Business Strategy

May - June 2011

Question No. 1
I. (a) Outline the implications of poor ethical standards and damaged reputation on relationship
between the affected stakeholders in any business organization. 5
(b) What are the main issues concerned with corporate social responsibility? 5
(c) At the Beijing Auto Show (in November 2010) China's car makers felt confident enough to show
off not just their newest low cost runabouts, also luxury and sports models, 'concept cars'
showing future possible designs and even a few hybrid electric vehicles. Local car markets in the
world's third largest and fastest growing car market would appear to have come of age.
Until recently many Chinese car makers built thinly-disguised copies of vehicles made by
Volkswagen, GM and Toyota. In the past few years things have changed. In preparation for push
overseas local firms such as Chery, Great Wall and Geely have proved they can develop their
own vehicle too. Buying designs from international specialists and installing fancy robotic
production lines means more than 100 new models will be introduced in China this year. Their
car makers have captured 27% of the market in China and will export 75,000 vehicles to over 100
countries this year. Foreign car makers are worried by the Chinese firm's ultra low prices. The
latest Shanghai Maple, for example, with leather seats, anti-lock brakes, air conditioning and a 2
year warranty costs a mere Taka 455,000. Foreign firms grumble that they cannot even buy the
steel needed to make the car for that choice.
How much of this miracle is the result of good business sense-rather than special treatment
granted to local firms is not entirely clear. A lot of early technology was borrowed. The
government also offered support to fledging firms via direct investments and guaranteed loans.
1 Universities also provided technical help, especially in the development of expensive engines.
The authorities even considered a law that would mandates a 50% share for local firms by 2012.
l- Future legislation is likely to force foreign firms to do more research and development in
conjunction with Chinese partners to ensure continued access to cutting edge engineering skills.
In market where buyers are unashamedly, brands have little value so far, except in the luxury
segment. For most buyers cost is more important. With average retail price falling by T.k.87,500 a
year producers are racing to cut costs, not improve quality. The number of faults per 100cars 2

made rose from 246 in 2008 to 338 in 2009. Reliability is likely to deteriorate further. Chinese
cars exported today mostly go to Africa, South East Asia and Middle East where expectations are
lower and prices matters more.

Requirements:

a) Identify, using Porter's diamond, the sources and nature of any competitive advantage
enjoyed by Chinese car manufacturer. 10
b) Recommend a strategy for Chinese car makers based on this analysis. I0

Answer to the question no. l(a):

The implications of poor ethical standards and damaged reputation on relationship between the affected
stakeholders in any organization can be summarized as:
• Customers -The damage to the company's reputation due to unethical behaviour may reduce
confidence among customers leading to reduced sales - with a subsequent impact on corporate profits.
• Shareholders- Investor confidence is important in public companies and any reputation risk is likely
to be reflected in market value.
 •
• Senior management= Poor ethical behaviour from them creates a poor perception of the
organization in the market However, poor ethical behaviour from those below can also have a
negative impact on such executives and make them wish to disassociate themselves from a failing
enterprise.
• Employees- Poor ethical standards may leave the employee feeling that they no longer have a
a
worthy association with the firm, which may cause them to leave or be de-motivated as result.

• Suppliers -It may be the case that suppliers decide not to deal with the organization because they feel
that the poor ethical standards will in some way implicate themselves.

Answer to the question no. l(b):

Corporate social responsibility (CSR) is concerned with companies acting in a socially responsible way. It
generally refers to business decision-making linked to ethical values, compliance with legal requirements,
and respect for people, communities and the environment.
The CSR issues that affect companies vary according to the nature of the company but there are five
broad issues concerned with CSR:
• To treat employees fairly and with respect;
• To operate in an ethical way and with integrity;
• To respect human rights;
• To sustain the environment for future generations; and

Answer to the questionno. 1(c) (a):, .2.

