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Course Code


Course Title

Managerial Economics

Assignment Code :



All Blocks

Note: Attempt all the questions and submit this assignment on or before 30th April, 2015 to
the coordinator of your study center.
1. Explain how the concept of leverage stretch and fit positions the firm in the market.
Illustrate your answer with the help of examples.
2. What are Strategic groups? Explain how the strategic groups help the organizations in
understanding the competition within the industry.
3. Discuss the additional consideration for using experience curve effect.
4. Chose an organization of your choice, which is expanding. Explain which type of
intensification strategy the organization is following and why.
5. Explain as to how the quality strategic decisions are affected with the change in leadership.
Illustrate your answer with the help of a real world example.

1. Explain how the concept of leverage stretch and fit positions the firm in the market. Illustrate your
answer with the help of examples.
Ans.: Using the leverage of time is the most fundamental strategy for success. There are only so many
hours in a day that you can work. If you use only your own time, you can achieve only so much. If
you leverage other people's time, you can increase productivity to an extraordinary extent. In the
article Strategy as Stretch and Leverage by G. Hamel and CK Prahalad write: Global competition is
not just product-versus-product or company-versus-company. Its mindset-versus-mindset. Driven to
understand the dynamics of competition, we have learned a lot about what makes one company more
successful than another. But to find the root of competitiveness to understand why some companies
create new forms of competitive advantage, while others watch and follow we must look at the
strategic mindsets. For many managers, being strategic means pursuing opportunities that fit the
companys resources. This approach is not wrong, but it obscures an approach in which stretch
supplements fit, which means creating chasm between ambition and resource and where leverage
complements the strategic allocation of resources. Managers at competitive companies can get a
bigger-bang-for-the-buck in five basic ways: Concentrate resources around strategic goals;
accumulate resources more efficiently; complement one kind of resource with another; conserve
resources whenever they can; and recover resources from the market-place as quickly as possible.
The concept of strategic intent is widely popular, and it gained currency from his article with the same
title in Harvard Business Review, May-June 1989 (Hammel and Prahalad, 1989). This concept went
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much further than specific strategic goals and milestones, but was not so broad as organizational
purpose; it was a sort of vision of what the organizations position in a business would be like at a
future point. I found it hard to distinguish it from a broad strategic objective, and though executed in
incremental steps, organizations do have a direction and consistency in their actions with a view to
achieving the broad objective. Strategic intent implied also a stretch in the organization (a concept he
developed later as stretch and leverage, see below) and its resources, with a view to achieving
something not recognized as easily achievable. Strategic intent would thus be a stretched and clearly
understood broad strategic objective of what a firm intended to achieve. It enabled a firm to strive to
reach out to much greater heights than would be apparent from a traditional SWOT analysis. The
concept of core competence challenged the managers to view their firms as a portfolio of
competencies rather than as a portfolio of businesses. The Strategic Business Unit (SBU) concept,
developed to enable decentralized functioning of a multi-divisional corporation, indeed had enabled
setting of high levels of accountability and the development of general managers at a relatively early
stage in their careers. But it also created individual islands, the SBUs, which stopped thinking beyond
their own boundaries. The result was the inability of a corporation to leverage competences developed
in one business into another. The SBU-based companies in the US grew more slowly as compared to
the Japanese companies which focused on the application of certain competencies across businesses,
gaining competencies in each. Core competencies, CKP argued, could be the means to get out of the
tyranny of SBUs.
2. What are Strategic groups? Explain how the strategic groups help the organizations in
understanding the competition within the industry.
Ans.: A strategic group is a concept used in strategic management that groups companies within an
industry that have similar business models or similar combinations of strategies. For example, the
restaurant industry can be divided into several strategic groups including fast-food and fine-dining
based on variables such as preparation time, pricing, and presentation. The number of groups within
an industry and their composition depends on the dimensions used to define the groups. Strategic
management professors and consultants often make use of a two dimensional grid to position firms
along an industry's two most important dimensions in order to distinguish direct rivals (those with
similar strategies or business models) from indirect rivals. Strategy is the direction and scope of an
organization over the long term which achieves advantages for the organization while business model
refers to how the firm will generate revenues or make money.
Hunt (1972) coined the term strategic group while conducting an analysis of the appliance industry
after he discovered a higher degree of competitive rivalry than suggested by industry concentration
ratios. He attributed this to the existence of subgroups within the industry that competed along
different dimensions making tacit collusion more difficult. These asymmetrical strategic groups
caused the industry to have more rapid innovation, lower prices, higher quality and lower profitability
than traditional economic models would predict.
Michael Porter (1980) developed the concept and applied it within his overall system of strategic
analysis. He explained strategic groups in terms of what he called "mobility barriers". These are
similar to the entry barriers that exist in industries, except they apply to groups within an industry.
Because of these mobility barriers a company can get drawn into one strategic group or another.
Strategic groups are not to be confused with Porter's generic strategies which are internal strategies
and do not reflect the diversity of strategic styles within an industry.
Originally, the analysis of intra-industry variations in the competitive behaviour and performance of
firms was based primarily on the use of secondary financial and accounting data. The study of
strategic groups from a cognitive perspective, however, has gained prominence during the past years.
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Understanding the nature of strategic groups within an industry is important for at least three reasons.
First, emphasizing the members of a firms group is helpful because these firms are usually its closest
rivals. When assessing their firms performance and considering strategic moves, the other members
of a group are often the best referents for executives to consider. In some cases, one or more strategic
groups in the industry are irrelevant. Subway, for example, does not need to worry about competing
for customers with the likes of Ruths Chris Steak House and P. F. Changs. This is partly because
firms confront mobility barriers that make it difficult or illogical for a particular firm to change groups
over time. Because Subway is unlikely to offer a gourmet steak as well as the experience offered by
fine-dining outlets, they can largely ignore the actions taken by firms in that restaurant industry
strategic group.
Second, the strategies pursued by firms within other strategic groups highlight alternative paths to
success. A firm may be able to borrow an idea from another strategic group and use this idea to
improve its situation. During the recession of the late 2000s, midquality restaurant chains such as
Applebees and Chilis used a variety of promotions such as coupons and meal combinations to try to
attract budget-conscious consumers. Firms such as Subway and Quiznos that already offered lowpriced meals still had an inherent price advantage over Applebees and Chilis, however: There is no
tipping expected at the former restaurants, but there is at the latter. It must have been tempting to
executives at Applebees and Chilis to try to expand their appeal to budget-conscious consumers by
experimenting with operating formats that do not involve tipping.
Third, the analysis of strategic groups can reveal gaps in the industry that represent untapped
opportunities. Within the restaurant business, for example, it appears that no national chain offers both
very high-quality meals and a very diverse menu. Perhaps the firm that comes the closest to filling
this niche is the Cheesecake Factory, a chain of approximately 150 outlets whose menu includes more
than 200 lunch, dinner, and dessert items. Ruths Chris Steak House already offers very high quality
food; its executives could consider moving the firm toward offering a very diverse menu as well. This
would involve considerable risk, however. Perhaps no national chain offers both very high quality
meals and a very diverse menu because doing so is extremely difficult. Nevertheless, examining the
strategic groups in an industry with an eye toward untapped opportunities offers executives a chance
to consider novel ideas.
3. Discuss the additional consideration for using experience curve effect.
Ans.: In management, models of the learning curve effect and the closely related experience curve
effect express the relationship between equations for experience and efficiency or between efficiency
gains and investment in the effort.
"Learning curves" were first observed by the 19th century German psychologist Hermann Ebbinghaus
investigating the difficulty of memorizing varying numbers of verbal stimuli. Subsequent learning
about the complex processes of learning are discussed in the Learning curve article.
Experience shows that the more times a task has been performed, the less time is required on each
subsequent iteration. This relationship was probably first quantified in 1936 at Wright-Patterson Air
Force Base in the United States, where it was determined that every time total aircraft production
doubled, the required labour time decreased by 10 to 15 percent. Subsequent empirical studies from
other industries have yielded different values ranging from only a couple of percent up to 30%, but in
most cases it is a constant percentage: It did not vary at different scales of operation. The Learning
Curve model posits that for each doubling of the total quantity of items produced, costs decrease by a
fixed proportion, as described by Equations 1 and 2. The equations have the same equation form. The

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two equations differ only in the definition of the Y term, but this difference can make a significant
difference in the outcome of an estimate.
Experience and learning curve models are developed from the basic premise that individuals and
organizations acquire knowledge by doing work. By gaining experience through repetition,
organizations and individuals develop relatively permanent changes in behavior or learning. As
additional transactions occur in a service, or more products are produced by a manufacturer, the perunit cost often decreases at a decreasing rate. This phenomenon follows an exponential curve. The
organization thus gains competitive advantage by converting this cost reduction into productivity
gains. This learning competitive advantage is known as the experience curve, the learning curve, or
the progress curve.
It is common for the terms experience curve and learning curve to be used interchangeably. They do,
however, have different meanings. According to definitions by Hall and Starr, the experience curve is
an analytical tool designed to quantify the rate at which experience of accumulated output, to date,
affects total lifetime costs. Melnyk defined the learning curve as an analytical tool designed to
quantify the rate at which cumulative experience of labor hours or cost allows an organization to
reduce the amount of resources it must expend to accomplish a task. Experience curve is broader than
learning curve with respect to the costs covered, the range of output during which the reductions in
costs take place, and the causes of reduction.
The idea of "learning by doing" is intuitive. We often experience this effect when we take up a new
sport or start to keyboard. Our skill levels increase rapidly with practice, up to a point, and then
progress at a slower rate. Eventually, our golf score levels off around some value and our keystrokes
per minute (without errors) levels off as well.
Organizational learning is complex in that we learn at many levels simultaneously. In organizations,
procedures, norms, rules, and forms store knowledge. March states that managers of competitive
organizations often find themselves in situations where relative position with regard to a competitor
matters. This possible competitive advantage through enhanced learning is the essence of the study of
experience and learning curves.
The analytical use of the concept for business purposes first surfaced in 1936 during airplane
construction, when Wright observed that as the quantity of manufactured units doubled, the number of
direct labor hours needed to produce each individual unit decreased at a uniform rate. The variation of
labor cost with production quantity is illustrated by the following formula:
F = log F /log N
where F equals a factor of cost variation proportional to the quantity N. The reciprocal of F represents
a direct percent variation of cost versus quantity.
This insight shows that experience-based learning is closely correlated with cumulative output,
extending beyond changes in design and tooling. Wright found empirical evidence that as unit volume
increases there are predictable corresponding reductions in cost. These data become central concepts
for strategic and operational planning. There has been much discussion on the role of learning in
business organizations. A seminal work in learning theory is the 1963 A Behavioral Theory of the
Firm by Cyert and March. These authors viewed firms as adaptively-rational systems. This means that
the firm learns from its experience. In its basic form, an adaptive system selects preferred states for
use in the future. With experience, management uses decision variables that lead to goals and shuns
those that do not lead to goals.

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The learning curve model was expanded by Adler and Clark into a learning process model. A key
conceptual difference from the prior model is that "a significant part of the effect of experience on
productivity (captured in the learning curve model) might be due to the influence of identifiable
managerial actions". The authors present two orders of learning. First-order learning refers to the
classic learning curve model where productivity is an exponential function of experience. Secondorder learning denotes that which is driven by changes in technology or human capital that lead to
goal attainment.
4. Chose an organization of your choice, which is expanding. Explain which type of intensification
strategy the organization is following and why.
Ans.: With a number of organizational structure options for running your business, choosing one
represents an important step in getting your business up and running. The election of a specific
organizational structure provides a focus for current and future plans related to management,
operations and finances.
Function: Organizational structure provides a hierarchy for handling problems, making decisions and
taking action. An organizational structure helps a usiness establish a recognized chain of authority.
Consider a business choice of organizational structure a road map for hiring employees and future
expansion. Creating job titles and establishing job duties and responsibilities represents a natural flow
of events after a business chooses an organizational structure.
Significance: A corporations chosen organizational structure impacts several every day and
customary business decisions and responsibilities. Tax implications abound depending on the type of
organizational structure chosen. For instance, a sole proprietor claims business income on their
personal income tax returns, while a corporation reports income twice essentially, once for the
company and again at the individual level for owners and shareholders. Other implications exist when
it comes to laying down plans for the future, such as owner succession protocols.
Types: Various types of organizational structure exist. Some offer a particular advantage to individual
business owners and small companies, while other structures offer specific protection of your personal
assets through limited liability clauses. Sole proprietorship, general partnership, corporation and
limited liability company represent some of the most common types of organization structures
available to business owners.
Facts: In regards to the various types of organization structures certain facts remain that may help
direct you towards choosing the appropriate one for your new venture. According to the U.S. Small
Business Administration, the majority of small business owners choose to start out as sole proprietors.
Sole proprietors have complete control over their business. They make changes without input from
others and perhaps have the easiest route to go as far as filing income taxes and making decision
related to investments in the business. The formation of a corporation results in the creation of a
unique entity. This means that the business itself can be taxed, sued and can take out loans and apply
for credit. Investigate all the parameters, pros and cons, of an organizational structure before making a
final decision.
Considerations: Take into account several factors when arriving at a decision on choosing an
organizational structure for your business. Future plans related to growth, vulnerability to liability
lawsuits and your capacity to work with others should all factor into your decision. Lay out the rules
with in a formal agreement, such as a partnership agreement, before starting a business with friends or
individual investors. Consult an attorney for guidance.

