Mb311- April 04

Question Paper Business Policy and Strategy (MB311) : April 2004 Section A : Basic Concepts (30 Marks) • • • • 1.

This section consists of questions with serial number 1 - 30. Answer all questions. Each question carries one mark. Maximum time for answering Section A is 30 Minutes.

(a) Divestiture (b) Market penetration (e) None of the above. 2.

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When a price cut by one airline is immediately matched by all other airlines, it suggests which of these forces is in action?

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(d) Leverage

(b) Global

(c) Nationalistic

(b) Political risk (c) Cultural risk

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(d) Technological risk

Which of these, according to Porter, is not a support activity in a manufacturing firm's value chain? (a) Firm infrastructure (b) Marketing and sales (c) Human resource management (d) Procurement Finance.

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(d) Transnational

_____________ refers to economic conditions that may adversely affect a company's ability to operate profitably and use its funds to meet its strategies. (a) Economic risk (e) Legal risk.

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(c) Growth

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(d)

The main reason for adopting a ______________ strategy is that in some cases cultural, legal-political, and economic conditions may dictate very different optimum operating practices from one country to another. (a) Multi-domestic (e) Regional.

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(d) Rivalry among existing

(a) Philosophy (b) Self-concept (c) Concern for public image Culture (e) Technology. __________ ratios measure how effectively a firm is using its resources. (b) Activity

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(b)

Which component in a mission statement represents an organization's basic beliefs, values, aspirations, and ethical priorities?

(a) Liquidity (e) Profitability. 7.

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Never pursue diversification strategies Focus on efficiency rather than effectiveness Do not stray too far from the firm's basic areas of competence Use a focus strategy whenever possible Both (a) and (b) above.

(a) Threat of substitute products or services Threat of new entrants (c) Bargaining power of suppliers firms (e) Bargaining power of customers. 5.

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(c) Mature stage (d) Shakeout stage

What is the meaning of the advice to firms to "stick to the knitting"? (a) (b) (c) (d) (e)

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(c) Harvesting (d) Conglomerate diversification

In which of the following stages of the industry life cycle, is the rivalry between companies intensified? (a) Beginning stage (b) Growing stage (e) Decline stage.

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Which of these is not an appropriate Question Mark division strategy in a BCG Matrix?

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10. An organization skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights is referred to as a(n)__________. (a) Learning organization (c) Entrepreneurial organization (e) Adaptive organization.

(b) Environmental organization (d) Strategic organization

11. Firm X plans to sell off a part of the firm via an equity offering to outsiders giving them ownership of a portion of the previously existing firm. Which of the following means shall be applied by the company for executing its plan? (a) Equity Carve Out (d) Divestiture

(b) Spin-off

(c) Split Up (e) Tender Offer.

12. Which of the following is not a step in operational control systems? (a) Set standards of performance (c) Identify deviations from standards (e) Measure actual performance.

(a) Economic responsibility (b) Legal responsibility (c) Ethical responsibility (d) Discretionary responsibility (e) Public image.

Rights given to existing creditors in the event of default Defensive tactics to prevent hostile takeovers Special voting rights given to shareholders Types of leveraged buyouts Ways of evaluating the success of a merger or acquisition.

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15. Vertical scope is described by Range of region, countries or group of countries in which a firm operates Serving buyers by variety of products Serving a particular segment Extent to which activities were performed in-house instead of by independent firms Firms vie with a co-ordinated strategy in a range of related industries.

16. In which mode of strategic decision-making is strategy formulation confined to owner promoters? (a) Entrepreneurial mode (c) Planning mode (d) Receptive mode

(b) Adaptive mode (e) Intuitive mode.

17. Which of the following describes a company’s product, market and technological areas of thrust, and reflects the values and priorities of the strategic decision makers? (a) Company’s Profile (b) Company’s Mission (d) Company’s Strategy (e) Company’s Vision.

19. Banking organizations in India have seen a lot of radical changes, one of the changes being the implementation of voluntary retirement scheme for their employees. This type of strategic change is called (b) Restructuring

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Their products have few substitutes and are important to buyers The buyer’s industry is not an important customer to the supplier Differentiation makes it costly for buyers for switching to other suppliers Suppliers have distinct marketing and sales function Suppliers give liberal credit terms.

(a) Re-engineering (e) Diversification.

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(c) Company’s Objective

18. Suppliers have more bargaining power when (a) (b) (c) (d) (e)

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14. Poison pills, standstill agreements, and control blocks are

(a) (b) (c) (d) (e)

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(b) Measure past performance (d) Initiate corrective action

13. When a two wheeler manufacturer sets-up free pollution checkups for two-wheelers in several cities across India, the activity is termed as

(a) (b) (c) (d) (e)

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(c) Innovation

20. A leveraged buyout proposal serves as a signal to market that

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(d) Capacity building < Answer >

(a) (b) (c) (d) (e)

Firm’s operating income in future will be large Operating income in the future will be less Firm’s operating income in the future will be high and highly risky Firm’s operating income in the future will be high and less risky Firm’s operating income in the future will be low and less risky.

21. Maximum delegation of authority in the strategic management process is possible in which of the following organizational structures? (a) Simple Matrix (d) Divisional (Business) Unit

(b) Functional

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(e) None of the above.

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22. Which of the following are the characteristics of fragmented industries? (a) (b) (c) (d) (e)

Low barriers to entry High barriers to entry High barriers to entry; with low product differentiation Low barriers to entry; with high product differentiation Low barriers to entry; with low product differentiation.

23. Which of the following describes the pricing policy where the company brings a product to the market with a remarkably high price? (a) Skimming price strategy (c) Cost-plus price strategy (e) None of the above.

(b) Dogs (e) Both (a) and (b) above.

