Mb311- April 05

Question Paper

Business Policy & Strategy (MB311) : April 2005 Section A : Basic Concepts (30 Marks) • • • • 1.

If Reliance Textiles purchases DCM Textiles (which is a smaller firm compared to Reliance) what is this process of purchasing a small firms by a bigger firm is known as? (a) Acquisition

2.

(b) Merger

Vision

(b)

Mission

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(c)

Goal

(d)

Sub Goal

(e)

Objective. < Answer >

(b) Functional strategy

The process by which strategies and policies are put into action through the development of programs, budgets, and procedures is known as

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(b) Strategy implementation (d) Strategy manipulation (e) Strategy direction.

Which of the following involves the ruthless use of power, coercion and manipulation to attain personal goals? (a) (b) (c) (d) (e)

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A strategy that describes a company’s overall direction in terms of its general attitude towards growth and management of its various businesses and product lines is known as

(a) Strategy formulation (c) Strategy control 8.

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(c) Expert power

The organization’s purpose of fundamental reason for existence is known as _________.

(a) Business strategy (c) Corporate strategy (d) Firm strategy (e) Directional Strategy. 7.

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(b) Cost leadership strategy (d) Prospector strategy (e) Threat of substitutes.

Advertisements for products and services such as life insurance policies, mouthwash and deodorants play upon fear. By showing the unfortunate consequences that a consumer faces if he does not use the service or product, thereby, advertisers force the consumers to purchase the product or service. Which of the following powers such ads use?

(a) 6.

(e) Buy out.

Rolex watches are handmade of gold and stainless steel and are subjected to strenuous tests of quality and reliability. This example has relevance to one of the Porter’s generic strategies Which of the following is that?

(a) Legitimate power (b) Coercive power (d) Referent power (e) Reward power. 5.

(d) Synergy

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The first one is a business level strategy while the second one is a corporate level strategy The first one is a strategy implementation while the second one is a strategy formulation The first one is a deliberate strategy while the second one is an emergent strategy The first one is a corporate level strategy while the second o ne is a business level strategy The first one is an emergent strategy while the second one is a deliberate strategy.

(a) Differentiation strategy (c) Focus strategy 4.

(c) Buy off

Analyse, how HLL’s decision not to sell its soap manufacturing unit but to buy ITC agro division is different from its strategy of running its cosmetic division? (a) (b) (c) (d) (e)

3.

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.

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Machiavellianism Politics Organizational development Quinn’s incremental model Re-engineering.

A popular strategy that occurs when two or more companies form a temporary partnership for the purpose of capitalizing on some opportunity is called a(n) (a) Merger

(b) Joint venture

(c) Takeover 1

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(d) Acquisition 10.

(b) Growing stage (e) Decline stage.

(c) Mature stage < Answer >

The reasons for mergers and acquisitions are (a) (b) (c) (d) (e)

12.

To increase managerial staff and to minimize economies of scale To reduce tax obligations and increase managerial staff To create seasonal trends in sales and to make better use of a new sales force To provide improved capacity utilization and to gain new technology To divest assets.

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

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(d) Procurement

_____________ are arrangements whereby, for a fee, one company provides personnel to perform general or specialized management functions for another company

15.

When increased economies of scale provide major competitive advantages, which of these strategies would be effective? (b) Product development (e) Leveraged buyout.

(b) Political risk

18.

19.

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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 Buyers can integrate backwards.

Merger means any transaction that forms one economic unit from two or more previous ones. Which of the following takes place between firms engaged in different stages of production operation? (a) Horizontal merger (b) Conglomerate merger (c) Vertical merger (d) Synergy

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(b) Backward Integration (d) Conglomerate diversification

Suppliers have more bargaining power in all of the following situations except (a) (b) (c) (d) (e)

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(c) Cultural risk (e) Legal risk.

If ITC (Tobacco division) starts its own chain of retail stores from where it sells its cigarettes, it is an example of (a) Horizontal Integration (c) Forward Integration (e) Concentric diversification.

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(c) Horizontal integration

Which of the following, 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 (d) Technological risk

17.

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Maturity of their domestic markets Slower domestic than foreign growth rates Ability to gain foreign product capabilities The desire to provide foreign aid to underdeveloped countries Capture new market opportunities.

(a) Backward integration (d) Forward integration 16.

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(b) Management contracts (d) Export agreements

All of the following are factors that often trigger companies to increase sales through international expansion except (a) (b) (c) (d) (e)

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(b)

(a) Franchise agreements (c) Joint ventures (e) