firms that "pursue similar strategies with similar resources?" a. e. d. d. e. strategic types.23 d. e. changes in the political environment. most important competitors. b. d. amount of government regulation. d.
b. b. this is called a. 90%. c. c. SWOT variables. b. Copyright © 2011 Pearson Education. b. c. competitive variables. those variables that can affect significantly the overall competitive positions of companies within any particular industry are called a. the chaos scenario. 50%.24 . strategic factors. e. e. Inc. hypercompetition. 30%. c. 21B In an Industry Matrix. e. statistical modeling. critical success factors. b. e. d. d. 18D reactors analyzers prospectors defenders Companies with fairly broad product lines that focus on product innovations and market opportunities are what strategic type? a. global competition. key success factors. initiators reactors analyzers prospectors defenders 19B Corporations that lack a consistent strategy-structure-culture relationship are what strategic type? a. initiators reactors analyzers prospectors defenders 20A When an industry undergoes an ever-increasing level of environmental uncertainty in which competitive advantage is only temporary. 80%. 22D The percentage of companies engaging in competitive intelligence activities is a. c. 10%. d.Chapter Three Notes b. publishing as Prentice Hall . d. industry fragmentation. c. e. 23E The most popular form of forecasting is a. industry consolidation. d. e. d.
The process of converting intuition and hunches into reality. d. c.Chapter Three Notes . simulations. The extension of present trends into the future. relevance trees. Process of asking some authorities in the area to make an "informed guess" about the future. What is trend extrapolation? a. 26C The most widely used forecasting technique used after trend extrapolation is a. b. IFAS. d. 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. publishing as Prentice Hall . e. 27B The technique recommended by the text to summarize an analysis of external factors is called a. e.25 b. c. b. EFAS. e. e. one attempts to conceptualize alternative futures. d. signal monitoring. e. 24B scenario-writing. brainstorming. the Delphi technique. scenario-writing. d. statistical modeling. c. SFAS. simulations. signal monitoring. b. c. the issues priority matrix. Copyright © 2011 Pearson Education. Inc. b. c. SWOT. Given a large amount of historical data on certain interrelated factors. d. scenarios. brainstorming. Delphi technique. trend extrapolation. Detecting faulty underlying assumptions before forecasting errors can occur.
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. 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. not through differences in industry structure identified by industry analysis. • The analysis of a corporation's internal environment includes not only an assessment of a firm's structure and culture. functional. 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. experts on the resource-based view suggest that differences in performance among companies may be explained best.26 . human resources. but through differences in corporate assets and resources and their application. 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. SBU. and information systems. • The basic organizational structures are simple. operations. research & development. publishing as Prentice Hall . and organization. • 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. A firm’s distinctive competencies can be identified using the VRIO framework in terms of a competency’s value. and conglomerate. a company's sustained competitive advantage is primarily determined by its resource endowments. divisional. rareness. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1.Chapter Four Notes CHAPTER FOUR INTERNAL SCANNING: ORGANIZATIONAL ANALYSIS SUMMARY OF KEY POINTS • According to the resource-based view of the firm. and values learned and shared by a corporation's members and transmitted from one generation of employees to another. • Corporate culture is the collection of beliefs. • The two basic characteristics of a company's resources and capabilities that determine the sustainability of its distinctive competencies are durability and imitability. finance. Copyright © 2011 Pearson Education. but also of its functional areas such as marketing. Inc. Unfortunately. expectations. this emphasis on the industry tended to ignore a firm's core skills and competencies.
publishing as Prentice Hall . a lot of unforeseen problems can emerge which may seriously effect the success of the strategy. acts to shape the behavior of people in a corporation. 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 is a definite weakness and will act to constrain strategy formulation. Based on the assumption underlying the BCG Copyright © 2011 Pearson Education. To the extent that it is not compatible. 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 the extent that top and middle managers have no experience with such a structure. if a corporation is structured on the basis of function.27 The resource-based view of the firm is compatible with the traditional concepts of S.T. A competency may be distinctive in one’s home country. “Differences among competitor value chains are a key source of competitive advantage. In order to implement such a strategy. it may spell disaster for a strategic change in the implementation stage. Since corporate culture has a powerful influence on the behavior of managers as well as other employees. however. If. Inc. to the extent that a corporation's culture is compatible with present and potential strategies.Chapter Four Notes . but only be a core competency (or less) in another location in the world. this may be a weakness if the firm wishes to grow by acquiring other profitable corporations. 4. the structure is not compatible with either present or potential strategies. 2. Corporate culture. a comparison with other firms at each stage can help identify a firm’s strengths and weaknesses. 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. 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. it can be viewed as an internal corporate strength. 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. the strategy formulators may have to reorganize on a divisional basis.O. expectations. 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. it can be viewed as an internal corporate strength. it may strongly affect a corporation's ability to shift its strategic direction. According to Porter. the idea that the durability and imitability of corporate resources determine competitive advance is a very useful one. a collection of beliefs. 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. For example. Acting in a manner similar to structure.W. to a series of value-added activities involved in producing and marketing a product or service. Assuming the firm under consideration operates at various stages of the industry value chain.” 3. 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. and values shared by a corporation's members. Nevertheless. and distinctive competence popular in the field since the 1960s.
however. but untested. 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. The experience curve is thus a basis for using financial and operating leverage to achieve a low cost business-level strategy. How might a firm's management decide whether it should continue to invest in current known technology or in new. The experience curve concept does have its limitations. only one star position is available in Henderson's growth-share matrix. technology? What factors might encourage or discourage such a shift? Although technological discontinuity is discussed in the chapter. Model-T Fords and Bic ball point pens are just two examples. Christensen explains how difficult it is for a firm to continue to build and market its current products to its current customers using current. The risk is therefore very high to a corporation contemplating a low cost strategy by using an assumed experience curve. and processes are primarily built around the old known technology. Although it is possible to have a number of successful niches in a given product/service market. The Innovator’s Dilemma. The cost and time requirements to stay up to date with new and old technologies can bankrupt a company. Another limitation of the experience curve is that much of its success is based upon economies of scale. 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. publishing as Prentice Hall . ADDITIONAL DISCUSSION QUESTIONS A1. untested technology. and (3) reallocating resources from improvements in the older process-oriented technology to investments in the newer. it will gain a dominant market share and pre-empt competition by keeping the price too low for potential competitors to earn profits. Inc. The use of computers and robots. making a timely commitment either to acquire the new technology or to prepare to leave the market. 5. Certainly a glance at history supports Henderson's argument. especially given that a company’s culture. negates much of the experience curve advantages. (2) as the technology surfaces.Chapter Four Notes growth-share portfolio matrix. Henderson argues that the key to profits lies in market share. For one thing. Differentiation and focus strategies can be very successful without using the experience curve. technology as the new technology approaches commercial realization.28 . 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. What is the difference between industry and corporate value chain analysis? What are their value in strategic planning? Copyright © 2011 Pearson Education. typically product-oriented. 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. 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 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. In his book. well-understood technology when it is trying to create new products for new customers using new. the answer to this question is not provided. The corporation successfully using the experience curve will earn large profits either as a star or when it eventually becomes a cash cow. however. This forms a formidable entry barrier. Results from PIMS research supports this notion. structure.
However. The heavy emphasis on building distinctive competencies in the literature seems to assume that the company has no significant weaknesses. of course. In terms of human resource management. under marketing. One goal of industry value-chain analysis is to identify where on the chain is the activity providing the greatest return on investment. what then? If the weakness is an obstacle to effective strategy implementation. the value chain is split into two segments. For example. a fairly sophisticated applied R&D effort may be needed. a strong market research group may be able to identify the kinds of niches available to the products or services under consideration. of which the firm may be only a small part. In analyzing the complete value chain of a product. R&D may be an important consideration also. In terms of finance. is not a problem unless it prevents the company from successfully implementing its strategy.an area of primary expertise where its primary activities (and core competencies) lie. if there is insufficient money to do both. be a dominant factor in choosing either approach. A weakness. to produce a few high quality goods with a small amount of capital because the needed manufacturing facilities may be small. This should be a good discussion question . for example. Either approach costs both time and money. in itself. yet it is a crucial one. Either the workforce would need to be replaced or an extensive job training and job enrichment program would need to be established. note that even if a firm operates up and down the entire industry chain. the production of a large number of low-priced products suggests a large capital intensive manufacturing facility.29 The focus of value-chain analysis is to examine the corporation in the context of the overall chain of valuecreating activities. To gain competitive advantage. however. 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. The systematic examination of individual value activities can lead to a better understanding of a corporation’s strengths and weaknesses . An expensive engineering staff may be needed. to design the assembly line needed to keep costs as low as possible for a low-priced product. each corporation has its own internal value chain of activities. it usually has a center of gravity . One solution to this question is to argue that a company must do both: build distinctive competencies and eliminate core weaknesses. In order to produce high-quality products. Costs would be extremely high because of the need for overtime and the lack of automated equipment. In corporate value-chain analysis. publishing as Prentice Hall . Copyright © 2011 Pearson Education. there is no one best answer to this question. Unfortunately. Because most corporations make several different products or services. If the facilities are primarily job shop.Chapter Four Notes . The type of manufacturing system in place will. in contrast.especially for grad students. It may be possible. A few of the most important factors can be brought out by going through each functional area. Inc. Each of a company’s product lines has its own distinctive value chain. an internal analysis of the firm involves analyzing a series of different value chains. 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.thus supporting strategic planning. A3. Most of the literature in strategy does not even deal with this issue. In industry value-chain analysis. This might be an activity which a corporation might want to expand when doing strategic planning. a fairly unskilled and low paid workforce cannot normally be expected to produce a high quality product on old assembly line machinery. upstream and downstream parts with the corporation under examination being the focal point. either the weakness must be fixed or the strategy changed. utilizing craft labor. A2. a plan to produce a large number of low-priced products would not be feasible in the short run.
c. operating cash flow. d. 5B The business model in which a company sells products. time model. factor analysis. 2D According to the resource-based view of the firm. timeliness. Copyright © 2011 Pearson Education. d. d. at breakeven pricing in order to sell higher-margin products. 4C A core competency can be easily imitated to the extent that it is transparent. which of the following is one of the two characteristics of resources and capabilities that are important in sustaining competitive advantage? a. e. b. Inc. b. tautological. such as razor blades. e. is called the a. b. b. certainty. and a. durability. c. cheap. customer solutions model.30 . internal strategic factors. d. and a.Chapter Four Notes MULTIPLE CHOICE QUESTIONS 1A (The letter after each item number is the correct answer) The VRIO framework evaluates a firm’s competencies by examining the variables of value. outsourcing. c. d. translucence. efficiency model. SWOT. e. quality accounting. transferable. c. permeability. multi-component system. ownership. such as razors. replicable. publishing as Prentice Hall . organization. competitive forces. e. c. imitability. qualitative. rareness. e. 3C The particular strengths and weaknesses that will help determine the future of the company are called a. objective. switchboard model. durable. b.
Employees having two or more superiors. b. Inc. authority. entrepreneur-dominated company with one or two product lines that operates in a small niche market. c. with employees acting as functional specialists but with no attempt at gaining synergy among the divisions.Chapter Four Notes . Most appropriate for large corporations with many product lines in several unrelated industries. Most appropriate for small. entrepreneur-dominated company with one or two product lines that operates in a small niche market. and work flow. c. b. d. Most appropriate for small. d. Most appropriate for large corporations with many product lines in several related industries. e. d. b. 8C Which of the following best describes a simple structure? a.31 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. e. Most appropriate for large corporations with many product lines in several unrelated industries. with employees acting as specialists attempting to gain synergy among divisional activities. with employees acting as functional specialists attempting to gain synergy among divisional activities. Most appropriate for large corporations with many product lines in several related industries. Work is divided into subunits on the basis of such functions as manufacturing and marketing. publishing as Prentice Hall . Which of the following describes a typical functional structure? a. Employees having two or more superiors. e. e. Work is divided into subunits on the basis of areas like manufacturing and marketing. distinctive competency. d. a project manager and a functional manager. 7A The structure of a corporation is often defined in terms of communication. technological competence. b. key capability. c. center of gravity. unique mission identifiable competitors external market focus a coordinator of all SBUs control of its business functions Copyright © 2011 Pearson Education. with employees acting as jack-of-all trades. a project manager and a functional manager. c. 9D Which one of the following is NOT one of the components that a SBU of any size or level must have? a. with employees acting as jack-of-all trades. with employees acting as specialists but with no attempt at gaining synergy among the divisions. core competency.
Most appropriate for large corporations with many product lines in several related industries. entrepreneur-dominated company with one or two product lines that operates in a small niche market. e. with employees acting as functional specialists attempting to gain synergy among divisional activities.Chapter Four Notes 10B Which one of the following best describes a divisional structure? a. Inc. a project manager and a functional manager. c. 11E Which one of the following best describes a conglomerate structure? a. e. b. Work is divided into subunits on the basis of such functions as manufacturing and marketing. place. integration (p. Employees having two or more superiors. entrepreneur-dominated company with one or two product lines that operates in a small niche market. b. b. Employees having two or more superiors. Most appropriate for large corporations with many product lines in several unrelated industries. values. Most appropriate for small. with employees acting as functional specialists attempting to gain synergy among divisional activities. Most appropriate for large corporations with many product lines in several unrelated industries. Most appropriate for large corporations with many product lines in several related industries. with employees acting as jack-of-all trades. b. with employees acting as functional specialists but with no attempt at gaining synergy among the divisions. publishing as Prentice Hall . c. d. and price is called Copyright © 2011 Pearson Education. c. or other culture content associated with the unit? a. with employees acting as jack-of-all trades.63) strength intensity coordination unity 13C What is the attribute of corporate culture that is the degree to which members of a unit accept the norms. with employees acting as functional specialists but with no attempt at gaining synergy among the divisions. promotion. Most appropriate for small. e. c.32 . d. d. e. integration strength intensity coordination unity 14D The particular combination of product. d. 12A What is the attribute of corporate culture that promotes the extent to which units within an organization share a common culture? a. a project manager and a functional manager. Work is divided into subunits on the basis of such functions as manufacturing and marketing.
marketing leverage. marketing mix. b. strategic study. d. market segmentation. b. e. higher profits higher earnings per share. d. product life cycle. d. technology transfer. investment evaluation. e. 15B marketing position. technological competence. technological discontinuity. capital budgeting.33 a. 18E The process of taking a new technology from the laboratory to the marketplace is called a. Inc. marketing leverage. product life cycle. b.Chapter Four Notes . break-even analysis. a firm with a high amount of financial leverage in an expanding market should have a. b. c. c. marketing position. b. the experience curve. technological competence. b. d. the R & D mix. marketing mix. financial leverage. higher sales revenue. Copyright © 2011 Pearson Education. e. lower profits. 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. publishing as Prentice Hall . c. c. d. market segmentation. lower earnings per share. technology transfer. e. c. break-even analysis. e. economies of scope versus operating leverage. 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. d. c. 16C As compared to a firm with low financial leverage. e. 17E The analysis and ranking of possible investments in terms of additional outlays and additional needed receipts is called a.
c. SFAS. management's current response to a particular factor. b. d. simultaneous strategy. e. Copyright © 2011 Pearson Education. e. c. b. 23A The technique recommended by the text to summarize an analysis of internal factors is called a. c. the issues priority matrix. d. the significance of a particular company within a particular industry. they have less significance for the management of multinational corporations. e. d. economies of scope over economies of scale. jointly-designed objectives. publishing as Prentice Hall . SWOT. 21D The term that describes putting once isolated specialists together to work and compare notes in a collective design effort is called a. whether a factor is important in the long or short term. cooperative design. e. e. a particular factor's probable impact on that company's strategic position.Chapter Four Notes 20D Flexible manufacturing emphasizes a. high-volume output of mass produced products. c. 24B Weight in column 2 of the IFAS Table refers to a. the learning curve is longer since technology is automated. they are experiencing a renewed sense of power. economies of scale over economies of scope. b. how well a company is performing in the industry. U. IFAS. b. d. EFAS. b. d. the cost advantages of intermittent system with the customer-oriented advantages of continuous system.34 .S. participatory planning. concurrent engineering. c. the current trend regarding unions is that a. Inc. they are maintaining an adversarial position to try to hold onto their membership. membership is declining. corruption and scandal still taint their existence. 22B According to the text.
O. they are called focus strategies and designated as differentiation focus or cost focus. 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.Chapter Five Notes. In terms of automobiles. Weaknesses. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1.35 CHAPTER FIVE STRATEGY FORMULATION: SITUATION ANALYSIS AND BUSINESS STRATEGY SUMMARY OF KEY POINTS • The basis of strategy formulation is S. an in-depth consideration of a company's Strengths. • 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. or product/service. publishing as Prentice Hall . • Cooperative strategy is usually conducted via strategic alliances. Therefore a niche can disappear because of changes within a company as well as because of environmental changes. This niche is the specific competitive role held by a corporation. • After situation analysis and before considering alternative strategies. both Rolls Royce and Morgan fill two very different niches in the auto industry. and Threats. 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. it is important to take the time to review the company's current mission and objectives. A Strategic Factors Analysis Table summarizes and condenses the external and internal factors identified earlier as EFAS and IFAS into strategic factors. The key to answering this question is understanding that a propitious niche exists not only because of environmental opportunities. division. If the strategies are aimed at a specific market segment or niche. analysis.T. licensing arrangements. Inc. Mutual service consortia.W. joint ventures. Opportunities. but also because a company has the resources to take advantage of these opportunities. • 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. Some of the possible changes are: Copyright © 2011 Pearson Education. If they are inappropriate. • Porter proposes differentiation and lower cost as the two basic competitive strategies. change them. and value-chain partnerships are types of strategic alliances. These may be timing or location tactics.
not only fills a demand in the market but actually causes the market to expand. Inc. 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. suggests however. Japanese companies such as Toyota in automobiles and Panasonic in consumer electronics are good examples. is doomed to below-average performance. The need for resources in the battle for new niches may cause the company/SBU to take its original niche for granted. Examples can be found of businesses which have been able to jointly follow overall low cost and high quality differentiation strategies. The company/SBU continues to make its products or services. The niche could then only support the strongest companies/SBUs. The environment/industry changes. through its own efforts.The market gets smaller because of factors beyond the control of the company/SBU. 1) Contracts . Customers either leave the market by buying a substitute product or stay in the market by buying a competitor's product. thus causing it to lose its niche. The possibilities for class discussion can be almost endless. Copyright © 2011 Pearson Education. the company/SBU may be forced to cut back its activities. 1) Contracts . That unit. Expands . the increasing price of gasoline in 2008 contracted the market for gas-guzzling performance-oriented automobiles.The company/SBU.) Research by Greg Dess and Peter Davis as well as by Rod White. but the size of the market changes. it is likely to become much less profitable unless it can find a new niche. 2.S. 2) b.Its own success in the niche may cause the company/SBU to move into nearby niches. 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). according to Porter. thereby squeezing the company/SBU out of the original market and thus out of its niche. profit opportunities will cause competitors with sufficient internal resources to join the niche. Such unfulfilled demand encourages competitors which may drive the original company/SBU out of the niche. The same market demand continues for specific products or services.Chapter Five Notes a.Due to demands for resources elsewhere in the corporation. publishing as Prentice Hall . (See Porter's Competitive Advantage.36 . The company/SBU Changes. Such competitors may be stronger and drive the original company/SBU out of the market. page 16. The specifics of what might happen depends upon how the company/SBU originally lost its niche. For example. that this may not be the case. It is unable to satisfy market demand. but the company/SBU itself changes so that there is no longer a synchronization between itself and the market. 2) If a company/SBU loses its niche. Small competitors may take advantage of the lack of concern by fighting to expand their piece of the market. Their offer of low price and high quality created serious problems for those companies following only one competitive strategy in the U. Expands .
It was the first computer to be "user friendly. but that they tend to enjoy a long-term advantage over their rivals. to supply almost everything it needed (in terms of software and hardware) to make and market its IBM PC. Instead of having to develop everything internally.for all practical purposes the inventor of the personal computer. for example. Consequently. 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. Late mover firms can have certain advantages as well. 4. the only real sustainable competitive advantage lies not in a corporation's product line. IBM was able to use a large number of outside vendors. but also to add value to the product or service being provided. Dell was able to foresee the trend toward Copyright © 2011 Pearson Education. companies in a hypercompetitive industry learn to quickly imitate the successful strategies of market leaders . They can look for weaknesses in the current competition and develop a product to get around these weaknesses. Through continuous improvement programs. By continuing to emphasize "user friendly" personal computers using its own speciallydeveloped software. Companies must thus be willing to cannibalize their own successful products in order to sustain their competitive advantage. publishing as Prentice Hall . It is not enough to be just the lowest cost competitor. (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. Like IBM in the 1980s and Dell in the 1990s. noted Apple Computer's difficulty in being accepted in business firms . competitors are usually working to lower their costs as well. Apple was able to keep and build the home and school markets while other competitors flailed unsuccessfully against IBM for the business market. 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. a company or business unit must constantly work to improve its competitive advantage or else it will not be sustainable. According to D'Aveni. but in its ability to learn and to adapt to constantly changing conditions. What are the advantages and disadvantages of being the first mover in an industry? Give some examples of first mover and late mover firms. they can wait until demand has been developed by the pioneer. Research indicates that pioneers in industries not only tend to obtain higher market shares than do later entrants. The same is true of a firm or unit that is following a differentiation strategy. Since hypercompetitive industries go through escalating stages of competition. 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.a market where IBM had tremendous strength and customer loyalty. They can evaluate which product ideas work and which tend to fail. Were they successful? The first company to manufacture and sell a new product or service is called the first mover or pioneer.Chapter Five Notes. IBM.37 3." Consumers could learn how to use the PC quickly and they were fascinated with Apple's graphic capabilities.making it increasingly difficult to sustain any competitive advantage. This occurs because the first mover has certain advantages: (1) The company is able to establish a reputation as a leader in the industry. Firms must find new ways not only to reduce costs further. Inc. A good example of a first mover firm is Apple Computer . like Microsoft and Intel among others. IBM and Dell were successful because of their ability to envision trends in personal computers.
Chapter Five Notes low cost computers and was able to replace IBM as industry leader through value chain efficiencies. ADDITIONAL DISCUSSION QUESTIONS A1. 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. It pulls the most important factors from the EFAS and IFAS Tables.T. It is thus an admission that a firm cannot achieve an objective on its own. The Strategic Factors Analysis Summary (SFAS) Matrix is one suggested way to summarize and combine a corporation's external and internal strategic factors. Alliances are usually formed in order to remedy a weakness or to generate a new strength. a fragmented industry is an industry with many small and medium-sized companies competing for relatively small market shares.W. publishing as Prentice Hall . 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. it has less reason to continue with the alliance. 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.38 . The SFAS Matrix requires the strategic manager to condense the many internal and external factors into less than 10 factors to be more manageable. Strategic alliances became especially popular during the 1990s when too much vertical integration kept a firm from adapting successfully to changing conditions. It forces strategic managers to develop both growth and retrenchment strategies. reduce financial or political risk. enter a new market. analysis. The real value of this technique is not to suggest a particular strategy the firm should follow.O. A2. but to act as a brainstorming tool to help create a series of alternative strategies management might not otherwise consider. No one firm or group of firms is able to dominate the industry in any way. and/or achieve competitive advantage. How does the Strategic Factors Analysis Summary (SFAS) aid in strategy formulation? The basic building block of strategy formulation is S. How can a company overcome the limitations of being in a fragmented industry? As pointed out in the text. Alliances may be formed in order to obtain access to a new technology or manufacturing facilities. 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. The SFAS Matrix thus contains only the most important factors and provides the basis for strategy formulation. This may occur because the industry is relatively new - Copyright © 2011 Pearson Education. 5. Inc. even though they might not believe at first that both sets of strategies are applicable to their corporation's situation. Once a firm learns what it needs. Businesses tend to be local and oriented to market segments. A3. Why are most strategic alliances temporary? The temporary nature of most strategic alliances comes from their rationale for being established. The TOWS Matrix is a logical extension of SWOT Analysis and helps keep strategic managers flexible in terms of possible options.
If there are few economies to be gained from size or no one design ever reaches the point of consumer acceptance. d.T. Apple Computer had successfully carved out a niche.O. 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.U. Before IBM entered the personal computer marketplace.O. A4.39 based upon a product in the early stage of its product life cycle. however. When a company is competing in an industry where it is possible to develop slow-cycle resources.I. there is less advantage to being a first mover. MULTIPLE CHOICE QUESTIONS 1C (The letter after each item number is the correct answer) 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.T. 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. Microsoft's MS-DOS soon became the standard of the industry behind IBM's marketing clout. S. e. In this kind of situation. the pizza business was a fragmented industry characterized by many small pizza "parlors" serving small market segments in cities throughout America.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. they are fast-cycle resources. b.B. S. c. 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. In an industry where the resources are primarily fast-cycle. Market share was divided among a large number of products. M. that industry was relatively fragmented. Slow-cycle resources which are durable and enduring are likely to provide the long-term competitive advantage needed to recoup that investment.Chapter Five Notes. Often. To the extent that the resources and competencies are not so durable and are relatively imitable. P. Since there is much less time for a firm to recoup its investment. being a flexible late mover may be more profitable. These are slow-cycle resources. the trick to be a successful firm in this kind of industry is to find the key to standardization which allows economies. Domino's Pizza achieved similar success in fast food by providing standardized pizza throughout North America and by guaranteeing delivery time faster than competition.E. R.B. it makes sense to strive to be a first mover. Copyright © 2011 Pearson Education. the industry may remain in this stage indefinitely. Being a first mover takes time and money.O. Inc. publishing as Prentice Hall . competitive advantage is relatively short-lived. Entry barriers are probably low and new entrants are constantly moving into the industry as others leave or go bankrupt. Before Pizza Hut and Domino's settled upon standardized pizza appealing to a wide variety of tastes across North American.W. The problem of entry and exit into the industry was so bad that experts advised people to beware of buying an "orphan" . but had not been widely adopted for business tasks.
c. b.40 . propitious niche. recovering the competitive lead by using all available resources that the company can provide. Inc. the competitive strategy that applies to the ability to provide unique and superior value to the buyer in terms of product quality.Chapter Five Notes 2B A SFAS Matrix differs from the EFAS and IFAS Tables by adding a new column called a. produce. providing adequate shareholders' return on investment. competitive scope. b. b. IFAS Table. d. and market a comparable product more efficiently than its competitors is called a. improving the competitive position of a corporation's products or services within a specified market segment. Copyright © 2011 Pearson Education. e. implicit strategy. publishing as Prentice Hall . e. is called a a. concentration. c. 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. c. e. comments. 5B Business strategy focuses on a. e. 3A A corporation's specific competitive role. d. rating. 6E According to Porter. lower cost. ensuring that the company maintains the existing market share that it has historically enjoyed. preventing the competition from gaining a competitive edge by undermining their marketing plan. strategic fit. d. which is so well-suited to the firm's internal and external environment that other corporations are NOT likely to challenge or dislodge it. SFAS Table. weight. d. 7B According to Porter. differentiation. c. TOWS Matrix. c. e. duration. common thread. EFAS Table. d. special features. the competitive strategy that applies to the ability of the corporation or its business unit to design. diversification. business screen. weighted score. b. b. Issues Priority Matrix.
Chapter Five Notes- 41
or after-sale service is called a. b. c. d. e. 8A competitive scope. differentiation. concentration. diversification. lower cost.
According to Porter, the term that applies to the breadth of a company's target market is called a. b. c. d. e. competitive scope. differentiation. concentration. diversification. lower cost.
When lower cost and differentiation strategies have a narrow focus on a market niche they are simply called a. b. c. d. e. cost leadership and differentiation. concentration and differentiation. cost focus and differentiation focus. competitive scope and focused differentiation. diversification and concentration.
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. b. c. d. e. differentiation cost leadership differentiation focus competitive advantage cost focus
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. b. c. d. e. differentiation cost leadership differentiation focus competitive advantage cost focus
According to Porter, a business unit in a competitive marketplace with no competitive advantage is a. b. c. d. e. achieving synergy. practicing innovative leadership. stuck on the middle. not goal directed. last in line.
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42 - Chapter Five Notes
Midamar Corporation, the maker of halal foods, successfully follows a strategy of a. b. c. d. e. cost leadership. cost focus. differentiation. differentiation focus. cost differentiation.
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. b. c. d. e. united industry. fragmented industry. consolidated industry. isolated industry. integrated industry.
As an industry matures while overcoming fragmentation and becomes dominated by a small number of large companies, it tends to become a(n) a. b. c. d. e. united industry. fragmented industry. consolidated industry. isolated industry. integrated industry.
A tactic is defined by the text as a. b. c. d. e. 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. the first company to manufacture and sell a new product or service. any action by a company or business unit that provides a direct or indirect indication of its intentions, motives, goals, or internal situation. policies which link formulation and implementation of the strategy. the ability to adapt a product or delivery system more closely to buyers' needs.
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. b. c. d. e. flanking maneuver bypass attack encirclement frontal assault guerilla warfare
Which offensive tactic advocates attacking a part of the market where the competitor is weak? a. b. c. flanking maneuver bypass attack encirclement
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Chapter Five Notes- 43
d. e. 19B
frontal assault guerilla warfare
Which offensive tactic proposes an indirect approach against the established competitor such as changing the rules of the game? a. b. c. d. e. flanking maneuver bypass attack encirclement frontal assault guerilla warfare
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. b. c. d. e. guerilla warfare lower the inducement for attack encirclement raise structural barriers increase expected retaliation
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.
The kind of strategic alliance in which a company forms a strong and close longterm 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.
Which of the following is NOT a reason for forming a strategic alliance? a. obtain access to specific markets b. reduce financial risk c. reduce political risk d. achieve competitive advantage e. develop secret proprietary technology.
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44 . • Directional growth strategies are composed of concentration via vertical or horizontal growth and diversification via concentric or conglomerate means. and profit. Vertical growth. • Retrenchment strategies are composed of turnaround. transfers resources. through line extensions) or expansion into another geographic region (an example of internal growth). An internal example was Lowe’s expansion out of the southern U. selling out/divestment. the industries in which the firm competes (portfolio analysis). • Directional strategies may be growth. • Parenting strategy deals with what businesses the company should own and with what structure. stability. One example of external horizontal growth was Delta Airlines’ purchase of Northwest Airline. in contrast. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1.Chapter Six Notes CHAPTER SIX STRATEGY FORMULATION: CORPORATE STRATEGY SUMMARY OF KEY POINTS • Corporate strategy deals with three key issues facing the corporation as a whole: the firm's overall orientation toward growth (directional strategy). • 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. publishing as Prentice Hall .g.S. It often involves the acquisition of another firm in the same industry (an example of external growth). 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. 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. and cultivates capabilities among units (parenting strategy). These are typically temporary. captive company. • Stability strategies are composed of pause. or retrenchment. and bankruptcy or liquidation. involves a firm's taking over a function previously performed by a supplier or a distributor. management processes.. into the rest of North America. 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 Copyright © 2011 Pearson Education. Inc. and the manner in which management coordinates activities. How does horizontal growth differ from vertical growth as a corporate strategy? From concentric diversification? Students often confuse these three strategies. It can also be useful to coordinate multiple strategic alliances. no change. and philosophy it should foster superior performance from the company's business units. but it could also be through the expansion of a firm's products in its current markets (e.
Here are some of them: INTERNAL GROWTH Pros ⋅ ⋅ ⋅ ⋅ More likely to be based on some proprietary development giving competitive advantage. but have a "common thread" in distribution channels relating them. Can purchase someone else's problems. Coca Cola’s acquisition of Taylor Wines. this would be an example of forward vertical growth. May ignore other uses of money with quicker return. was an example of concentric diversification out of the soft drink industry. Cons ⋅ ⋅ ⋅ ⋅ May take a long time to develop a new product or new concept. Favored program may take time away from current businesses EXTERNAL GROWTH Pros ⋅ ⋅ ⋅ ⋅ Can grow quickly. some tradeoffs for each approach. however. PepsiCo's diversification into snack foods to complement its line of soft drinks is an example of concentric diversification. Need a lot of money and/or financial moxie to do it right. can always cut losses before in too deep. More likely to fit well with current business units/products Can finance slowly out of retained earnings. The additions may be through acquisition or through internal development. Can generate a lot of excitement on Wall Street and boost stock price. The firm buys or develops another division which is similar to its present product-line. 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.Chapter Six Notes. Cons ⋅ ⋅ ⋅ ⋅ All or nothing gamble. If it purchased its current distributors. Good way to use financial leverage to boost EPS. it would be an example of horizontal growth in the same industry.45 to be diversification). is the addition of products or divisions which are related to the corporation's main business. The products are not alike. Concentric diversification. May be hard to get current managers to try something new. Copyright © 2011 Pearson Education. Don't have to build anything from scratch. If plan no good. Inc. in contrast. If Coca Cola bought PepsiCo. however. publishing as Prentice Hall . There are. 50% of all acquisitions fail to achieve the purchaser's objective. but are added because of the attractiveness of other industries rather than because they support the activities of the current product lines. 2.
it is therefore a strategy by default.W. They are different in terms of what they stand for. Portfolio analysis. They are also memorable buzz-words for use in the situational analysis. Opportunities. These two approaches are alike in a number of ways. 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. and acquisitions take less time and are often less expensive at first.O. it deserves to be called a strategy. is a term for a whole series of different techniques for analyzing internal and external environmental factors. but is just a pause between strategies. publishing as Prentice Hall .O. 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. Since one way to view strategy is as a direction the corporation is taking in order to reach its objectives. is merely an acronym for Strengths. 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. licensing. standing still has no direction and thus is not a strategy. It is not really a technique to aid in situation analysis. most of which will never be successful? The basic theme of portfolio analysis its emphasis on cash flow. Just as no decision is the same as making a decision. 5. stability is perceived only as a viable short-term strategy while management is waiting for key factors needed for growth to fall into place.. Compare and contrast S. Neither is really a substitute for the other and can actually complement each other. The text takes the position.O. however.Chapter Six Notes In terms of international entry strategies. 3.T. Portfolio analysis puts corporate headquarters Copyright © 2011 Pearson Education. internal growth through green field development is usually expensive and time consuming. 4.W. and dogs help remind the student that the basis of strategic management is environmental assessment. 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. but may end up being more expensive if the other firm has a lot of problems. It merely is a buzz-word to help a person remember to search for strategic variables. Terms like S. Weaknesses. cash cows. but allows the firm to use its own competencies to achieve success. it is argued that even though stability may be viewed as not choosing a strategy. According to the text. that stability is a strategy in itself. Joint ventures. Inc. in contrast. Typically. 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. to the extent that stability helps explain the movement of a corporation toward its objectives. Nevertheless. S.W. and Threats. however.46 .T.T analysis with portfolio analysis.
July-August.Chapter Six Notes. In portfolio analysis. they typically have no real common thread other than return on investment (i. 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. ADDITIONAL DISCUSSION QUESTIONS A1. financial synergy). does imply. however. 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. They only need to involve themselves in divisional (business) strategies to the extent that funds are requested to support the strategies. that is..e.47 into the role of an internal banker. but to coordinate diverse units to achieve synergy. publishing as Prentice Hall . The central job of corporate headquarters is not to be a banker. 1980). 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. Operating in effect as holding companies. There are. As suggested by its name. by using cash generated from mature units to build new product lines. Corporate parenting attempts to answer two similar. They can be very successful because their operations in many diverse businesses allow them to spread their risks over many different markets. however. Corporate parenting. This is one way to achieve a "strategic fit" so that overall corporate effectiveness and efficiency are achieved. yet are successful. 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. 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. One could therefore conclude that a common thread is not necessary for corporate success. 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. at least in the short run. however. Inc. top management views its product lines and business units as a series of investments from which it expects to get a profitable return. but different questions: • • What businesses should this company own and why? What organizational structure. Corporate strategy makers are thus able to focus entirely on ROI. the conglomerate approach implies a heavy finance orientation. Just as the common thread concept implies a heavy marketing orientation. Unfortunately. in contrast. that such a heavy financial Copyright © 2011 Pearson Education. 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. Berkeley Hathaway and General Electric are just two of the many examples of successful conglomerates. The classic article by Hayes and Abernathy ("Managing Our Way to Economic Decline. a number of corporations which do not have a common thread connecting their divisions. 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. 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. there should be a "common thread" or unifying theme. management processes. The problem with this approach. and that those corporations with such a common thread are better able to direct and administer their many activities. 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. This is especially important in a global industry in which a corporation must manage interrelated business units for global advantage." HBR.
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. What applies to one product probably will not apply to another. 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. 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. A4. A3. Dogs appear to be those products or units on the decline stage of the product life cycle. customized batches instead of in large assembly-line production. they lose some of their value when they are taken too much at face value and generalized too far. 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. Inc. 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. On the basis of some future point on the experience curve.48 . 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. Portfolio analysis thus serves as a convenient technique for comparing external opportunities and threats with internal strengths and weaknesses. Different products have different product life cycles.each with their own specialized (and thus low volume) product. By carefully examining both market or industry factors and business strengths or market share. the idea is to price the product very low to preempt competition and quickly increase market demand and thus market share. At a basic level. and maturity stages of the product life cycle. 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. The experience curve is certainly key to understanding the implications of the BCG matrix. 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. 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. Both the GE and the BCG matrixes list the external environment on one axis of Copyright © 2011 Pearson Education. Unfortunately. The experience curve does not "just happen". the prescriptions of the BCG matrix will not be useful and may in fact hurt a company if applied as given. publishing as Prentice Hall . 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. The development of question marks into stars and then into cash cows suggests the introduction. In order in make a question mark product a star. growth. it is possible to pinpoint factors of strategic importance to corporate or divisional success. Future market share may be composed of a series of market segments . a firm has to invest a lot of time and money into getting that experience. In this instance. A2. the experience curve of the industry as a whole or of one company might not hold true for a particular company. the answer is certainly affirmative. 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. As the text points out.Chapter Six Notes orientation leads to short-run thinking and may actually cause long-run decline.
In fact. Whereas the BCG matrix is based on some assumptions concerning the experience curve and the link of market share with cash flow and profitability. a maker of chip sets for wireless networks. MULTIPLE CHOICE QUESTIONS 1A (The letter after each item number is the correct answer) Which strategy specifies the firm's overall direction in terms of its general orientation toward growth.. In contrast. 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. 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). the answer may also be negative. When highly vertically integrated firms become excessively large and bureaucratic. A5. however. in effect. weights. or obtain access to potential customers. the GE matrix contains no such assumptions. gain control over a scarce resource. 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. Henry Ford. The firm. At a deeper level of analysis. and ratings to calculate the value for each axis of the GE matrix. the maker of Internet hardware. It makes no statement. used internal company resources to build his River Rouge Plant outside Detroit. Inc. The terms given to each cell are very comparable to those given to the cells in the BCG matrix. Vertical growth is a logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry . builds on its distinctive competence by expanding along the industry’s value chain to gain greater competitive advantage. the industries or markets in which it competes.thus justifying outsourcing over vertical growth.especially when technology is predictable and markets are growing. Cisco Systems. the costs of managing the internal transactions may become greater than simply purchasing the needed goods externally . guarantee quality of a key input. one is given the opportunity to use whatever assumptions one feels are valid to generate the various criteria.Chapter Six Notes. chose the external route to vertical growth by purchasing Radiata. 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. for example.49 a matrix and the internal environment on the other. Inc. The GE Business Screen is much more than just a complicated version of the BCG growth-share matrix. and the manner in which it coordinates activities and transfers resources among business units? a. as does the BCG matrix. corporate Copyright © 2011 Pearson Education. publishing as Prentice Hall . This growth can be achieved either internally by expanding current operations or externally through acquisitions. 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. 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. This acquisition gave Cisco access to technology permitting wireless communications at speeds previously only possible with wired connections. To keep and even improve its competitive position.
b. functional c. b. cooperative strategy e. parenting strategy d. portfolio strategy b. acquisition e. c. horizontal growth. stability strategy d. portfolio strategy b. directional strategy c.Chapter Six Notes b. 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. outsourcing 6B Which one of the following strategies is most frequently used in corporations? a. directional strategy c.50 . e. d. concentration c. divisional d. 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. cooperative strategy e. stability growth consolidation retrenchment renewal Copyright © 2011 Pearson Education. organizational e. cooperative strategy e. parenting strategy d. directional strategy c. functional strategy 5E Which is the opposite of a vertical growth strategy? a. portfolio strategy b. Inc. publishing as Prentice Hall . business 2B Which kind of corporate strategy deals with the firm's overall orientation toward growth? a. diversification d.
b. diversification backward vertical growth. publishing as Prentice Hall . 10E Growth through diversification out of an industry into an unrelated industry is called a. improves coordination of activities. c. d. c. e. e.Chapter Six Notes. captive company strategy. concentric diversification. e. c. d. avoids time consuming tasks. concentration. b. c. c. franchising joint venture green-field development turnkey operation management contract 12C Which international entry strategy involves building a manufacturing facility and distribution system from scratch? a. e.51 7A A disadvantage of vertical growth is that it a. 11D Which international entry strategy involves constructing a manufacturing facility for a fee? a. creates entry barriers. b. concentration. horizontal growth. forward vertical growth. d. horizontal growth. Inc. conglomerate diversification. vertical growth. conglomerate diversification. horizontal growth. creates exit barriers. 9C Adding a related or complementary product to a corporation's business units is called a. increases the cost of improvement of coordination and control. franchising joint venture green-field development Copyright © 2011 Pearson Education. concentric diversification. d. 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. e. c. b. d. b. b. vertical growth.
e. market share divided by that of the largest other competitor. opting to decrease short-term discretionary expenses to maintain profits at a certain level? a. c. c. e. Inc. d. its its its its its market share. division. c. e. b. or corporation is defined as a. It involves adding different products or divisions to the corporation. gross sales divided by its market share. d. b. e. b. pause strategy no change strategy retrenchment strategy horizontal strategy profit strategy 14E Which strategy is descriptive of a corporation in a mature industry facing a drop in its attractiveness. pause strategy no change strategy retrenchment strategy growth strategy profit strategy 15B Which strategy involves giving up management of the firm to the courts? a. market share divided by that of the smallest other competitor. Occurs when a corporation liquidates all its assets. 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 Copyright © 2011 Pearson Education.Chapter Six Notes d. 17E In the Boston Consulting Group's growth-share matrix. the relative competitive position of a product. Emphasizes improving operational efficiency and is appropriate when a corporation's problems are pervasive.52 . market share multiplied by that of its nearest competitor. e. b. Occurs when the corporation becomes "captive" to another firm. publishing as Prentice Hall . A form of divestment and is appropriate when corporate problems can be traced to the poor performance of an SBU or product line. b. but not yet critical. d. e. 13A turnkey operation management contract 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. c. d. c. liquidation bankruptcy diversification divestment consolidation 16C What is a turnaround strategy? a. d.
23A Corporate parenting generates corporate strategy by focusing on a. innovative initiative. stabilizing. effective management. e. R&D. b. b. the cash flow among its business units. e. 20E According to the BCG growth-share matrix. c. c. 21E Which of the following is defined by GE as one of the variables forming business strength/competitive position? a. It raises the issue of cash flow availability for use in expansion and growth. acquiring distinctive competencies in the marketplace. cash cows. market share. e. It provides the basis for impartial objectivity from which to make decisions.53 a. Inc. publishing as Prentice Hall ." "question marks. b. d." "white knights. stars. d. e. the key to success is a. c. 19D "dogs.Chapter Six Notes." "buckets. or retrenching. The graphic depiction facilitates communication. differentiating its activities into separate units and integrating these activities through complex integrating mechanisms. b. It encourages top management to evaluation each of the corporation's businesses individually. It stimulates the use of externally oriented data to supplement management's judgment. b. lost leaders." "stars. question marks. d. industry profitability competitive diversity market growth rate market size market share 22B Which of the following is NOT one of the advantages of portfolio analysis? a. d. whether a business unit should be growing. c." New products which are typically introduced in a fast-growing industry are called a. d. dogs. d. the core competencies of the parent corporation and on the value created from the relationship between the parent and its units. Copyright © 2011 Pearson Education. competitive positioning. b. e. c. c. e.
vertical strategy. c. strategic competition. e.Chapter Six Notes 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. laissez-faire competition. horizontal competition. portfolio strategy. c. e. 25C Business firms that compete with each other not only in one business unit. oligopolistic competition. pyramid strategy. horizontal strategy.54 . b. b. Inc. multipoint competition d. d. but in a number of related business units are said to be engaging in a. hierarchical strategy. publishing as Prentice Hall . Copyright © 2011 Pearson Education.
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? Copyright © 2011 Pearson Education. Inc. • Outsourcing is purchasing from someone else a product or service that had been previously provided internally. Are functional strategies interdependent. each with its own functional strategy. R&D. it is increasingly being managed by cross-functional teams composed of managers from each of the functional areas. and information technology strategies. pressures from stakeholders and the corporate culture. 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. Each company or business unit has its own set of functional departments. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. Operations will probably emphasize highly skilled employees and flexible manufacturing to adjust production to customer requests. financial. human resource management.55 CHAPTER SEVEN STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE SUMMARY OF KEY POINTS • Functional strategy maximizes resource productivity so that a distinctive competence will develop to provide a company or business unit a competitive advantage. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. 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. a company’s business competitive strategy of differentiation through high quality means that each functional strategy must support high quality. Among the many functional strategies are marketing. Even though both of these functional strategies can be formulated independently. • Once a set of strategies are formulated. 2. policies must be established to define the ground rules for those charged with implementing the strategies.Chapter Seven Notes. functional strategies must interrelate if they are to be successful. Distribution (part of marketing strategy) will probably be through quality distributors and retailers that emphasize customer service and support. • Corporate scenarios use spreadsheets to develop pro forma financial statements as a decision aid in choosing the best alternative strategy. as well as the needs and desires of key managers when selecting an alternative. For example. operations. Purchase only those activities that are not key to the company's distinctive competence. publishing as Prentice Hall . Because the orientation of each functional strategy is dictated by its parent unit’s business strategy. • Strategic decision-makers must keep in mind questions of acceptable risk levels.
According to the text. customized goods and services. A firm should consider outsourcing an activity or function whenever it has low potential for competitive advantage. 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. processes. Inc. If that activity comprises only a small part of the total value of the firm's products or services. mass customization requires that people. Even though price may be secondary to specific product characteristics. it cannot be significantly higher than the price for a mass produced good. 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 text views policies as the link between strategy formulation and Copyright © 2011 Pearson Education. when that activity or function adds significant value to the company's products or services in addition to providing competitive advantage. If. units. the key to outsourcing is to purchase from outside only those activities that are not key to the company's distinctive competencies. What is the relationship of policies to strategies? Generally speaking. 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. however. 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. The result is low-cost. high quality. the firm should purchase it through long-term contracts with trusted suppliers or distributors. the company may give up the very capabilities that made it successful in the first place . it is an example of reverse vertical integration. it should be purchased on the open market (assuming that quality providers of the activity are plentiful). however. According to the text. when they want it. Full vertical integration should only be considered. 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. 5. Otherwise. When pricing a new product. 4.thus putting itself on the road to eventual decline. For new product pioneers. Penetration pricing offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry. and technology reconfigure themselves to give customers exactly what they want.Chapter Seven Notes This question is especially important for pioneers/first movers into a new market. How does mass customization support a business unit's competitive strategy? Mass customization is an operations functional strategy. As such. a company or business unit can follow a marketing strategy of skim pricing or penetration pricing. 3.56 . 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. Appropriate for an everchanging environment. mass customization requires flexibility and quick responsiveness. the activity contributes highly to the company's products or services. The customer is primarily interested in purchasing a product designed to its own specifications and delivered where and when it needs them. publishing as Prentice Hall . 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.
57 implementation. maximize shareholders wealth. Implementation begins when one moves from planning into organizing and directing activities. ADDITIONAL DISCUSSION QUESTIONS A1. Inc. not action-oriented. publishing as Prentice Hall . and controlling. The leader strategy is normally expensive.Chapter Seven Notes. This strategy would need to be implemented by a business strategy oriented to improving the company's competitive position. diversify into related markets. 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. increase advertising expenditures to emphasize market "pull" over "push. They are the broad guidelines to be used in the implementation of strategy. 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. For example. 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. 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. functional strategy 2E Which of the following is an example of a marketing functional strategy? a. Strategy formulation and implementation can be interchangeable terms based on one's location in a corporate hierarchy. competitive strategy c. achieve overall cost leadership. they more properly belong within strategy formulation. Since the development of policies are primarily planning." Copyright © 2011 Pearson Education. business strategy b. directing. suppose a corporation decides to concentrate in one industry as its corporate growth strategy. the follower R&D strategy can be fairly cheap in comparison. enterprise strategy e. To To To To To increase profits by 10%. MULTIPLE CHOICE QUESTIONS 1E (The letter after each item number is the correct answer) Which strategy is developed to pull together the various activities and competencies of each department so that corporate and business unit performance improves? a. In contrast. This functional strategy is appropriate for those firms choosing to reap the benefits of late movers. At the top management level of a corporation both divisional (business-level) and functional strategies could be viewed as ways of implementing corporate strategy. generic strategy d. This text categorizes all strategies under the heading of strategy formulation because of their common planning orientation. c. d. e. The same can be said of functional strategy. b.