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Capital investment decisions also can be called capital budgeting in financial terms. Capital
investment decisions aim includes allotting the capital investment funds of the firm in the most
effective manner to make sure that the returns are the best possible returns. Assessing projects as well
as the allocation of the capital depends on the project requirements are some of the most crucial
capital investment decisions aspects.
There might be many different criterias for choosing the appropriate and right capital investment
decision. For e.g., a company might stress on projects that assure for prompt returns while a few other
companies might assert on projects which ensure for a growth in the long term. The important aim of
capital investment decision is increasing the firms value by taking on a good project at the perfect
The power to study as well as take capital investment decisions permits an individual as the manager
or owner of a particular business to make sure that their resources which are limited are apportioned
to the project(s) which would best accomplish their strategical goals (thus they also are at times
denoted as strategic capital investment decisions). These kinds of decisions could be associated to
capital investments decisions like constructing a new factory, dedication towards a new campaign for
marketing, acquiring a business or developing or creating a new website.
The aim of a business while making capital investment decisions is maximising the wealth of the
shareholder by acquiring assets and yielding profit and to be able to do this, as the owner of your
business, you should to be able to find out and determine as to what projects of capital investment
would yield a cash flow which is positive and when there are constrained resources, as they generally
are in case of start-up or small business or usually for most of the businesses that are facing the creditcrunch, rate the projects in the bases of priority depending on the kind of value they generate.
5. Explain as to how the quality strategic decisions are affected with the change in leadership.
Illustrate your answer with the help of a real world example.
Ans.: Strategic management involves formulation and implementation of the major goals and
initiatives taken by a company's top management on behalf of owners, based on consideration of
resources and an assessment of the internal and external environments in which the organization
competes. Strategic management provides overall direction to the enterprise and involves specifying
the organization's objectives, developing policies and plans designed to achieve these objectives, and
then allocating resources to implement the plans. Academics and practicing managers have developed
numerous models and frameworks to assist in strategic decision making in the context of complex
environments and competitive dynamics. Strategic management is not static in nature; the models
often include a feedback loop to monitor execution and inform the next round of planning.
Change is pervasive in our society and a fact of life in organizations (Goodfellow 1985). Where does
the impetus for change come from? The simple answer is that the impetus to change comes from the
environment. Effective strategic leaders understand that change in the strategic environment is a
continuous process. By environment, we can mean the internal organizational environment, but more
often, we are talking about the external environment. Organizations are awash in the external
environment, and a sea change in the environment (e.g., the rifled musket, steam-driven warships, the
jet engine, the Age of Information) can cause an unresponsive organization to founder. A part of
strategic leadership is understanding when environmental change implies a need for organizational
change and when it does not. Making internal changes to accommodate external change is reactive,
and strategic leadership should be proactive. This is where a well-crafted, wel- managed strategic
vision can help balance reactive and proactive changes.

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Change is about survival. Change is especially necessary in organizations that wish to prosper in a
volatile, uncertain, complex, and ambiguous environment. If changes rocking the external
environment were temporary, the slow and uncertain pace at which organizations change would
matter less. But, the reverse is true. Powerful forces in the environment are pressuring public and
private organizations to alter permanently existing structures, policies, and practices (Bolman & Deal,
1991). Globalization is one example of pressure to change. With globalization comes greater
competition, especially for workforce quality. Wider differences in the skills, attitudes, and needs of
the workforce are coupled to increases in communications problems. Geographic dispersion creates
conflict between regional offices (e.g., unified commands) and the central headquarters as well as
conflict among regional offices. Globalization creates the challenge of building cohesion and common
purpose in the face of cultural and organizational differences. All of this is complex because many of
the variables in the equation are not under the control of the leaders who are creating the vision for
Peace is another example of pressure to change. Peace necessitates, at least in the minds of some
people, the need for reduction in the size of military forces. With smaller military forces comes the
need for increased capabilities because the number and diversity of missions has increased. Also,
reduced budgets create friction among the CINCs and among the services. Another example of
environmental pressure for change is information technology. Information technology facilitates
structural decentralization and downsizing. People must develop new skills. Power often shifts from
centralized functions to operating units.
Demographic changes in the population are creating enormous pressure for change in organization.
Structural responses to demographic diversity include policies and programs like equal opportunity
and affirmative action. The changing workforce has varied needs (e.g., religious and language) and
often creates new training requirements. Friction and conflict develops between demographic groups.
In the private sector, deregulation has created major structural changes in some industries (e.g., the
break-up of Ma Bell, the proliferation of airline companies, and the merging of major defense
contractors). People in the workforce can sense that they can be cut loose without warning.
Deregulation can bring major shifts in power (e.g., from the government to the consumer). And,
deregulation results in the need for the redefinition of organizational mission and culture.
Change is absolutely necessary for the survival of individuals and organizations. The question isn't
whether or not to implement change. Over the long run, you have no choice unless you are willing to
become irrelevant. The strategic environment, over which you have little or no control, is in a state of
constant change and it's your job to sense when changes in the organization are going to be necessary.

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