• To be a responsible neighbour in the community.

ii '+.7
By using Porter's Diamond, following sources of the Cost Leadership advantages enjoyed by the Chinese
car industry can be identified:
1. Demand conditiois:
China is a very large market (world's third largest car market) and fast growing. This enables firms to
gain significant economies of scale and also to justify investment in the new models (100 next year)
and production equipment. With the exception of the luxury segment, the demand is for low price
cars and this has forced car makers to concentrate on reducing costs.
2. Related industries:
The only cited example is the assistance from universities in R&D. This provides significant cost
advantages compared with in-house development. The low price of the Shanghai Maple suggests that
steel and other components are being sourced cheaply too.
3. Factor conditions:
China clearly has· a good technical education system. It is also known for having abundant cheap
labour and land available for building car plants. It has good sea links and freight handling for the
purposes of exporting.
4. Firm strategy, structure and rivalry:
The scenario mentions only three firms which, between them, share 27% of the Chinese market. The
Chinese government wishes this to increase to 50%. This will give each significant economies of
scale and an incentive to invest in product and process improvement. That foreign-made cars are
allowed into China gives a stimulus to product development and the search for competitive
advantage. It is noticeable that the predominant mode of competition is price/cost and not quality. The
industry seeks to build a me-too version of a foreign car but at a lower price.
 Answer to the question no.1(c) (b). ;'; }; -"; ,·
The attempt by Chinese car manufacturers to go 'up-market' and develop unique designs and distinctive
brands for export- is a mistake. It suggests a vanity that could sacrifice the industry's competitive '
advantage.
The appropriate strategy for the industry is to remain a low cost player. It has huge internal markets
available to it that value its present offerings. Its low cost position may enable it to focus on export
markets such as other developing economies where low cost is also important.
However its advantages are location specific and it should access these markets by exporting rather than
setting up factories outside China.

The poor quality of its products should be addressed. The number of faults is rising and by giving a two-
year warranty the firms are bearing the substantial costs of rectifying these. It may be cheaper to stop the
faults happening than it is to fix them and it would improve customer perception at home and abroad.

Question No. 2
2. (a) "The most fundamental ethical issue facing marketing is the potential accusation that marketing
wastes the world's resources by making things that people don't really need and then using
promotion to convince people that they are not satisfied without them."
i) State the arguments, with examples, for this view. 2
ii) State the arguments, with examples, against this view. 2

(b) Explain the concept and importance of branding to a company. 4

( c ) Explain the way in which relationship marketing can be used by a company to attract and retain
its customers. 5

(d) Identify the ethical and social responsibilities issues that face contemporary marketers in a
manufacturing industry: 4
(e) Explain the role and importance of pricing to the marketing effort. 4
(f) Explain the differences in both competitor based pricing and demand or market-based pricing
of any product. 6
(g) Explain what the terms product positioning and market targeting mean? 4
(h) Define the terms 'Cash Cow' and 'Dog' as used in Boston Consulting Group Matrix.

Answer to the question no.2(a) ;% :.±vs%.. ; •·

es 4 i { »
. #

Argument for the comment:

The huge amount of paper and valuable resources used to advertise products and to direct-mail
promotional material (junk mail) supports to the argument. Also the envy created by development and
presentation of products that only some can have, such as personal digital players, mobile phones,
expensive trainers etc also contributes to street crime.
For example: sports shoe manufacturer Nike was caught-up in accusations that its slogan 'just do it' was
encouraging street thefts of its shoes.

Argument against the comment:

It is hard to accept this argument in the areas of essential products.

age 35

/7
Phrases like 'things that people don't really need' are not helpful because if people will spend money and
effort to get them, who is to say they don't need them: Moreover, Marketing tries to ensure that unwanted
products and marketing effort is reduced. This saves resources.
For example: Marketing has been used to promote alternative and more ecologically responsible products
and ways of life (e.g. quit smoking). This suggests that it is not the practice of marketing that is unethical
but rather some of the ends to which it has been put.

Answer to the question no. 2 (b) . 'j··

Branding & its importance

Branding is the process involved in creating a unique name and image for a product in the consumers'
mind with a consistent theme (quality, business practice, uniqueness etc.).
Branding is a key 'concept in marketing circles, as it is the pivotal springboard that can thrust a business
forward, and give it a competitive edge. Brands add value to products by making them recognizable and
endowing them with associations attractive to the target segment.
A well-defined and strong brand will drive sales, build customer loyalty, create brand value, and most of
all; it will be the catalyst for business growth, as consumers will be motivated to buy product.
Business branding is therefore important to every business regardless of the size, because it
communicates information about a business and product to the market.

Answer to the question no. 2 (c)

Use of relationship marketing
This is a long-term approach to creating, maintaining and enhancing strong relationships with customers
and other stakeholders. Organisations need to view each transaction as part of a long-term goal. If the
customer is satisfied with the product or service they have received for the price they have paid, they are
more likely to return. A short-term outlook on the other hand will consider only a quick profit and not the
more important possibility of a repeat purchase.
There are jive different distinguishable levels with the relationship that can be formed with customers who
have purchased a product or service. These are:

Basic
Selling a product without any follow up.

Reactive
Selling a product with follow up encouraged on the part of the customer.

Accountable
Having sold a product, the follow up occurs a short time afterwards to confirm the customer's
expectations have been met.

Proactive
The sales person contacts the customer from time to time with suggestions regarding improved products.

Partnership
The company works continuously with the customer to deliver improved levels of value. Relationship
marketing can contribute to an organisation in a number of ways. It can establish a rapport with customers
creating trust and confidence.
Page 36
/
 Answer to the question
. . no. 2 (d)

Responsibilities of the modern marketer

I
Marketing concepts and techniques should be used to promote the welfare of society as a whole instead of
just providing products that satisfy consumers' needs efficiently and profitably. For instance, marketing
tools can be used in promoting healthier lifestyles through better diets, encouraging leisure activities and
pursuits and social behaviour.
Social marketing suggests that a more ethical and moral orientation be incorporated into companies
marketing strategies: marketers should consider and incorporate the wider social implications of their
products and services, such as natural conservation or labour exploitation in emerging countries.
Marketers have to consider ecological, environmental and consumer welfare issues together with their
wider social role more frequently in their marketing plans and activities. For example: modern marketers
are faced to produce recyclable products and packaging, reduce pollution generated by toxic products or
from contamination and protect consumers against hazardous products by modifying them or withdrawing
them from sale or to produce organic product.

Answer to the question no. 2 (e)

Role and importance of pricing

Pricing decisions can have important consequences for the marketing organization and the attention given
by the marketer to pricing is just as important as the attention given to more recognizable marketing
activities. Some reasons pricing is important include:
• As part of the marketing mix, price will help the perceived quality, value and image. If the price
is high, then customers generally take the view that the product is of high standard and is good
quality. This of course, needs to be backed up with the other elements of the marketing mix. If the
price is low, there is a danger that the perception is of low quality and is 'cheap and cheerful'.
• Price can help to gain market share by using methods such as 'price skimming' or 'price
penetration'. Penetration will gain a large marketing share as price is set very low, whereas
skimming pricing is where the price is set high, usually for new products launched into a market
with few competitors and a smaller market share is gained.
• Most often customers' perception of a product is formed as soon as they learn the price. It is
important for marketers to know if customers are more likely to dismiss a product when all they
know is its price. If so, pricing may become the most important of all marketing decisions if it can
be· shown that customers are avoiding learning more about the product because of the price.

Answer to the question no. 2 (f)

Competitor-based pricing

Competitor-based pricing involves the setting of prices based on. what rivals are charging.
Most firms in a competitive market do· not have sufficient power to be able to set prices above their
competitors. They tend to use "going-rate'' pricing - i.e. setting a price that is in line with the prices
charged by direct competitors. In effect such businesses are "price-takers" - they must accept the going
market price as determined by the· forces of demand and supply.
An advantage of using competitive pricing is that selling prices should be line with rivals, so price should
not be a competitive disadvantage.

Page 37

(9
The main disadvantage is that the business needs some other way to attract customers. It has to use non
price methods to compete -e.g. providing distinct customer service or better availability.

Demand/market-based pricing
Demand/market - based pricing method takes in to account market needs and wants and relates to what is
in demand. Demand-based pricing is any pricing method that uses consumer demand - based on perceived
value - as the central element. These include: price skimming, price discrimination bundle pricing,
penetration pricing, and premium pricing.
Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.
Advantage of this pricing is price is, this is a more suitable method of pricing as customers are becoming
more demanding and economic issues and the elasticity of demand are considered here.
Disadvantage is this method is difficult to apply in the high competitive environment and/or if the product
is standardized.

Answer to the question no. 2 (g)

Product Positioning
Product positioning is the overall location of a product in the buyer's mind in relation to other competing
products/brands. Product positioning is a technique which carefully targets various product attributes of
the (chosen) market segments.
Various factors of the product can be considered (e.g. quality and price) and the company can in this way
decide how to position its product.

Market targeting
Targeting involves selecting the best market segment. Market targeting considers how markets can be
split into different sectors and then each sector targeted with a specific product. There are three possible
approaches.
(i) Undifferentiated marketing: One product, one market. No attempt is made to segment the
market.
(ii) Differentiated marketing: The market is segmented with products being c.levelopec.1 to appeal to
the needs of buyers in the different segments.

..#
(iii) Concentrated marketing: The market is segmented with the product being specifically targeted
at a particular segment.
'Answer to the question'no. 2(h)"-;
Cash cow
='
a
A product that has high market share of a relatively slow growth market. Cash cows typically generate
cash in excess of the amount of cash needed to maintain the business. Little investment required to defend
cash cows but large enough market share to exploit available opportunities.
They are to be "milked" continuously with as little investment as possible, since such investment would
be wasted in an industry with low growth.
Dog
Dogs are products with a low share of a low growth market. Dogs generally show a modest net cash
. inflow or outflow. Some features of Dogs are:
o Unattractive markets without the market share
o Modest cash flow
o The best strategy may be to exit the market ("divest")
age-38

20
 Question No. 3

G PL em ploys a total quality m anagem ent program and m anufactures 12 different types of pie from
chicken leek to vegetari an. The directors of G PL are proud of their products and attem pt to m aintain high
quality of input at a reasonable price. The inputs are sourced as fo llow s:
• The alum inium is obtained fr om a single supplier of m etal related pro ducts. There ar e fe w
suppliers in the industry resulting from fa ll in dem and fo r alum inium related products
fo llow ing inc reased use of plastics. .
• The flour fo r the pastry shell is sourced from flour m illers in fo ur different countries - one
source of supply is not feasible because har vests occur at different tim es and GPL cannot store
suffi cient flour from one harv est fo r a year 's pro duction.
•· O btaining m eat and vegetables is diffi cult due to the large num ber of suppliers located in m any
different countries. R ecently, GPL obtained significant cost savings by delegating sourcing of
these item s to a specialist third par ty.
• Plastic w rapping is obtaining either directly fr om the m anufa cturer or via an intern et site
speci alizing in selli ng surplus wra pping from govern m ent and other sources.
Requirements:

a) Explain the main characteristics of a Total Quality Management (TQM) programme. 6

b) Identify the sourcing strategies adopted by GPL and evaluate the effectiveness of those
strategies for maintaining a constant and high quality supply of inputs. Your answer should also
include recommendations for changes you consider necessary. 9

Answer to the question no. 3 (a)•+ ··-535% > 3 >#33

Main characteristics of TQM

Total quality management (TQM) is a management philosophy, aimed at continuous improvement in all
areas of operation.

A TQM initiative aims to achieve continuous improvement in quality, productivity and effectiveness. It
does this by establishing management responsibility for processes as well as output.

Principles of TOM

(i) Prevention

Organizations should take measures that prevent poor quality occurring.

(ii) Right first time

A culture should be developed that encourages workers to get their work right first time. This will save
costly reworking.
(iii) Eliminate waste

The organisation should seek the most efficient and effective use of all its resources.

(iv) Continuous improvement

The Kaizen philosophy should be adopted. Organisations should seek to improve their processes
continually.

2(
(v) Everybody's concern

Everyone in the organisation is responsible for improving processes and systems under their control.

.i
(vi) Participation
All workers should be encouraged to share their views and the organisation should value them.

Answer to the question no. 3 (b)

Single Sourcing of Aluminium foi]

Advantages
• Easy to develop and maintain a relationship with a single supplier;
• A supplier quality assurance program can be implemented easily to help guarantee the quality of
products;

Disadvantages
• GPL is dependent on the supplier - providing significant supplier power;
• Issues such as quality assurance may not be addressed quickly;
• · GPL is vulnerable to any disruption in supply.

The directors of GPL could look for alternative sources of supply to guard against this risk.

Multi Sourcing of pastry shell flour

Advantages
• Ability to switch suppliers should one fail to provide the flour;
• Competition may help to decrease price.

Disadvantages
It may be difficult to implement a quality assurance program due to time needed to establish it with
different suppliers.
GPL could implement some quality standards that suppliers must adhere to in order to keep on supplying
flour. ·

Delegated Sourcing of meat and vegetables

Advantages
• Provides more time for GPL to concentrate on pie manufacture rather than obtaining inputs;
• The third party is responsible for quality control checks on input.

Disadvantages
• Quality control may be more difficult to maintain if the third party does not see this as a priority;
e There will be some loss of confidentiality regarding the products that GPL uses.

Given the diverse sources of supply, GPL is probably correct using this strategy.
 Parallel sourcing of plastic_film
r Advantages
• Supply failure from one source will not necessarily halt pie production because the alternative
source of supply should be available;
• There may be some price competition between suppliers.

Disadvantages
• GPL must take time to administer and control two different systems;
• Quality may be difficult to maintain, and as with multiple sourcing, it will take time to establish
supplier quality assurance programmes.

The weakness in the supply strategy appears to be obtaining film from the Internet site -- in that quality
control is difficult to monitor. Changing to single sourcing with a supplier quality assurance programme
would be an alternative strategy to remove this risk.

Question No. 4
4. Your corporate client Wal-Mart Ltd. has purchased the following data which provides sources of
the political risk for a number of countries in which the country is considering investing in a new
subsidiary.
Total Economic Debt in Credit Govemme Remittance Access
performance Default ratings nt stability restrictions capital
Weighting 100 25 10 10 25 15 15
Gmala 37 13 4 5 5 10 0
Forland 52 5 10 9 16 8 4
Amapore 36 12 2 3 9 5 5
Covia
- 30 9 3 2 15 I 0
Settia 39 1.5 4 3 11 4 2
Countries have been rated on a scale from 0 up to the maximum weighting for each factor (e.g. O-15
for remittance restrictions). A high score for each factor, as well as overall, reflects no political risk.
A proposal has been put before the company's board of directors that investment should take place in
Forland.

Requirements:
Prepare a brief report for the company's board of directors discussing whether or not the above data
should form the basis for:
a) The measurement of political risk, and I0
b) The decision about which country to invest in. 10

Answer to the question no. 5 (a) & (b) :_,·1 ... · .•. \.:.• ••, .. :
pa ,a

To Board of directors
From Accountant
Date TODAY
Subject The evaluation of political risk in investment decisions

The measurement of political risk .

There are various agencies that can provide risk scores for different countries, but the key problem for all
such approaches is that the scores that they use will always be subjective.
-Page +I
 Weaknesses of approach
Considering the data that is being used in this case in more detail, there are a number of weaknesses that
should be recognized.
(a) Economic performance is not really a component of political risk.
(b) There is no information about the source of this information and as to how the weightings have been
arrived at.
{c) A number of factors that could have been included have been ignored. These include:
(i) Cultural homogeneity
(ii) Quality of infrastructure
(iii) Legal system
(iv) Record on nationalization
(v) Currency stability

Other methods of evaluation

The directors should also consider some of the other approaches to the evaluation of political risk. These
include:
(a) Seeking the views of individuals with direct experience of the countries in question, such as
academics, diplomats and journalists
(b) Social as well as economic analysis

The decision about which country to invest in

The evaluation of political risk must obviously form some part of the decision about which country to
invest in. However, the use of this type of data to evaluate political risk in this context can be misleading
for the following reasons.
(a) Micro risks
These scores are valid at the macro level, but they do not measure the risk that is faced at the micro level
by the industry or firm. Some activities will be welcomed by countries due to the perceived benefits that
their presence can bring.
(b) Emphasis on political features
It can lead to an over-emphasis on the political features of the host country while neglecting other vital
considerations such as the strategic fit of the new investment with the company's other operations.
This type of data therefore has relevance to the investment decision. but should not form· the sole basis on
which the decision if made. Although Farland comes out best in the overall scores, it has the worst level
of economic performance. If the subsidiary is being developed with a view to serving primarily the local
market, then this factor should receive a higher weighting in the overall decision making process since it
will have a significant impact on the expected cash flow that will be generated.

The End

2-j