Chapter Seven Notes 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. skimming the cream. d. market development. pioneer the lowest-cost product design. pull strategy. publishing as Prentice Hall . e. c. push strategy. illegal in most countries. create low-cost ways of performing value activities. b. market development. an application of the capital asset pricing model. innovate in other activities to increase buyer value. a good way to build a core competency. b. imitate the products pioneered by others. 7C According to Porter. 8C The flexible manufacturing system is defined by the text as Copyright © 2011 Pearson Education. c. b. product development. d. push strategy. c. e.58 . an example of internal financing. c. to achieve a cost advantage by following the functional strategy of technological followership a business unit should a. product development. d. b. skimming the cream. e. Inc. b. d. 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. c. e.eventually paid off with money generated from the acquired company's operations or sale of its assets is a. d. the leveraged buyout. pull strategy. demand pricing competitive pricing skim pricing penetration pricing loss-leader pricing 4C The type of marketing strategy in which a company develops new products for new or existing markets is a. 6D A popular financial strategy in which a company is acquired in a transaction financed largely by debt . e. be the first firm down the learning curve.
c. strategic performance feedback. are very expensive.Chapter Seven Notes. transaction costing. 360-degree appraisal. c. publishing as Prentice Hall . processes. c. 9D The manufacturing strategy which requires that people. are not central to the company's distinctive competence. the hokey pokey. horizontal integration. a process utilizing the just-in-time (JIT) method of manufacturing. parts grouped into manufacturing families to produce a wide variety of mass-produced items. 10B continuous improvement. e. tactical performance looping. c. but is positioned in the same order as the parts are processed. d. are not very expensive. b. standardization of components with each machine functioning like a job shop. and technology reconfigure themselves to give customers exactly what they want. d. b. b. 11C A recent trend in information systems strategy is a. e. 13A The key to outsourcing is to purchase from the outside only those activities that a. job shop. d. are provided by an important supplier. b. units. bottom-up performance evaluation. one-of-a-kind production using skilled labor. highly automated assembly lines making one mass-produced product using little human labor. d. when they want it is called a. b. replacing main frame computers with robots. automating customer service. 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? Copyright © 2011 Pearson Education. just-in-time. provide the company competitive advantage.59 a. forming closer relationships with customers and suppliers through extranets. computerizing accounting. mass customization. vertical integration. c. e. 12D Purchasing a product or service from an outside contractor is called a. e. e. outsourcing. replacing Fortran with Cobol in order to boost productivity. The HRM functional strategy in which input for performance appraisal is gathered from multiple sources is a. b. d. the behaviorally anchored rating scale. mass production. c. e. Inc. d.
e. c. follow the leader hit another home run arms race do everything 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.W. develop common-sized financial statement. 18D The technique used to help strategists choose among alternative choices by defining the task environment. decision trees. analysis. d. b.O. d. Copyright © 2011 Pearson Education. industry scenarios. c. Capital Asset Pricing Model. the future long-term prospects of the industry. publishing as Prentice Hall . b.T. 19E The first step in constructing a corporate scenario is to a. c.T. cash flow. follow the leader hit another home run arms race do everything losing hand 17B When considering acceptable alternative strategies. d. d. the specific strategic factors developed in the S. the most important criterion is the ability of the proposed strategy to deal with a. decide upon how much risk management is willing to accept. corporate scenarios. b. d. d. S.W.Chapter Seven Notes a. c. e. e. defining the competitive environment in which the firm is competing. b. and using proforma financial statements is called a.O. c. e. e. construct detailed pro forma financial statements. b. c. governmental regulations and requirements placed on the industry. developing a set of various forecasts. analysis. b. use industry scenarios to develop a set of assumptions about the task environment. Inc. 15C follow the leader hit another home run arms race do everything losing hand 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. analyze the societal environment.60 . e.
21A In order to avoid reaching consensus before all the issues have been examined. d.61 20C A strategy aimed at influencing key stakeholders is a a. d. e. b. business strategy. e. devil's advocate Sloan's judgment sales presentation dialectical inquiry scenario construction Copyright © 2011 Pearson Education. corporate strategy. which decision-making technique assigns a group or individual to identify potential problems with an alternative? a. Inc. functional strategy. horizontal strategy.Chapter Seven Notes. publishing as Prentice Hall . b. political strategy. c. c.
publishing as Prentice Hall . investment. according to Chandler. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. • The job characteristics model of job design is a very useful way to rethink the way work is done at the employee level. which have successfully progressed through the stages of birth.Chapter Eight Notes CHAPTER EIGHT STRATEGY IMPLEMENTATION: ORGANIZING FOR ACTION SUMMARY OF KEY POINTS • Changes in a corporation's structure.other than trying to exit one business and enter another. and cellular organization structures. • The organizational life cycle helps explain why companies. or management synergy. 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. it tends to move from a stage I simple structure to a stage II functional structure and finally to a stage III divisional structure. This is one reason why corporations commonly reorganize after an acquisition. there is no real reason to acquire another firm . • More flexible advanced forms of organizational structure are being used to implement strategies. growth. operating. service. A lot of synergy is needed in vertical and horizontal growth as well as in concentric diversification. Some of these are the matrix. The firm is looking for advantages of scale or scope. As a company grows and develops. • Multinational corporations tend to organize themselves either into product groups. or time. or in a matrix structure to balance the needs of the corporation (satisfied through centralization) with those of the local situation (satisfied through decentralization). and maturity.62 . by geographic areas. Its aim is to reduce manufacturing defects to only 3. If some sort of synergy cannot be achieved. It is an implementation program because it asks. however. The corporation pursues these strategies in order to achieve the benefits of efficiency coming from marketing. follow significant changes in strategy. eventually go into decline and die. If. Inc. how would we run this place?" • Six sigma is a quality improvement program used to reduce costs and increase quality by reducing product variance. top management Copyright © 2011 Pearson Education. • Reengineering is the radical redesign of business processes to achieve major gains in cost. network. The extent to which synergy should be achieved depends upon the strategy being pursued. the corporation is pursuing conglomerate diversification as a strategy.4 per million. "If this were a new company.
specialists in certain areas may need to be hired from outside the company. strategies. budgets. Some may take night courses at a local community college or university. a new information and management system. They lack the necessary in-depth knowledge of functional areas. A company may need to "unlearn" its traditions and policies in order to revitalize itself. the owner-manager needs to train those in the company who are willing to learn functional skills and knowledge. (See the additional teaching module at the end of this discussion question section. In some instances. and procedures. objectives. maturity. 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. Reengineering has been touted as one way for a corporation to renew itself by rethinking and redesigning its business activities. 4. like the product life cycle. or time. 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. 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. To prepare the firm for this transition.) The noted sociologist. Inc. service. 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. and policies. Management's philosophy is one of buying and selling companies without much attempt to gain the benefits of synergy.Chapter Eight Notes. According to Danny Miller in his book.63 may only wish financial synergy in which high cash flow from one unit makes up for low cash flow from another unit. 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). the owner-manager needs to begin giving them increasing decision-making autonomy. This tendency to do things the "company way" can lead to an inability to adapt appropriately to changing conditions. and death. 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. decline. and a new value system with greater emphasis on the customer. One way to keep from getting in a rut like this is for top management in particular to frequently question its mission. referred to this phenomenon as "trained incapacity" in which one's abilities can function as "blind spots" when those abilities are pushed too far. It is an effective way to implement a Copyright © 2011 Pearson Education. As others in the company build their expertise in certain areas. The is referred to by Miller and Friesen as the revival stage. growth. organizations tend to move through the stages of birth. 2. the use of cross-functional work teams. In this case. Others may participate in various management development programs offered by organizations like the American Management Association. 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. publishing as Prentice Hall . 3. Robert Merton. It involves a fundamental rethinking of the way work is done. as well as its programs.
64 . Like other fads. Structure is thus viewed as a response to environmental change. etc. The cellular/modular form includes the dispersed entrepreneurship of the divisional structure. publishing as Prentice Hall . however. This is one reason why traditional academics who like to segment their areas of study have difficulty with the more integrative and practitioneroriented concept of reengineering. management by objectives. research studies showing mixed results. Unless these academics are able to see reengineering as a useful way to bridge the gap between organization and job design. 5. Authorities had pointed out instances where reengineering failed or had no real impact on performance.) that can operate alone but that can interact with other cells to produce a more potent and competent business mechanism. total quality management and reengineering were the hot topics of the 1990s. In contrast. How is the cellular/modular organization different from the network structure? Miles and Snow. Adherents of reengineering argue. 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!). Traditional org theory views org design from the outside in. "a cellular organization is composed of cells (self-managing teams. and finally the stage when business firms view the concept as "out of fashion" and move on to the next emerging fad . Cynics point out that management tends to be "fad driven." Just as zero defects. As proposed. Inc. they may help cynics ridicule it as another fad and thus bury an otherwise useful approach to strategy implementation and organizational change. then org design. Job design tends to be ignored by org theorists in favor of the "macro" approach.something that org theorists have been slow to do. views org design from the inside out." 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. Reengineering thus tends to combine the "macro" approach of org theory and the "micro" approach of org behavior. and self-organizing knowledge and asset sharing of the network. in contrast. Reengineering. Long-term contracts with suppliers and other strategic alliances replace the services the company could provide for itself. this concept may find still a permanent place in the literature on organizational change. customer responsiveness of the matrix. successful application by a few well-known firms. As such. the network structure is really a sort of non-structure by its virtual elimination of in-house business activities. 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. ADDITIONAL DISCUSSION QUESTIONS Copyright © 2011 Pearson Education. and zero-based budgeting were hot topics in the 1960s and 1970s. followed quickly by oversaturation by the business media. 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. autonomous business units. et al propose in this chapter that the evolution of organizational forms is leading from the matrix and the network to the cellular.leaving the concept to live on only as a paragraph in textbooks. As of 2010. Reengineering is important because it looks at job design as the building block to organization design . reengineering was beyond the oversaturation stage. According to them. reengineering goes through the various stages of discovery.Chapter Eight Notes turnaround strategy and can thus be a part of the revival stage of the organizational life cycle. Job design comes first. reengineering is no longer in favor within the business world.
Research does support the contention that structure follows strategy. 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. budgets. 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. a good argument can be made for strategy following structure as well. A2. Inc. 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. To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative. It is a good structure for an entrepreneurial venture. What responsibilities do top managers have in strategy implementation? This is an open-ended question with no clear-cut answer. 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. Perhaps if they had been able to foresee all the needed implementation problems. Since a corporation does not need to invest in acquiring or developing the wide range of functional activities it needs to operate.Chapter Eight Notes. it is logical to allow the implementers at the lower levels to "flesh out" general implementation plans made by top management. Logic suggests that responsible strategy makers will consider present corporate structure as a serious consideration in the choice of a strategic alternative. Pros: This structure provides increased flexibility and adaptability to cope with rapid environmental change. The reverse also appears to be true. Long-term contracts with suppliers and other strategic alliances replace the services the company could provide for itself. All this is merely conjecture. The choice of a particular strategy. Chandler himself implies that one of the problems of strategy formulation in the past has been a lack of serious consideration of structural issues. Taking this view. and procedures given general guidelines (policies) from the top. money. publishing as Prentice Hall . One could also argue that top management should only have a general role in the development of implementation plans. the chosen strategy might have been quite different and more in line with their present structure. 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. It allows a firm to specialize in those activities that are essential to its competitive advantage. of course. A3. is partially based upon an assumption of how it will be carried out by people at lower levels in the corporation. Hindsight is always clearer than foresight. they have the knowledge necessary to decide specific programs. Since lower level managers are close to the "action". 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. one would conclude that top management must be as heavily involved in strategy implementation as it is in formulation. they will have to assess the compatibility of a desired strategy with the present corporate structure. 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.65 A1. Copyright © 2011 Pearson Education. If the desired strategy cannot be implemented given the present structure. this structure is very cheap. therefore. 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. how much time.
and culture. ADDITIONAL TEACHING MODULE (Use when discussing the organizational life cycle) Trajectories of Decline In The Icarus Paradox. A4. . structure. A successful firm develops a theme based on a mission and a mutually supportive configuration composed of strategies.Open feedback channels by providing workers information on how they are performing. According to the job characteristics model.Establish client relationships so the worker will know what performance is required and why. and.Chapter Eight Notes Cons: Depending almost completely on outside vendors for important functions can make the firm very vulnerable to outside pressures. Success creates momentum. This structure can only operate if there is a certain level of trust in the network and information lines are always kept open. causing organizations to keep extending their theme and configuration until they push too far and eventually start Copyright © 2011 Pearson Education. 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. 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. publishing as Prentice Hall . The company can be at the mercy of a few key suppliers or distributors.Form natural work units to make a worker more responsible and accountable for the performance of the job. . . Inc.66 . .Vertically load the job by giving workers increased authority and responsibility over their activities.Combine tasks to increase task variety and to enable workers to identify with what they are doing. policies. The model proposes that managers follow five principles in redesigning work: . 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.