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(b) Strategic formulation (d) Strategic alternative

28. Which of the following controls reflects the need to thoroughly reconsider the firm’s basic strategy based on a sudden unexpected event? (a) Implementation control (c) Premise control (e) Strategic surveillance.

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(b) Capital budget (d) Operating budget

27. The development of long range plans for the management of opportunities and threats, and utilizing the strengths and weaknesses inherent in the organization is defined as (a) Strategic choice (c) Strategic implementation (e) Objective.

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(c)

26. Irena has been assigned to work on the development of a budget that plans future investments in major assets such as building and heavy machinery. Irena is working on a (n) (a) Cash budget (c) Revenue budget (e) Expense budget.

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(b) Functional strategy (d) Grand strategy

25. BCG matrix is a portfolio approach that compares various businesses in a firm’s portfolio on the basis of relative market share and market growth rate. In this regard, sometimes called "problem children" or "wildcats", which of these are new products with a potential for success, but need a lot of cash for development? (a) Cash cows Stars (d) Question marks

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(b) Penetration price strategy (d) Value pricing strategy

24. Strategy which emphasizes on improving the competitive position of a product in a specific industry or market segment is termed as (a) Business strategy (c) Objectives (e) Corporate strategy.

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(b) Special alert control (d) Operational control

29. The management of change in any company generally fails for one reason, i.e. an inadequate understanding on the part of top management. Quinn (1988) argues that the hardest part of strategic management is implementation of change. The roles of strategic leaders are critical in the process because they are responsible for the proposed change.

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Which of the following statements is contradictory to the Quinn’s Incremental Model? (a) The strategic leaders will develop their information channels within and extend to the organization (b) The strategic leader should generate awareness of the desired change within the organization (c) The strategy will be floated as a clear major change so that it will attract minimum resistance (d) In the initial period, the strategy will be flexible, so that changes can be made in the light of trials (e) Finally, the proposed changes will be formalized and ideally accepted within the organization. 30. Which of the following types of organizational culture is innovative and encourages and rewards initiative taking by middle and lower level managers?

(a) Inert culture

(b) Thin culture

(c) Thick culture

(e) None of the above. END OF SECTION A

(d) Adaptive culture

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Section B : Caselets (50 Marks) • • • • •

This section consists of questions with serial number 1 – 7. Answer all questions. Marks are indicated against each question. Detailed explanations should form part of your answer. Do not spend more than 110 - 120 minutes on Section B. Caselet 1

Read the caselet carefully and answer the following questions:

1.

The Citicorp-Travelers merger was expected to be a perfect fit as the merger would facilitate cross-selling of each other’s products in each other’s territories. However, many hurdles hindered the realization of the synergies identified prior to the merger. According to you, what were the major hurdles that prevented the realization of synergies after the merger? (7 marks) < Answer >

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Citigroup’s Co-CEO structure did not work well and one of the CEOs had to step down. Explain why the Co-CEO structure failed to function efficiently. What are the problems associated with such a structure? (8 marks) < Answer >

Citigroup-Travelers Merger In April 1998, the financial services giants Travelers Group and Citicorp agreed to the largest merger in corporate history. The $166 billion merger created the world’s biggest company, Citigroup, with $700 billion in assets and a market value of nearly $160 billion. The new entity was expected to have 162,600 employees and 3,200 offices, and offer some 100 million customers in 10 countries a range of financial services. Citigroup was likely to have a 24member board, with an equal number of members from each merging entity. John S. Reed and Sandy Weill, the CEOs of Citicorp and Travelers, respectively, would serve as Co-CEOs and Co-Chairmen of the Board of Directors. Citicorp and Travelers hoped that the merger would facilitate “cross-selling” of each other’s products in each other’s territories. While Travelers had a limited presence overseas, it had one of the strongest distribution systems in the US. Citicorp, however, had an impressive network outside the US. After the merger, Citicorp could sell its CitiGold and Private Banking Services more efficiently to Travelers’ 20 million U.S. customers. The customer segments of the pre merger entities seemed to complement each other well. While Citicorp had a young, less affluent customer base, Travelers’ customers were older and more affluent. Another area where synergies existed for Citicorp was mutual funds; Citicorp was weak in this area and hoped to learn from Travelers’ experience. Although many synergies would be achieved by the merger, there were some areas of concern. The compensation policy was very different for the two companies. Citicorp had a relatively conventional compensation structure that offered stock options to the people it wished to retain. It did not insist that executives retain their stock. The officers and directors at Citicorp put together owned less than 0.5% of the company’s stock. At Travelers, Weill himself owned 1.3% of Travelers’ stock, worth about $950 million, and the company’s officers and directors together owned 2.45%. The work culture of the two companies was very different. Travelers had an aggressive, fast, deal making culture. On the other hand, Citicorp had a conservative culture built around long term customer relationships. Appointing Reid and Weill as Co-CEOs also caused problems for the merged entity. Both Reed and Weill were contrasting personalities. Reed was a loner who disliked talking to the press while Weill was outgoing and liked to stand in front of crowds and answer their questions. Analysts doubted whether two such strong, but very different people could really share the top job for any length of time. Weill was a cost cutter and was always concerned about short-term profits and the stock price of the company. He also managed the company through personal relationships. Weill expected and received loyalty from his managers. Reed, however, had a long-term vision for the company and was willing to spend the money to realize it. Reed was not a “people person”; he valued on memos and processes to manage the organization. In October 1999, the merged entity took the first step towards integration by drawing up the organization chart. The chart itself was a clear indicator that Travelers had taken a dominant position in the new entity. At the top of the chart were Co-CEOs, Reed and Weill. James Dimon, CEO of Saloman Smith Barney was appointed

President. Dimon would head Citigroup’s Global Corporate Businesses and would be assisted by Victor Menezes, CEO of Citibank, and Deryck Maughan, Co-head of Solomon Smith Barney. Analysts wondered whether Weill and Reed could succeed in fashioning two very different cultures and businesses into one cohesive organization. They doubted that Weill and Reed could smoothly rearrange their corporate structures into one. Reed and Weill’s inability to control their followers led to confusion over which corporate culture would predominate—the fast-moving, aggressive deal-making culture of Travelers or the more conservative culture of a large commercial bank. Citicorp which had relationships with large multinational companies, wanted to maintain those contacts and didn’t want to be absorbed into Travelers, which also served corporations but had little presence overseas. On the other hand, Travelers’ employees did not like the idea of commercial bankers (Citicorp) with little bond-underwriting expertise taking the lead in emerging-market fixed-income deals. By mid 1999, though the merger seemed to be going reasonably well, there were signs of tension between Weill and Reed. Analysts felt that a rift at the top between Weill and Reed could hamper the performance of Citigroup. Reed and Weill were attempting several revolutions at Citigroup. They were trying to offer consumers around the world everything from CDs and credit cards to mutual funds and insurance. Reed and Weill were finding it very difficult to arrive at a consensus on numerous issues. For example, when they had to decide on a common pension plan for nearly 170,000 Citigroup employees, the gap between the two CEOs’ attitudes was considerable. Travelers offered very conservative benefits to its employees, while Citicorp’s benefits were quite generous. Weill believed in cutting costs by clubbing benefits and pension plans and replacing them with stock options. Citicorp traditionally paid fairly low salaries, but rewarded long-time workers with good benefits. Weill wanted to implement a new benefit plan by January 01, 1999. However, Reid and Weill couldn’t reach an agreement until April, and the new benefit plan did not come into effect until January 01, 2000. The new benefit plan cut down Citicorp’s benefits and relied more on stock options, while cutting costs in the short term. In July 1999, relationship between Reed and Weill took a new turn. An internal memo dated July 28, 1999, indicated that Reed and Weill had agreed to split their responsibilities. Weill would be responsible for the company’s operating businesses and financial function; Reed would take care of the Internet, advanced development, technology, human resources and legal functions. In March 2000, a board meeting was called to deliberate on the failure of Citigroup’s Co-CEO structure. In the meeting, Reed announced his plan to retire as Co-CEO of Citigroup, stating that the job of merging Citicorp and Travelers was done. Reed probably was hiding his feelings. In a speech he had given in August 1999 to the Academy of Management he had said: “We are talking about putting two cultures together that are quite different, quite distinct. I am trying to understand how to make this work. I will tell you that it is not simple and it is not easy, and it is not clear to me that it will necessarily be successful. As you put two cultures together, you get all sorts of strange, aberrant behavior, and it is not clear whether each side getting to know the other side helps, or whether having common objectives helps, or whether it is just the passage of time.” After Reed’s exit, Weill was solely responsible for running Citigroup. Weill seemed to have done well: Citigroup recorded revenues of $112 billion in 2000 and $13.5 billion in profits, second only to Exxon Mobil’s $17.7 billion. However, analysts felt that Weill, who turned 68 years in 2000, should retire and choose a successor. In 2003, Weill announced his successor. Caselet 2 Read the caselet carefully and answer the following questions: 3.

GE entered the Japanese market through the Joint Venture route. Why do you think GE chose this route to enter Japan? What other routes could it have taken? (7 marks) < Answer >

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Why was GE relying on expatriates to run the business in Japan? How did GE overcome this problem? (6 marks) < Answer >

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“I remember being frustrated by how long the Japanese took to make a decision. But when they made one, you could bet your house on it.” What do you infer from this statement? (6 marks) < Answer > Neutron Jack - Japan

GE has always been a global company. After World War II, GE’s relationship with Japan has grown steadily. GE has built the largest power plant in Japan. GE ventured into the Japanese market during Neutron Jack’s days. Jack Welch recollects, “ I first came to Japan as a young manager in what was the "plastics operation," which was a small venture at

GE then, and I arrived in Tokyo in search of partners and markets. I was lucky to meet and shake hands on a joint venture with Hiroyasu Nagase, the head of Nagase & Co.” GE provided its advanced technology and the product to the deal, whereas the Japanese counterpart offered its skills in supply chain management. Welch recollects, “I remember being frustrated by how long the Japanese took to make a decision. But when they made one, you could bet your house on it. In over 35 years, almost every business relationship I had in Japan turned into an enduring personal friendship.” After its initial success in the power sector, GE ventured into other segments of the market. GE agreed to establish a 50/50 joint venture in factory automation with Fanuc of Japan, the clear market leaders in numerical controls for machine tools. This arrangement was regarded as one of the biggest international deals ever made in the 1980s. Commenting on the deal, Welch said, “I've seen first-hand the value of a Japanese handshake on a deal. It is more valuable than an ironclad written contract in most parts of the world. The loyalty of our business partners, their commitment to excellence, and their devotion to quality have never wavered.” In the mid 1990s the Japanese economy began to sour. The Japanese started deregulating their financial markets to attract foreign investment. GE grabbed the opportunity, and in 1994, acquired Minebea, a $1 billion consumer finance company subsidiary of a ball-bearing company. During that period, GE also entered into a joint venture with Toho Mutual Life Insurance. In the initial stages of its operations in Japan GE employed US expatriates. However, as the pace of globalization accelerated, GE reduced the number of expatriates it employed. As a result, within a year GE reduced expenses by over $200 million. When a US expatriate is hired to manage a Japanese operation on a salary of $150,000, it costs the company over $500,000. Welch therefore advised his business leaders to employ smart Japanese University graduates. However, GE found it difficult to hire the best male Japanese graduates because they were reluctant to work for foreign companies in Japan. Welch recollects, “Finally, it dawned on me. One of our best opportunities to differentiate GE from Japanese companies was to focus on women. Women were not the preferred hires for Japanese companies, and few had progressed far in their organizations.” GE tried to position itself as the employer of choice for women.

Caselet 3 Read the caselet carefully and answer the following questions: 6.

Who are Boeing's and Airbus' customers? Comment on bargaining power of customers in the airline industry. (8 marks) < Answer >

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What are Porter's three generic strategies for competition within an industry? Relate them to product development by the two companies. Which of them does the Sonic Cruiser strategy by Boeing represent? Comment on Airbus' plan for the 380X. (8 marks) < Answer >

Competitive Strategy Moves for Boeing Introducing new products into a marketplace can be a response to changes in the competitive landscape. When evaluating the demand for new products, and in deciding whether and how to commercialize new product offerings, firms have to consider how long the demand for a given product will last, as well as how much initial demand they will face. Every product line has a different life cycle (compare washing machines to transistor radios, for example), so some products have to be developed and sold over short time-spans. But there are also products that have very long product development phases, lasting for years or even decades. The airline industry is characterized by longer phases. As the leading manufacturer of jet airliners, Boeing has long been locked in competition with Airbus Industries, a European company. Started as a consortium of European defense manufacturers, Airbus has been increasingly successful with its line of jets, meeting Boeing face-to-face in most product categories, but especially in small- and medium-size segments. Any airline, wherever it operates in the world, is quite likely to have jets from both companies in their fleet. One product category where Airbus has less success is in the jumbo category, in which passenger loads of 300 or more are suitable for trans-Atlantic or trans-Pacific flight. Boeing initiated this product category in the 1970s with its successful 747 series. Early in 2001, Airbus announced its plans to enter this category with a new airplane, the A380, as a “superjumbo” with seats for 550 passengers. Boeing promptly announced that it would re-design the 747-400 – the largest model of the 747 – as the 747X, adding additional passenger capacity. Things changed, however: a few months later, Boeing announced a different strategy, choosing to target a market sector that was not based on size, but on speed and distance instead. Their solution is a “Sonic Cruiser,” which is expected to have around 250 seats, only a medium size. What it lacks in seats is compensated by improvements in speed and distance. It will be able to fly farther and faster, thus making it possible for trans-oceanic customers to get directly to their destination city from major hubs in the U.S. or Europe, or directly to the ultimate destinations in Asia and Australia. Trans-oceanic flight inevitably requires multiple flights and

stops. Boeing perceives that passengers will prefer direct flights. Adding thousands of miles to its range and using more powerful engines will make the Cruiser more suitable for airlines to meet the demands of more specific and narrowly defined travel segments. Thinking About the Future! In the complex aviation market, there is interaction between airline manufacturers, airliners, airports and civil aviation authority, labor, and travel customers - each with its own stakeholders. Each of these very different groups work towards greater mobility for goods and services, at a lower cost, and each would also like to harvest the benefit that they desire most for their efforts! For the businesses, it will be profit, return on investment, and market share; human resources and human customers will seek greater service; and competitive and regulated aviation market institutions attempt to implement policy. Successful competitors need expertise in navigating all of these waters simultaneously. For Boeing and Airbus, the gamble that they place with their product development expenditures is billions of dollars in up-front expenditure vs. the uncertain returns from anticipated sales of the airplane. They are betting on certain circumstances to be present that will be favorable to the success of their product – even though that won't be determined for years down the line. Other airplane manufacturers in different product categories face similar competitive choices. For example, numerous commuter airlines are consumers for short-hop, propeller-driven planes to fly less than 500 miles with fewer than 50 passengers. This system feeds well into the major airlines by flying from those airlines' hubs. Bombardier, Embraer, and other airplane manufacturers compete in these segments.

END OF SECTION B

Section C : Applied Theory (20 Marks) • • • •

8.

This section consists of questions with serial number 8 - 9. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.

When the Chief Minister of Andhra Pradesh announced that APSEB would be divided into 3 grids for efficient functioning of the board, employees resented the move, and went on a strike, though they were assured that there would be no lay offs. What are the reasons do you think for the employees withholding support? What techniques can be used to overcome resistance to change? (10 marks) < Answer >

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A matrix structure is a type of departmentalization that superimposes a horizontal set of divisional reporting relationships onto a hierarchical functional structure. What are the advantages and disadvantages of this type of organization structure? (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Policy and Strategy (MB311) : April 2004 Section A : Basic Concepts 1.

Answer : (d) Reason : For a Question Mark division, the alternative strategies could be in terms of product or market development to grow the division, or a horizontal diversification to increase the

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growth. If these are not feasible, it may make sense to divest the division. Conglomerate diversification will not be relevant here, as it is a corporate level strategy. Answer : (d) Reason : Rivalry between companies intensifies as an industry enters the shakeout stage. Answer : (c) Reason : “Stick to the knitting” advice conveys the message that firms should pursue growth strategies in the business that they are familiar with, and not stray too far from the firm's basic areas of competence. Answer : (d) Reason : Rivalry among existing firms is normally evident, when a price cut by one airline is immediately matched by all other airlines. Firms try to match competitors’ actions under this phenomenon Answer : (a) Reason : Philosophy component in a mission statement represents an organization's basic beliefs, values, aspirations, and ethical priorities Answer : (b) Reason : Activity ratios measure how effectively a firm is using its resources, in its various business activities. Answer : (a) Reason : A Multidomestic strategy is adopted by companies, due to the varying cultural, legalpolitical, and economic conditions in different countries, and hence a uniform approach may not give the desired results. Answer : (a) Reason : Economic risk refers to the economic conditions that may adversely affect a company's ability to operate profitably and use its funds to meet its strategies. Answer : (d) Reason : According to Porter, Procurement is not a support activity in a manufacturing firm's value chain. It is a primary activity in the value chain. Infrastructure, Marketing and sales, Human resource management and Finance are considered as the supporting activities.. Answer : (a) Reason : A learning organization is one that is skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights. Answer : (a) Reason : Firm X shall apply the equity carve out for executing its plan . Equity carve out is a variation of divestiture and involves the sale of a portion of the firm via an equity offering to outsiders, giving them ownership of a portion of the previously existing firm. A spin -off creates a separate legal entity, wherein shares are distributed on a pro rates basis to existing shareholders of the parent company. It represents a form of dividend to existing shareholders. It represents a form of dividend to existing shareholders. A split-off is a variation of a spinoff. In a split-off, a portion of existing shareholders receives stocks in a subsidiary in exchange for the parent company stock. Divestiture involves sale of a portion of the firm to an outside third party. The buyer is an existing firm and divestiture simply represents a form of expansion by the buying firm. No new legal entity results. Answer : (b) Reason : Operational controls are concerned with providing action controls. Operation control systems exist because operating managers need control methods appropriate to their level of strategy implementations. These provide post-action evaluation and control over short time periods. Operational control must take the following four steps in order to be effective I,e set standards of performance, Measure actual performance, identify deviations from standards and initiate corrective action or adjustment. Hence, measuring past performance is not a step in operational control systems. Answer : (d) Reason : When a two wheeler manufacturer set-up free pollution checkups for two-wheelers in several cities across India, the activity is termed as Discretionary responsibility. This refers to the purely voluntary obligations that a corporation assumes. Governments define legal

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responsibilities as laws that management is expected to obey. An ethical responsibility of a firm’s management is to follow the generally held beliefs about behavior in a society. Economic responsibility deals with producing goods and services of value to society so that the firm may repay its creditors and share-holders. The issue of public image is important to a growing firm that is involved in redefining its mission Answer : (b) Reason : Poison pills, standstill agreements and control blocks are defensive tactics to prevent hostile takeovers. All the other options are not correct. Answer : (d) Reason : Vertical scope is described by the extent to which activities were performed in house instead of by independent firms rather than the range of region, countries or group of countries in which a firm operates, servicing buyers by variety of products, serving a particular segment and firms vie with a coordinated strategy in a range of related industries. Answer : (a) Reason : In the entrepreneurial mode of strategic decision-making, strategy formulation is confined to owner promoters. The owner promoters then delegate their vision / mission to the organizational hierarchy for implementation Answer : (b) Reason : The mission statement is enduring statement of instruction of an organization; it refers to the philosophy of business in order to build the image of the company by activities currently pursued by the organization and its future status. While, Vision statement describes the aspiration for the future , but without specifying the means to achieve those desired ends. Answer : (c) Reason : When differentiation makes it costly for buyers to switch suppliers, suppliers have more bargaining power, as they can extract better prices and supply terms. All other options are not correct in relation to more bargaining power of suppliers Answer : (b) Reason : Restructuring program involves changes in the relationship between division and function. Banking organization is downsizing the number of employees though VRS to reduce operating cost. (a) Re-engineering is the fundamental rethinking and radical redesign of business process to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service and speed (c) Innovation is a process by which organizations use their skills and resources to create new technologies or products (d) capacity building is the increase in the volume from the existing one. (e) Diversification is a growth strategy that entails effecting growth the development of new areas that are clearly distinct from current business. Answer : (d) Reason : A LBO is defined as the acquisition ,primarily financed by borrowing ,of all stock, or assets, of a public company by a small group of investors. So a leveraged buyout proposal serves as a signal to market that firms operating income in the future will be high and less risky.(a)(b) (c)(e) are not correct as per the explanation given above. Answer : (d) Reason : Maximum delegation of Authority in the Strategic management process is possible in the divisional business unit form of organizational structure. It helps the progress in critical decision-making within each division in response to different competitive situation.(a) Simple structures encourages employee involvement in more than one activity and are efficacious in businesses that serve a localized simple product\market. (b) Functional structure generally exists in the firms, which concentrates on one or few related products/markets. The grouping of similar tasks and activities viz. production/operation, marketing, finance/accounting, research and development as separate functional units with the organization is done by functional structures.(c) The Matrix organizational structure provides for dual channels of authority, performance responsibility, evaluation and control. Essentially, subordinates are put into basic functional area as well as in project or product manager. The matrix form has the combined advantages of both functional specialization as well as product specialization Answer : (e)

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In a Fragmented Industry there are large number of small medium sized companies Ex. Video rentals, where high profits may lead to new players coming into the industry and product differentiation is low. (a) Low barriers to entry in case of a fragmented industry is incorrect.(b) High barriers to entry in case of a fragmented industry is incorrect.(c) High barriers to entry; with low product differentiation in case of a fragmented industry is incorrect.(d) Low barriers to entry; with high product differentiation in case of a fragmented industry is incorrect. (a) A skimming price strategy describes the pricing policy where the company brings a product to the market with a remarkably high price to skim the market.(b) A penetration price strategy describes the pricing policy where the company brings a product to market with a remarkably low price to penetrate the market.(c) Cost-plus pricing is the most common method used for pricing. Under this method, the price is set to cover costs (materials, labor and overhead) and a predetermined percentage for profit. (d) Virtual pricing is a generic term (e) Value pricing is an attempt to win the loyal customers by charging a fairly low price for a high-quality offering (a) This type of strategy exist at the business unit or product level .It lays emphasis on improving the competitive position of a product in a specific industry or market segment.(b) A functional strategy is the strategy which is usually a short-term game plan for a key functional area within the company.(c) Objectives are guide points in defining standards of what the organization should accomplish in providing direction and motivation.(d)Grand strategy is otherwise termed as a statement of means that indicates the method for achieving the objectives. It is also a unique package of long term strategies (e) Corporate strategy is a type of strategy that addresses what businesses the organization will operate, how the strategies of those business will be coordinated to strengthen the organization’s competitive position, and how resources will be allocated among the businesses. (d) Question marks are sometimes called "problem children" or "wildcats", and these are new products with a potential for success, but need a lot of cash for development.(a) cash cows are the businesses that have a high relative market share in a slowly growing market.(b)Dogs are businesses that have a low relative market share in a slowly growing or stagnant market. (c) A business in the star category has a high relative market share in a rapidly growing market. (b) A budget is a plan expressed in numerical terms. They are usually expressed in financial terms. The budget which shows costs of major assets such as new plant, machinery, land etc is known as capital budget. The other budgets included are cash budget which shows all the sources of cash income and cash expenditure revenue budget shows the anticipated income from normal operations, operating budget is concerned with planned operations within the organization, expense budget shows the anticipated expenses for the organization during the coming time period. (b) An organization strategy formulation helps to obtain information from the environment and it helps in defining and redefining an organization’s vision ,mission ,objective and goals.(a) A Strategic analysis enables a firm to identify a range of possible attractive interactive opportunities. These opportunities reflect the possible avenues for investment. If these opportunities are screened through the criterion of the company mission, a set of desired and possible opportunities can be generated. A further screening process results in the selection of options called strategic choices.(c) Strategy implementation is the process by which strategies and policies are put into action. Programs, budgets, and procedures are developed for this purpose.(d) Strategic alternatives are the various alternatives available for achieving of organizational goals. (e) Objectives are guide points in defining standards of what the organization should accomplish in providing direction and motivation. (b) Special alert control reflects the need to thoroughly reconsider the firm’s basic strategy based on a sudden unexpected event.(a) Implementation control determines whether or not the overall strategy should be changed in light of the unfolding events and results associated with

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incremental steps and actions that implement the overall strategy.(c)Premise control helps to check systematically and continuously whether or not the premises set during the planning and implementation are still valid.(d) Operational control are concerned with “steering” the company’s future direction and they are concerned with provide action controls.(e) Strategic surveillance is designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firm’s strategy Answer : (c) Reason : Quinn’s approach can be illustrated as follows:

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• The strategy may be floated as a minor change to minimize resistance. So the alternative (c) is the answer. • The strategic leaders will develop their information channel within and extend to the organization and will draw on this using formal system. So the alternative (a) is correct statement. • The strategic leader then should generate awareness of the desired change within the organization. So the alternative (b) is correct statement. • The strategic leaders will seek to legitimize the new strategies by lending authority to them. Then they will gather key supporters for strategy. • The steps are taken to remove or minimize opposition. For example, opponents can be moved to other parts of the organization.

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• In initial period, the strategy will be flexible, so that changes can be made in the light of trials. The principle of learning by doing is practiced by strategic leaders. Finally, the proposed changes will be formalized and ideally accepted within the organization. It is important to look ahead and consider how the new strategy might be developed further in the future. Answer : (d) Reason : Adaptive culture is an organizational cultures which is innovative and encourages and rewards initiative taking by middle and lower level managers.(a)Inert culture are those that are cautious and conservative, that do not value middle and lower level managers taking such action and indeed may actively discourage such behavior.(b) Thin culture has few shared assumptions and has a weaker influence on organizational life. 0(c) Thick cultures have layers of important shared beliefs and values have stronger influence on organizational behavior.

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Section B : Problems 1.

The merger between Citicorp and Travelers was expected to bring in a lot of synergies for both the entities and facilitate ‘cross-selling’ of each other’s products in each other’s territories. While Travelers had a limited presence overseas, it had one of the strongest distribution systems in the US. On the other hand Citicorp had an extensive network in the overseas markets. Both these factors were expected to make the merger a perfect fit. But there were also many hurdles that would prevent the realization of these synergies. The hurdles were mainly related to the organizational culture of the two companies. There was a difference in the compensation policies of the two companies. Travelers was known for its stingy benefits while Citicorp gave generous benefits. Though Citicorp paid low salaries, it rewarded long-time workers with good benefits. Citicorp offered stock options to people it wished to retain. But employees were free to sell their shares. As a result, all the officers and directors at Citicorp owned less than 0.5% of the company’s stock. In contrast, Travelers’ employees and directors together owned 2.45% of company’s stock. The work culture in the two companies also differed. The compensation policy at Travelers encouraged teamwork. It was quite common for divisions to support each other in selling products. But Citicorp’s talented, smart and ambitious young executives were very aggressive and enjoyed organizational politics. There were also apprehensions regarding the arrangement of Co-CEO and Co-Chairman. Analysts felt that both Reed and Weill would not work well together as Co-CEOs as they had very different personalities. Reed was a loner and disliked the press, whereas Weill was gregarious and enjoyed speaking to people. Though the merger had the potential to create a company with the scale, capital and ambition to make global retailing a reality, some analysts felt that size could prove to be problem when attempting to merge such different cultures.

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Many analysts were apprehensive about the success of the merger and they doubted whether Weill and Reed could smoothly unify their companies. When the merger was announced it was agreed that there would be Co-Chairmen and Co-CEOs. However, analysts were skeptical about the success of such an arrangement, because they felt such arrangements rarely worked. Weill and Reed had two distinct personalities and different styles of functioning. Weill was a cost cutter for whom short-term profits and the stock price are paramount. He managed through personal relationships. He expected and received loyalty from his managers. Reed, however, had a long-term vision for the company and believed in spending money to realize it. He believed in memos and ‘processes’ for managing the organization. Though the merger seemed to be smooth, there were signs of tension between Reed and Weill by mid 1999. Reed started feeling that sharing the top job was tough. Both men were anxious to show progress and in many ways the merger was going smoothly. However, Reed felt that the merged entity was yet to prove itself. Reed carried around a progress checklist of priorities for key areas such as the consumer bank, the corporate bank, and asset management. According to him only asset management made the grade. By March 2000, it became clear that the Co-CEO structure of Citigroup was not working well. Its failure can be attributed to the different cultures of the two companies and the differing personalities of the two CEOs. At a board meeting in March 2000, Reed announced his plans to retire as Co-CEO of Citigroup. Analysts felt that Reed may have left Citigroup before a successor had been identified because of problems created by the structure. The Co-CEO structure resulted in slow decision making as the two CEOs found it difficult to arrive at a consensus.

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A number of market entry strategies are available to global companies. These include exporting, entering into licensing agreements, acquiring foreign firms, setting up subsidiaries and entering foreign countries through joint ventures.

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Exporting Japan is the second largest export market for U.S. goods after Canada. As a result, exporting seems to be a viable strategy to enter into Japan. The Japanese government has created a non-profit, organization JETRO (Japan External Trade Organization) to promote trade between Japan and other nations. JETRO provides a host of services like, •

Providing information on economic data, consumption trends, trading conditions and distribution channels.

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Information related to market trends and also facilitates to identify a trading partner through a database TOPS

(Trade Opportunity Service). Companies who wish to enter the Japanese market through the export route register with TOPS, which identifies a suitable business partner. This approach aims to form distribution agreements between the exporter and the Japanese importer. Exports should carefully weigh the positive and negative aspects. On the positive side, exporting •

provides instant market access, minimizes the start-up costs and risk of doing business in Japan;

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ensures credibility with the customer in selling the product, and reliable cash flows.

On the negative side •

The distributor may lack required product knowledge and may have a large number of products to be handled, resultant lack of sufficient attention.

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Most of the time fails to provide required interface with the customer to the foreign firm.

Licensing Agreements In this type of arrangement, one firm gives another firm the right to use certain assets such as trademarks, patents, or copyrights in exchange for a fee. This method is commonly used by companies to enter the Japanese market. The benefits of this approach are; •

It can provide a market to set operating standards for new technologies and products.

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It renders the benefit of short-term fees with the promise of longer-term profits.

However, this method also has its own disadvantages; •

Sharing new technology, processes, or information with a competitor.

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Over a period of time the licensee may develop upon the existing technology, processes leading to competitive obsolescence.

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The inability to prevent licenses from being copied. All these force many MNEs to rethink this option.

Acquisitions The Japanese generally do not sell their companies. Japanese management philosophy maintains that people are a company’s assets, not plant and equipment. As a result, it is not easy to enter the Japanese market through the acquisition mode. Creating a local subsidiary This approach is popular as it provides benefits like, closeness to the customer, and attainment of world-class performance. However, the drawbacks include, incremental fixed costs in the initial phase, the challenge of hiring local personnel, and hiring minority partner. Managing site operations effectively determines the success or failure of this approach. Joint Venture This is a popular approach for entering a foreign market since it gives the company immediate market access and rapid profits. It also reduces the negative impact of failure since both sides jointly share the risk. To identify a suitable partner, companies should analyze a potential partner’s distribution channels, customer association, technical leadership in the field, support and after sales service capabilities, geographic coverage, market image and reputation, complementary/competitive product fit, industrial ranking, willingness to accept a nonexclusive arrangement and long term synergies. GE weighed the pros and cons of all these approaches and identified JV as the most suitable approach for entering the Japanese market. < TOP >

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Recruiting personnel for managing on site operations in Japan is a difficult task for MNEs. In US, top managers are often recruited from other firms; but this is not possible in Japan since it is difficult to persuade Japanese executives to change companies. It is not easy to hire college graduates in Japan because graduates of the first-tier universities such as Tokyo University, Kyoto University and Waseda University show little interest in joining foreign firms. Thus GE was forced to bring in expatriates to manage its Japanese operations. GE also developed compensation packages that are designed to attract qualified women. The compensation package includes a day-care center for young children, 1-year leave for new parents, and higher wages and shorter working hours. Through these measures, GE effectively tackled its recruiting problems at its Japanese operations. < TOP >

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Foreign businesspersons should be aware of the distinctive organizational features of a typical Japanese company that is responsible for the slow pace of the decision-making process. In particular, they should bear in mind that the Japanese system of management is firmly rooted in an ideology that emphasizes harmony through consensus. Although certain aspects of this system are now changing, a reliance on consensus continues to guide most corporate activity in Japan. Japanese companies are well-known for their decision-making system, Ringi. Ringi is a multi-step procedure for building consensus. It involves a complex set of negotiations for accommodating divergent viewpoints. In this system, proposals are circulated among interested parties at the sectional, divisional, and corporate levels. The circulation of a proposal is usually followed by a thorough discussion of the details of the plan in an attempt to arrive at a consensus on an appropriate course of action. Although this approach may appear to be fairly time-consuming, it has the advantage of precluding disagreement once a consensus has been reached. Since everyone involved with a given proposal registers his or her approval prior to the plan's official acceptance, decisions arrived at through this consensus-based method are much easier to implement than those taken by a president alone or by other high company officials acting on their own < TOP >

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Boeing's and Airbus' customers are the airline service providers like the Air India, Singapore Airlines, British Airways, Jet Airways, etc. Major airline service providers use either Boeing or Airbus manufactured airplanes. Other manufacturers of airplanes are Bombardier, Embraer and other small manufacturers. The bargaining power of customers depends on their ability to force down prices, bargain for higher quality or more services, play competitors against each other. The customer or a group of customers is powerful if some of the following factors hold true: •

A customer purchases a large portion of the seller’s product or service

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A customer has the potential to integrate backward by producing the product itself

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Alternate suppliers are plentiful because the product is standard or undifferentiated

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Changing suppliers costs very little

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The purchased product represents a high percentage of a customer’s costs, thus providing an incentive to shop around for a lower price

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A customer earns low profits and is thus very sensitive to costs and service differences The purchased product is unimportant to the final quality or price of a customer’s products or services and thus can be easily substituted without affecting the final product adversely In light of the above discussion, the bargaining power of the customers tends to be weak. However, major airline service providers have formed consortiums to promote their operations better. In light of that fact, the bargaining power of these airline service providers tends to be strong.