detail-obsessed "Tinkerers" making perfect products with little appeal to the marketplace. bureaucratic "Drifters" whose sales orientation ignores product development and produces a stale and disjointed line of "me-too" products. b. they alienate customers. Maytag was probably well on its way to becoming a tinkerer. Implementation is often considered after strategy has been formulated. MULTIPLE CHOICE QUESTIONS 1D (The letter after each item number is the correct answer) • • • Which statement below is NOT true of "strategy implementation?" a. Miller.67 to decline. and procedures. Strategy implementation is the sum total of the activities and choices required for the execution of a strategic plan. e. but forgot about the marketplace. Venturing trajectory converts growth-driven. Decoupling trajectory converts "Salesmen" with superior market skills and prominent brand names into aimless. Source: D. b. c. d. 1990). budgets. 2C Synergy can take place in all but which one of the following? a." dominated by cults of free-spirited scientists in pursuit of interesting inventions with little market appeal. publishing as Prentice Hall . Inventing trajectory turns "Pioneers" with unexcelled R&D and state-of-the-art products into utopian "Escapists. Strategy formulation and strategy implementation are two sides of the same coin. entrepreneurial "Builders" with imaginative leaders and brilliant financial staffs into impulsive. c. It is the process by which strategies and policies are put into action through the development of programs. but eventually could not keep track of all its acquisitions and went into decline. Strategy implementation is not an important part of strategic management. Inc. By focusing on perfection and not on the marketplace. By the end of World War II and before Daniel Krumm revitalized the company. Miller found four very common "trajectories" of decline. Based on studying over 100 companies. Shared know-how Coordinated strategies Six sigma Copyright © 2011 Pearson Education. Polaroid under Dr. • Focusing trajectory turns quality-driven "Craftsmen" with masterful engineers and excellent operations into rigidly controlled. greedy "Imperialists" who squander their resources by expanding helter-skelter into businesses they know nothing about. Land became an escapist firm when it continued to develop wonderfully innovative products.Chapter Eight Notes. but was no longer developing innovative products to sell. ITT under Harold Geneen was first a brilliant success in conglomerate diversification. Procter & Gamble in the 1970s and 1980s continued to emphasize its powerful marketing brilliance. The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall (New York: Harper Business.
d. b. guidelines.Chapter Eight Notes d. 3E Shared tangible resources Pooled negotiating power Who typically implements strategy in large. course of action. mechanistic structure is best for firms in a changing environment. publishing as Prentice Hall . it helps boost the self-image and ego of all managers to be asked for advice. e. d. multi-industry corporations? a. program. course of action. d. the board of directors top management middle management first level management everyone in the organization. budgets. strategy follows structure. because collective bargaining agreements often mandate worker participation. b. c. structure follows strategy. 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. Inc. 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. c. procedures. to gain an insight as to what work needs to be done and to gain cooperation in the implementation of the strategy. 4C It is advisable to have management from all levels participate in the strategy formulation process a. c. b. concluded that a. d. procedures. which factors MUST be closely aligned or else face Copyright © 2011 Pearson Education. e. c. e. e. it is part of their job responsibilities to provide input regarding their respective area of expertise. guidelines. 7C Alfred Chandler.68 . c. e. e. because it is a legal requirement. 8C According to Chandler and others. d. known for his study of large American corporations. b. program. b. strategic business units are the key to effective decentralization. budgets. organic structure is best for firms in a changing environment.
II company. b. c. 13E Which structure simultaneously combines functional and product forms at the same level of the organization? a. b. Inc. decline stage. 12C Stage III in the organizational life-cycle is the a. III company. and integrators A corporation run by a team of managers with functional specializations and which successfully operates in one industry is said to be a a. 10A Objectives which are personal and subjective and are typified by an entrepreneurial spirit describe what stage of corporate development? a.69 the consequences of poor organizational performance? a. V company.Chapter Eight Notes. workforce. c. death stage. and tasks hierarchy. Stage Stage Stage Stage Stage I company. d. d. goals. and environment rules. b. c. and finance strategy. b. II company. V company. growth stage. 11C In what stage does a corporation typically decentralize into profit or investment centers? a. Stage Stage Stage Stage Stage I company. III company. b. d. e. and customers operations. strategic business units functional structure network structure divisional structure matrix structure Copyright © 2011 Pearson Education. e. IV company. maturity stage. III company. c. IV company. d. structure. II company. e. e. d. V company. d. Stage Stage Stage Stage Stage I company. e. b. birth stage. c. 9B management. c. publishing as Prentice Hall . IV company. contacts. e. marketing.
c. e. or time is called a. c. publishing as Prentice Hall . d. c. service. c. Inc. they become experts on the one best way to do that job. how would we run this place?" a. b. total quality management.Chapter Eight Notes 14C Which structure is described as a "non-structure" by its virtual elimination of in-house business functions? a.4 per million? a. strategic business units functional structure network structure divisional structure matrix structure 15B The radical redesign of business processes to achieve major gains in cost. d. b. e. d. c. e. c. By giving the worker more autonomy. a worker is given more of the same type of duties to perform. e. b. Reengineering Total quality management Management by objectives Six sigma Strategic planning 17D Which management program aims to reduce manufacturing defects to only 3. action planning. By moving workers through several jobs. the worker has control over job activities. statistical process control. b. d. e. d. By combining different tasks. Copyright © 2011 Pearson Education. d. 18C Reengineering Total quality management Management by objectives Six sigma Strategic planning 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. what function does job enrichment perform? a. reengineering. By training the workers to do one job over and over again.70 . they are exposed to increased variety. management by objectives. 16A Which management program asks the question: "If this were a new company. b. b. position matching functional duties job design task conversion responsibility shift 19D To combat the adverse consequences of task specialization.
71 e. geographic-area structure matrix structure product-group structure international structure functional structure 21A Which type of structure enables a company to tailor products to regional differences and to achieve regional coordination? a. e. 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. b. geographic-area structure matrix structure product-group structure international structure functional structure Copyright © 2011 Pearson Education. d. c. publishing as Prentice Hall .Chapter Eight Notes. Inc. b. c. d.
Because of the likely growth orientation of the strategy.72 . If this Copyright © 2011 Pearson Education. and (3) decide if an attempt to change the culture will be worth the costs. 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. (2) assess if a change in culture will be needed. and TQM are techniques used to implement a new strategy. 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. the strategic manager must (1) evaluate what a particular change in strategy will mean to the corporate culture. • After a change in strategy. Growth strategies often require new people or new skills. • Multinational corporations need to be careful when managing international assignments and when staffing foreign subsidiaries.Chapter Nine Notes CHAPTER NINE STRATEGY IMPLEMENTATION: STAFFING AND DIRECTING SUMMARY OF KEY POINTS • A change in strategy will probably mean that staffing needs will change. The most appropriate type of manager needed to effectively implement a strategy depends on the strategy of the firm or business unit. separation. and longterm orientation. Inc. less people will be needed. publishing as Prentice Hall . assimilation. uncertainty avoidance. • Successful downsizing programs include training remaining employees to implement new strategies and programs. If the new strategy is one of retrenchment. or deculturation. • After an acquisition. individualism-collectivism. 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. masculinity-femininity. MBO. • Hofstede proposes that the success or failure of certain management practices can be explained internationally using five cultural dimensions: power distance. • Action planning. a corporation can manage the culture of the newly-acquired company in one of four ways: integration. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. • Match the manager to the strategy in executive succession. and sales/marketing experience. a higher tolerance for ambiguity. managers should probably have a greater willingness to take risks.
a program usually used in implementing a retrenchment strategy. The best answer may lie in finding the right person to implement the needed strategy regardless of where the person is found. 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. and if the board of directors is composed of a large percentage of outsiders. Progress toward the goal must be measured at intervals and results communicated widely.Chapter Nine Notes. -Communicate the reasons for actions. In this case. units. and. but unprofitable divisions. the policy should be reconsidered and an exception made. One must scan not only key forces in one's industry. publishing as Prentice Hall . 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. it is essential to have an effective management development training program. 2. -Develop value-added jobs to balance out job elimination. Unless staffing issues are dealt with appropriately in retrenchment. 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. -Invest in the remaining employees. -Contract out work that others can do cheaper. How can corporate culture be changed? The text points out that communication is key to the effective management of change in culture. A system of incentives also must be developed to reward those who support and encourage the culture change. 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. the last CEO was fired. then the company must recruit an appropriate outsider. Otherwise. 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. the company must take a chance on promoting one of its own . Many cultures are very ethnocentric and do not like foreigners Copyright © 2011 Pearson Education. 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" . The probability of hiring an outsider to lead a firm in difficulty increases if there is no heir apparent. and projects. 4. Under the condition of a promotion from within policy. 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. 3. 5. knowledge of national cultures is important to environmental scanning.73 type of person is not available internally. The new culture must be part of a "strategic vision" which can capture the emotions of the employees. The insider/outsider distinction may not really be the important issue. Inc. -Plan for long-run efficiencies. Top management must be committed to a culture change and communicate that commitment to everyone in the organization.a good reason for proceeding cautiously.
but fail in another. non-Saudis cannot own land . ADDITIONAL DISCUSSION QUESTIONS A1. A2. and hope that the person selected can lead other strategic managers in formulating and implementing the best strategy. the U.74 . for example. Inc. This tying together forms a hierarchy of objectives similar to the hierarchy of strategy mentioned in Chapter One. defense industry). Hofstede found in his research that national culture is so influential that it tends to overwhelm even a strong corporate culture. since most companies want to get implementation moving quickly and don't want two managers to do the job of one. managerial style and human resource practices must be tailored to fit the particular situations in other countries. An understanding of national cultures is also important to evaluation and control (covered in Chapter Ten). 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. In measuring the differences among five national dimensions from country to country. An understanding of different cultures is especially important in strategy implementation. 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. therefore. In Saudi Arabia.S. it makes sense to select the strategy which best fits the existing manager's skills and experiences.Chapter Nine Notes controlling key parts of their country. a better option is to transfer existing managers from one unit to another. publishing as Prentice Hall . In this instance. 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. business. acts to tie together corporate. and functional objectives. the company might wish to either provide him/her with additional training or an assistant having some of those skills/experiences. Unfortunately. A4. Another approach is to consider the skills and experiences of the existing manager in the process of strategy formulation when choosing among strategic alternatives.they can only rent it. If there is little difference in the expected results from two different strategies. as well as the strategies developed to achieve them. How might manager-strategy fit be accomplished short of firing current managers? If the current manager of an SBU is capable. 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. top management or the board has no choice. What type of person should be selected to manage a company or business unit when no clear strategy has been formulated? Unfortunately. A3. A company must have an understanding of these differences if it is to formulate various entry strategies into different countries or regions. MBO. Knowledge of these kinds of differences is crucial for any multinational corporation. he was able to explain what a certain management practice might be successful in one nation. it must search for a person with a proven capability to exercise initiative and leadership in the industry. Most countries have rules regarding ownership of companies in industries which are deemed important to that country's welfare (for example. Does culture follow strategy or does strategy follow culture? Why? Copyright © 2011 Pearson Education. Because of cultural differences. but does not appear to have the skills and experiences necessary to implement a particular strategy.
To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative. MBO also encourages the superior to negotiate the subordinate's objectives with the subordinate's input. A6. Inc. MULTIPLE CHOICE QUESTIONS 1A (The letter after each item number is the correct answer) According to the text. Compare and contrast Action Planning with Management By Objectives. Culture follows strategy. it can be used as a program to implement both an overall low cost or a differentiation business strategy.75 This question derives from the question raised in Chapter 8 regarding the relationship between structure and strategy. during what time frame. For MBO to work. the organization must emphasize continuous improvement to improve product quality and reduce costs. but the reverse also appears to be true. Since the mission of most business firms is customer driven. Management by Objectives is also a technique useful for the development of programs. To the extent that a company is able to continually improve its service to its internal customers. it should be a complete system. The type of culture within a corporation will act to influence the selection of feasible alternative strategies. If the desired strategy cannot be implemented given the present culture. Unlike action planning. at the individual level only. they will have to assess the compatibility of a desired strategy with the present culture. and reducing costs in order to better satisfy the customer. increasing flexibility. and with what expected results. 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. A5. and effort will be needed to change the culture. however. can be done strictly on a top down basis with little to no input from the subordinate. Like action planning. Enterprise Rent-A-Car follows a staffing policy of Copyright © 2011 Pearson Education. Total Quality Management helps keep employees' minds on a crucial objective of strategic management . Because TQM aims to reduce costs as well as improve quality. in contrast. MBO includes action planning as part of the discussions between a manager and his/her subordinate. 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. both strategy and culture are very important and need to be carefully evaluated before any significant change in either is recommended. Action planning can be done. 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. Don't throw away a good culture just because the current strategy is not as successful as it could be. MBO pinpoints individual responsibilities for each unit objective and specifies a time frame when that objective is to be achieved. however. The answer here is much the same. TQM makes the key point that since competitive advantage is usually only temporary. a lot of time. MBO takes a more organization-wide approach to planning implementation programs and budgets. this may be very appropriate. publishing as Prentice Hall . customers can be internal as well as external to the organization. It aims at improving quality. Action plans are the primary means by which programs are developed for the implementation of strategy. money. Both strategy and culture affect each other simultaneously. Clearly. by whom. Action planning alone. To the extent that the culture derives from the "distinctive competence" of the company. According to TQM. Like MBO. TQM helps to clarify and fine-tune the company's mission statement.Chapter Nine Notes. Some might even say that a good culture is more important than is a good strategy. An action plan states what actions are going to be taken.increasing sales and profits by pleasing the customer.