< TOP > Porter's three generic strategies for competition within an industry are: Cost Leadership Differentiation Focus Porter argues that to be successful, a company must achieve one of the generic competitive strategies. Otherwise, the company is stuck in the middle of the competitive marketplace with no competitive advantage and is doomed to below-average performance. Although Porter agrees that it is possible for a company to achieve low cost and differentiation simultaneously, he argues that this state is often temporary. However, Porter does admit that many different kinds of potentially profitable competitive strategies exist. Although there is generally room for only one company to successfully pursue the mass market cost leadership – because it is so dependent on achieving dominant market share, there is room for an almost unlimited number of differentiation and focus strategies – depending on the range of possible desirable features and the number of identifiable market niches. Quality, alone, has eight different dimensions – each with the potential of providing a product with a competitive advantage. Most entrepreneurial ventures follow focus strategies. The successful ones differentiate their product from those of other competitors in the areas of quality and service, and they focus the product on customer needs in a segment of the market, thereby achieving a dominant share of that part of the market. Adopting guerrilla warfare tactics, these companies go after opportunities in market niches too small to justify retaliation from the market leaders. So, no one competitive strategy is guaranteed to achieve success. Each of the generic strategies has its risk. Both of the major industry players in airplane manufacturing have different generic strategies at different points of time. Their competitive tactics involve timing tactics and market location tactics too.

Boeing’s Sonic Cruiser represents a Differentiation and Focus strategy for a first mover (or pioneer) advantage. The product is for a different market niche and focused towards a market segment. On the other hand, Airbus' 380X is represented by cost leadership and focus strategy for achieving cost leadership in production of larger airplanes with a focus for a general market. < TOP >

Section C: Applied Theory 8.

Managers promoting change often possess insufficient knowledge to determine as to how a firm should respond to change. A senior manager interested in bringing about change must rely on employees to implement the new response once it has been developed. Therefore, they need to support managers and employees in designing a change initiative and implementing it. In certain organizations, employees withhold such support. Certain reasons for withholding support are: Lack of Awareness Change requires a broad view of both the competitive and general environment. Manager (at middle and lower level) and employees are often too focused on current activities to develop this kind of perspective. They become narrowly focused to the aware of potential change over the horizon. They fail to appreciate the need for change, especially if change means learning new methods, processes or techniques. Lack of Interest Even when managers and employees recognize the need for change, they often perceive it with lack of interest. This kind of reaction is common even with new developments. People also tend to ignore developments that represent, transcend or relatively small opportunities for expansion. Incompatibility With Cherished Values Mostly firms develop their own sense of shared values and corporate cultures. Managers and employees oppose new strategies, products or approaches that appear to conflict with established practices. Therefore, strongly held values and corporate cultures can become significant obstacles to change Fear Of Cannibalization Development new products that are distinct from those of the firm’s current lineup means admitting the possibility that alternatives or substitute products exist. Facing the threat of substitute products is hard for any company. Therefore, cannibalization is one of the main reasons that prevent companies from investing in new technologies/products before competitors compel them to do so. Fear Of Personal Loss The fear of restructuring that would eliminate entire divisions or business, along with people involved in it, making corporate change painful. Moreover, change may reduce the career opportunities for employees and may even cost them their jobs. Different Perception A manager may make a decision and recommend change base on his/her own assessment of a situation. Other may resist the change because they may perceive the situation differently. As a result of different perception it become difficult for organizations to implement change. The opposition to change must be overcome, if it is to be implemented successfully. Casualties are possible and sometimes inevitable. Moreover, some people will leave because they are uncomfortable with the changes. But there are several techniques to overcome resistance. They are : Participation And Involvement Participation is the most effective technique for overcoming resistance to change. Employees who participate in planning and implementing a change are better able to understand the reasons for change Education and Communication Education and Communication helps people understand the logic and the need for change. If open communication is established and maintained during the change process, uncertainty can be minimized Facilitation and Support Facilities and support involve training and counseling. An example could be making only necessary changes, announcing those changes in advance and allowing time for people to adjust to new way of doing things. This can helps in reducing resistance to change. < TOP >

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A matrix structure is a type of departmentation that superimposes a horizontal set of divisional reporting relationship onto a hierarchical functional structure. The essence of a matrix organization normally is the combination of functional product patterns of departmentation in the same organization structure. The advantages and disadvantages of adopting a matrix structure are: Advantages: i. It facilitates decentralization of decisions. The decisions are taken at the functional or division project manager levels. This enables management to concentrate on long-term strategic issues ii. It adds strong horizontal coordination to projects and thus the probability of success is enhanced iii. Its structural form facilitates monitoring of environmental conditions. As the decisions are taken at the lower levels, the structure can react quickly to the changes in environment iv. By allocation of support systems such as computers, software and other special equipments as per the requirements, cost efficiency is achieved. Disadvantages: i. As the layers of project managers and support staff are more, the administration cost are higher ii. The individuals have the ambiguity of the authority and responsibility as they report to two bosses. iii. There are higher possibilities of conflicts due to the dual authority system. This system requires greater communication between functional and project manager. iv. In this form, the preoccupation of the individuals with respect to their internal relations become high and thus they neglect project goals v. As this structure encourages group decisions making, even the minor decision are made in groups and it hinders the over all productivity vi. In this structure, due to poor interpersonal skills and top managements’ focus to retain complete control, the organizations become slow in responding to change. < TOP >

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