Inc. 5B staffing. d. make decisions with no input from others. recruiting outside the company for upper level management positions. planning. hiring a hatchet man/woman to implement its turnaround strategy. c. b. directing. downsizing to be "lean and mean". 2B promotion from within. c. controlling. Copyright © 2011 Pearson Education. d. rely more on skills developed through group decision-making. professional liquidator dynamic industry expert turnaround specialist analytical portfolio manager cautious profit planner 3C Which type of chief executive officer would be appropriate for a weak corporation in a relatively attractive industry.Chapter Nine Notes a. e. 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. d. c. c. What did a study of 173 firms over a 25-year period reveal about CEOs of successful corporations? a. publishing as Prentice Hall . b. b. They tended faster pace. b. b.76 . d. outsourcing its staffing functions. e. organizing. be more aggressive in their risk-taking than former CEOs. c. e. e. They tended They tended They tended They tended to have less loyalty than former CEOs. e. d. professional liquidator dynamic industry expert turnaround specialist analytical portfolio manager cautious profit planner 4A That part of strategy implementation which focuses on the selection & utilization of employees is a. switching companies as a to to to to have the same functional specialization as the former CEO. having a challenge-oriented ability useful for saving a company? a.
Plan for long-run efficiencies. Produces no short-term benefits. Find a joint-venture partner or contract with another company to carry out the strategy. Develop value-added jobs to balance out job elimination. none of these. d.77 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. e. b. leaderless group discussions management games in-basket exercises IQ tests case analyses 8A Which one of the following is NOT a problem associated with inappropriate downsizing? a. but the culture can Copyright © 2011 Pearson Education. d. b. publishing as Prentice Hall . e. c. e. Surviving employees had to do extra work in addition to their own. Morale declines. 11C If a planned strategy is not compatible with the current culture. b. Implement new strategy and identify how it is superior to the old strategy. c. Eliminate unnecessary work. what should the company do? a. Invest in remaining employees. d. c. c. b. Manage around the culture by establishing a new structural unit to implement the new strategy. Inc. d. c. e. b. Move forward very carefully by introducing small steps and modifications before implementation. d. Surviving employees experienced decreased morale.Chapter Nine Notes. abilities identifier job evaluation the 5-E system performance appraisal system 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. e. Outsource everything. 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. Overall productivity declines. 10B If a planned strategy is fully compatible with the company's current culture.
12A Find a joint-venture partner or contract with another company to carry out the strategy. b. d. b. none of these. c. b. 13C Which method of managing disparate cultures involves a relatively balanced give-and-take of cultural and managerial practices between the merger partners. Manage around the culture by establishing a new structural unit to implement the new strategy. e.Chapter Nine Notes be easily modified to make it more compatible with the new strategy. what should the organization do? a.78 . b. d. Manage around the culture by establishing a new structural unit to implement the new strategy. separation deculturation integration assimilation 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. c. d. Move forward very carefully by introducing small steps and modifications before implementation. and management is not willing to make major organizational changes required to manage around the culture. Implement new strategy and identify how it is superior to the old strategy. e. e. what should the organization do? a. b. e. separation deculturation integration assimilation segmentation Copyright © 2011 Pearson Education. and no strong imposition of cultural change on either? a. Find a joint-venture partner or contract with another company to carry out the strategy. Move forward very carefully by introducing small modifications before implementation. d. e. publishing as Prentice Hall . If a planned strategy is not compatible with the company's current culture. c. c. separation deculturation integration assimilation segmentation 14D Which method of managing disparate cultures involves one firm's domination over another willing firm? a. d. Implement new strategy and identify how it is superior to the old strategy. c. Inc. none of these.
d. Buy-outs.79 16D Strategic goals can be accomplished through defining an action plan. states states states states states what action is going to be taken by whom the action will be done during what time frame the action will be done where the action will be done what are the expected results of the action 17E What does "MBO" stand for? a. b. c. b. individualism-collectivism. and Options Multinational Business Organization Manufacturing Backlog Order Management by Objectives 18D "TQM" refers to a. e. Tremulous Qualitative Methodology. 19B The concept of continuous improvement is part of a. Total Quality Methods. Market Buy-Out Mergers. Total Questioning Methods. Action Planning. the dimension which measures the extent to which the society is oriented toward money and things or toward people is called a. c.Chapter Nine Notes. d. c. e. Management By Objectives. Resource-based View of the Firm. c. d. e. uncertainty avoidance. e. d. d. b. 20C According to research by Hofstede on various national cultures. publishing as Prentice Hall . Terrible Quantitative Management. Reengineering. Inc. c. b. Which one of the following is NOT one of the components which make up an action plan? a. Copyright © 2011 Pearson Education. long-term orientation. power distance. masculinity-femininity. e. b. Total Quality Management. Total Quality Management.
Input controls are most appropriate when performance results are hard to measure and when there is no clear-cut relationship between activities and results. • Controls should follow strategy. • The weighted-factor.80 . long-term evaluation. one should also consider shareholder value measures (like EVA and MVA) and the balanced scorecard. it does not include the development of an information system so that performance can be Copyright © 2011 Pearson Education. and (5) take corrective action. • Divisions and functional units are often evaluated as responsibility centers in terms of standard cost . and/or investment centers. and strategic-funds methods reward managers for effectively formulating and implementing strategy. expense. • Benchmarking is an excellent way to compare a company's or business unit's products. • Although corporations are typically evaluated on the basis of ROI and EPS. Is Figure 10. The text proposes six guidelines to help ensure the proper use of controls. revenue. the control and reward systems used by a global multinational corporation should be different from those used by a multidomestic MNC. (2) establish standards for performance.1 a realistic model of the evaluation and control process? Figure 10. Output controls are most appropriate when there are agreedupon output measures and there is no clear cause-effect relationship between activities and results. or practices against the toughest competitors or best-in-class firms. • Activity-based costing (ABC) and enterprise resource planning (ERP) are increasingly being used to provide better data for monitoring and evaluating performance. services. • 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. publishing as Prentice Hall . For example. Inc. profit. (4) compare actual performance with the standard.1 is certainly not a complete model of the control process.Chapter Ten Notes CHAPTER TEN EVALUATION AND CONTROL SUMMARY OF KEY POINTS • The basic evaluation and control process is a five-step model requiring the strategist to (1) determine what to measure. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. (3) measure actual performance. • In terms of international considerations.
i. Some examples of output controls are sales quotas. ROE. this approach can improve efficiency within a corporation. and EPS continue to have widespread usage. 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. What are some examples of behavior controls? Output controls? Input controls? Behavior controls specify how something is to be done through policies. If the manager intercedes. 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. rules. 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. the manager in charge will have to decide if the deviation is important enough to correct. Nevertheless. publishing as Prentice Hall . It uses stock price to measure the difference between the pre-strategy and post-strategy value of a corporation. Inc. 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. If. quotas of sales calls to potential customers. 2. behavior controls are very appropriate when results are hard to measure and a clear causeeffect exists between activities (behaviors) and results. If a process is going slightly off the desired course. a corporation will often need "steering" or feed-forward controls to assess slight deviations before they become performance break-downs. It is slightly misleading to the extent that it suggests that all control is post hoc. shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. Is the evaluation and control process appropriate for a corporation that Copyright © 2011 Pearson Education.Chapter Ten Notes. ROE. 5. Is EVA really an improvement over ROI. with their emphasis on the "bottom line" are generally considered superior to behavior controls. As pointed out in the text. and surveys of customer satisfaction. These controls really provide feedback to the manager. Some examples of behavior controls are company procedures.81 measured in step 3. the exact amount of the transfer price is open to manipulation by powerful.e.throwing the process off track in the other direction. and orders from a superior. the model is adequate as a simple representation of the basic steps in evaluation and control. after the fact. Although output controls. It is for this reason that more simpler measures like ROI. and rules regarding attendance and tardiness. cost reduction or profit objectives. 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. standard operating procedures. These activities are not included in Figure 10. Another limitation of EVA is this its concern with only one aspect of the task environment . Input controls are the least useful and are most appropriate when output is difficult to measure and there is no clear causeeffect relationship between behavior and performance (such as in college teaching). The conclusion seems clear. EVA is often difficult to calculate. In theory.the stockholder. the deviation may correct itself. interested parties within the corporation. 3. 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). To the extent that the transfer price reflects the true market price of the items in question. 4. Like the traditional measures. 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. However. she/he may cause a reaction . however. If left alone.1..
publishing as Prentice Hall . Inc. e. The text does not mention this issue at all. they may destroy the very thing they are trying to nurture. ability to achieve a profitability objective. however. 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. Control and creativity are thus compatible if the controls are appropriate and used properly. Most creative types. ADDITIONAL DISCUSSION QUESTION A1. it appears that the concept is here to stay. 2B Return on investment (ROI) is appropriate for evaluating the corporation's or division's a. To the extent that managers attempt to regulate the activities which go into creativity. almost everyone who uses benchmarking finds it to be very useful and well worth the time and money to do it. Given that Xerox developed the concept of competitive benchmarking in the early 1980s. b. see “Creativity Loves Constraints. c. choose to impose their own form of discipline on themselves. by Xerox Corporation. There is some feeling that a large number of controls do constrain creative impulses. Take corrective actions. b.82 . Data from advertising agencies and R&D labs do suggest that corporations emphasizing creativity tend to reduce the number of controls used. Data is just not collected on intermediate activities such as time in the office or manner of dress. however. d. Establish standards for performance. Since this is a situation which is bound to affect various companies in the future. The emphasis tends to be on the end-result of activities rather than upon the activities themselves. c. 2006 (p. they need both talent and discipline. Establish objectives and strategies. To be successful. 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. present profitability potential Copyright © 2011 Pearson Education. Pioneered in the U. benchmarking is bound to be increasingly adopted. or reengineering. Control is not ignored. It is especially useful for companies which find themselves falling behind others in the industry. Creative types may be like artists.” by Marissa Ann Mayer in the February 13. TQM. Measure actual performance.S. 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. 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. level of social responsibility commitment.102) issue of Business Week. For further discussion.Chapter Ten Notes emphasizes creativity? Are control and creativity compatible? This is a wide-open question meant to generate a lot of discussion. MULTIPLE CHOICE QUESTIONS 1A (The letter after each item number is the correct answer) Which one of the following is NOT a part of the evaluation and control of performance? a. Unlike MBO. Determine what to measure.
c. e. c. it provides an incentive to use existing assets efficiently. reengineering. the time span of concern in short range. e.83 d. and EPS are not reliable indicators of a corporation's economic value. c. Which is the MOST commonly used measure of corporate performance in terms of profit? a. commitment to employee development. e. e. d. internal processes. publishing as Prentice Hall .Chapter Ten Notes. b. b. it is a steering control. e. d. d. d. c. 6B An advantage of ROI as a measure of performance is that a. shareholder value basic earning power price/earnings ratio profit margin on sales return on assets 8D The measure of corporate performance in which financial measures are combined with operational measures of customer satisfaction. provides an disincentive to use existing assets efficiently. it is sensitive to book value. 5D A limitation of ROI as a measure of performance is that a. and innovation and improvement activities is called Copyright © 2011 Pearson Education. 3D prospects for favorable future earnings. can be computed only after profits are totaled for a period. the business cycle strongly affects ROI performance often despite managerial performance. Inc. value-chain analysis. d. 7A Because of the belief that accounting-based numbers such as ROI. it it it it it is a single comprehensive figure examining only one facet of the firm. b. which method of corporate performance is now touted? a. benchmarking. e. b. total quality management. MBO. does not provide the basis for common comparison. c. EVA Gross Margin DPS ROI ROVA 4C Activity-Based Costing is very useful in making outsourcing decisions by doing a. b. ROE. provides a disincentive to acquire new assets.
publishing as Prentice Hall . revenue center. standard cost center. standard cost center. revenue center. e. 11C A responsibility center which measures resources in dollars without consideration of service or product costs is called a(an) a. c. profit center. d. b. expense center. d. investment center. the return on investment. c. Inc. b. investment center. revenue center. e. profit center. 10B A type of responsibility center which is primarily used in sales regions is a(an) a. A type of responsibility center which is used primarily in manufacturing facilities based on historical cost data is a(an) a. expense center. investment center. d. b. e. b. standard cost center. b. investment center. 9E activity based costing. c. c. d. expense center. d. b. profit center. profit center. the shareholder value. e. e. expense center. the balanced scorecard.84 . c. market value-added. 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. revenue center. expense center. e. revenue center. investment center. 13A Which type of responsibility center will a stage III company with multiple product lines emphasize? a.Chapter Ten Notes a. profit center. standard cost center. c. standard cost center. Copyright © 2011 Pearson Education. d.
and practices against the toughest competitors or those companies recognized as industry leaders is a. a company which primarily exports. c. 15C Which of the following is NOT one of the steps followed in the benchmarking process? a. c. measure and compare the results with the best-inclass company. d. b. to reduce taxes. purely domestic company. Identify the area or process to be examined. total quality management. b. Calculate the differences among the company's measurements with those of the best-in-class company. Control should involve only a minimum of information. b. Controls should be timely so that corrective actions can be taken before it is too late. but also a. 18D global MNC. b. Controls should measure all activities in order to be comprehensive. b. Which of the following is NOT a guideline for proper control? a. e. Develop tactical programs for closing performance gaps. publishing as Prentice Hall . benchmarking. Long-term as well as short-term controls should be used. management by objectives. c. d. e. for marketing reasons. action planning. d.85 14B The continual process of measuring products. Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet standards. for manufacturing location decisions. for outsourcing. multidomestic MNC. c. e. 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? Copyright © 2011 Pearson Education. to locate suppliers. e. c. services.Chapter Ten Notes. d. Implement tactical programs. e. 17D The type of multinational corporation which should use loose controls on its foreign units is a a. 16A Transfer pricing is heavily used by multinational corporations not only to calculate ROI. not-for-profit MNC. Link parallel activities instead of integrating their results. Inc. d. reengineering.
c. d. strategic-funds method segmentation method long-term evaluation method individual evaluation method weighted-factor method 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? a. b. b.86 . b. strategic-funds method segmentation method long-term evaluation method individual evaluation method weighted-factor method Copyright © 2011 Pearson Education. d. e. Inc. 20C strategic-funds method segmentation method long-term evaluation method individual evaluation method weighted-factor method Which method of matching rewards to the accomplishment of strategic objectives compensates managers for achieving objectives set over a multi-year period? a. e. publishing as Prentice Hall .Chapter Ten Notes a. c. d. c. e.
• 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. Since one of the key objectives of any business corporation is to earn a profit. the student has free reign to take a long range viewpoint and consider how a good firm can do better. the best place to begin a case is to assess the firm's current performance. If the firm is doing badly financially. Convert every category from Copyright © 2011 Pearson Education.wherever they may be. a lot can be learned by considering how it is doing financially. 2. The basic rule of thumb for beginning a case analysis is to look for problem areas . a logical starting point is whatever problems are given in the case. After calculating ratios for the company. calculate ratios and generate common-size statements over a five-year period.87 CHAPTER ELEVEN SUGGESTIONS FOR CASE ANALYSIS SUMMARY OF KEY POINTS • A case can be analyzed using a number of organizing frameworks. A particular recommendation is less important than the process of analysis and decision-making used in making that recommendation. Nevertheless. SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. This would be especially appropriate when the case under consideration focuses on only one aspect of a corporation's functioning. publishing as Prentice Hall . The figures will very likely point out some symptoms of underlying problems that should be addressed. compare them to average ratios for the industry and key competitors during that time period. Consider following the methodology described in Appendix A. Calculate changes individual categories from one year to another. • Once a student has read the case to get a sense of the situation. If the firm is doing well financially. If not available. 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?". 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. Inc. Keep in mind that there is no one right way to analyze a case. This case analysis methodology combines many of the analytical techniques found in earlier chapters of the text. such as the EFAS and IFAS Tables. • Use the Strategic Audit presented in Appendix C as a checklist for case analysis. and the SFAS Matrix. such as conflict between a board of directors and top management.Chapter Eleven Notes. Various resources are listed in Appendix B. This may be quickly done by using financial data usually given in the case from annual reports. 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.
the character played by Gregory Peck would be Copyright © 2011 Pearson Education. a special situation. make comparisons with industry data. This background should provide students an appreciation for the situation as it was experienced by the participants in the case. By the mid-1990s. since they provide a series of historical relationships (for example. such as cost of goods sold and accounts receivable." the character played by Gregory Peck works in public relations for a corporation located in New York City in the mid-1950s.Chapter Eleven Notes dollar terms to percentages. Everyone is. Information on the industry will provide insights on its competitive activities.) To more easily note category changes. For the income statement. When you convert statements to this form. Comparisons of these percentages over the years can point out areas for additional analysis. He was earning $7. such as accounts receivable and accounts payable. however. 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%. 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. They want everyone in the class to have the same information so that in an open class discussion or a written paper. if available.000 in New York City would probably not keep a family above the poverty level! If the movie were done now. For example.for example. it is relatively easy to note the percentage that each category represents of the total. in the movie "The Man in the Grey Flannel Suit. It is the obligation of the instructor to tell the students what level of outside research is allowable for the purpose of assignments. To get a proper picture. A company's annual report and 10-K form from that year can be very helpful. For the balance sheet. Inc. 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. This research is especially useful when preparing for group oral presentations. These statements are especially helpful in developing corporate scenarios and pro forma statements. to see if fluctuations are merely reflecting industry-wide trends. publishing as Prentice Hall . net sales represent 100%. Connect the dots to view trends in each category. The key is to stay within the time frame of the case. Many instructors do not want students to obtain outside information on a company described in an assigned case. and calculate other asset and liability categories as percentages of the total assets. This is. can also be calculated as a percentage of net sales. 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. (Individual asset and liability items.000 and was being interviewed by the president of a large radio/television network for an important job paying $9. If a firm's trends are generally in line with those of the rest of the industry. analyzing the same case. 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.000. give the total assets a value of 100%. and inventories as a percentage of assets). 3. earning only $9.88 . plot the annual percentages over a five year period for each of the categories. A poor trend indicates an underlying problem needing attention. interest to sales. 4. Calculate each category’s percentage of net sales so that the categories sum to 100%. in effect. however. cost of goods sold to sales. An understanding of the economy during that period will help students avoid making a serious error in analysis . analyses by different people will be comparable. there is a lower likelihood of problems than if the firm's trends are worse than industry averages.
but are not on the list of questions. One is to use whatever base year is being used in that country. Its limitations are.again using an index of inflation like the Consumer Price Index (CPI). 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. a person may unthinkingly use them without considering that there may be other.S. the text states that the strategic audit provides a checklist of questions.Chapter Eleven Notes. If no date is given. Check the beginning and ending paragraphs of the case to see if a date is mentioned. perhaps more important questions which need to be raised. Inc. but insidious disguise. a technique's strengths can also serve as it's weaknesses. 5. by area or issue. more recent base year (1982-84) has been selected to replace 1967 . The problem with any checklist is that the user may tend to use it almost automatically. but when they're converted to constant dollars (or whatever currency is being used). Even though all the questions in the audit may not be relevant to a specific situation. Dividing sales and net income by the CPI factor in Table 11. 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.a simple. In the U.89 demanding ten to twenty times that amount! Sixty years of inflation makes a big difference. For example. Another approach is to adjust previous years in a financial statement using the most recent year as the base year . not so obvious.especially in annual reports. a new. 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. The danger in ignoring inflation when doing financial analysis is that one can miss key data signaling a corporation's slow decline over time. that enables a systematic analysis of various corporate activities to be made. Given that in the U. they may show a steady decline. 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). check to see the date of the financial statements given in the case.2 for a particular year will change the reported figures to 1982-84 constant dollars. How can you learn what date a case took place? The student needs to place him/herself into the timeframe of the case. Chief executive officers wish to keep their jobs and will tend to bias figures in their favor . It equaled 100 and other years were adjusted around it. ADDITIONAL DISCUSSION QUESTION A1. 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. This is especially important when the student is going to do some outside research. Like everything else in the world. 1967 has been used as the base year for many years. 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 Copyright © 2011 Pearson Education.. 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.S. Sales and profits stated in current or historical dollars (or whatever currency is being used) may seem to show substantial growth. (like any other country) politicians dislike people seeing how much inflation has been occurring. publishing as Prentice Hall . however. There are two methods of adjusting for inflation.
e. b. leverage ratios. asset management ratios.Chapter Eleven Notes under consideration and not to do their analysis on "automatic pilot. both pertinent and extraneous. d. b. d. profitability ratios. profitability ratios. c. liquidity ratios. e. c. b. activity ratios. liquidity ratios. d. 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. 5C Ratios which measure the effectiveness of the corporation's use of resources are called a. publishing as Prentice Hall .90 . It provides a learning experience on library usage which is helpful in all courses. d. liquidity ratios. profitability ratios. It is a requirement of this course. c. c. e. activity ratios." MULTIPLE CHOICE QUESTIONS 1C (The letter after each item number is the correct answer) What is the main purpose of conducting outside research into the environmental setting of the case? a. d. It gives you clues as to what the organization should be doing in the future. leverage ratios. asset management ratios. 6A Ratios which measure the contributions of owners' financing compared with creditors' financing are Copyright © 2011 Pearson Education. c. Inc. b. leverage ratios liquidity ratios activity ratios asset management ratios profitability ratios 3B Ratios which measure the corporation's ability to meet its financial obligations are a. e. leverage ratios. e. It furnishes large amount of data. It gives a realistic background of the industry during specified period. 4E Ratios which measure the degree of the corporation's success in achieving desired profit level are a. b. asset management ratios. activity ratios.
b. Z-value. profitability ratio. liquidity ratio activity ratio. liquidity ratio activity ratio. liquidity ratio activity ratio. d. 10C Converting categories on financial statements from dollar terms to percentages results in a. b. e.Chapter Eleven Notes. Inc. publishing as Prentice Hall . d. activity ratios. 9A "Times interest earned" is an example of a(n) a. d. liquidity ratios. d. c. e. c. c. asset management ratio. c. risk factor. asset management ratio. 8C "Days of inventory" is an example of a(n) a. asset management ratio. 12A At what Z-value level is a firm considered in serious trouble? Copyright © 2011 Pearson Education. leverage ratio. 7E leverage ratios. b. e. e. profitability ratios. d. CAPM. the the the the the return on investment. profitability ratio. e. asset management ratios. c. "Earnings per share" is an example of a(n) a. diverse rates of returns. correlation coefficient. b.91 a. leverage ratio. b. d. common-size statements. e. b. inflation-adjusted statements. c. profitability ratio. leverage ratio. constant dollar denominations equivalency comparison 11E The formula which predicts the likelihood of a corporation going bankrupt is called a.
publishing as Prentice Hall .Chapter Eleven Notes a. free cash flow. It is easier for the financial analyst to judge the effectiveness of management's decision-making. c. c. d.1 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.82 greater than 5. d.2 and 4. e. It acts as a means to compare an organization's performance with other direct Copyright © 2011 Pearson Education. Dow-Jones Industrial Average New York Stock Exchange Index Wiltshire 500 Equity Index Consumer Price Index NASDAQ Series 17A What purpose does analyzing the prime interest rates serve in case analysis? a. e. For better assessment of strategic decisions to borrow money to build new facilities.1 between 3. z-value. e. b. b. It serves as documentation for the case analyst for their evaluation.S. the organization's future historical performance. common-size statements and ratios should be compared to a. debt to equity ratio. d.2 and 3. d. c. the leading competitor in the industry.. the financial performance of the overall U. It shows the true performance of the corporation in comparison with that of the industry or the economy in general. It is helpful in predicting the future potential of the organization. Inc. 16D To adjust for general inflation in the U. b. the direct competitor least like the organization. c. e. c. b. 14E To get a proper picture of the position of the organization. e. b. operating cash flow. b.92 .81 above 1. what index does the text suggest? a. 15C What benefit does converting sales and profits to constant dollars in times of inflation offer when analyzing a case? a. c. 13A below 1. It provides a method which is familiar and easy to understand.0 between 2. industry-wide average trends. gross domestic production (GDP). d.S. It contributes to determining the risk factors when computing the Z-value.
serve as documentation when a group of students are assigned a case analysis. c. internally-oriented. d. e. the recommended strategy should be a. b. gather data which can be entered onto a computerized program for easier analysis. provide a systematic method to organize a student's analysis. provide the basis by which a teacher of a strategy and policy course can judge a student's performance. publishing as Prentice Hall . which of the following is included in a corporation’s Strategic Posture? a. determine if an organization's managerial decisions have been successful. c.93 d. The function of the Strategic Audit is to a. e. d. It acts as a means to compare an organization's performance with the entire economy. It acts as a means to compare an organization's performance with the entire industry. 18D competitors. include appropriate programs and a budget. c. b. e. Inc. externally-oriented. one of the strategic alternatives. Copyright © 2011 Pearson Education. b. a revised mission statement. d.Chapter Eleven Notes. 19A In the Strategic Audit. e. Objectives Programs Budgets Procedures Performance 20B In the Strategic Audit.
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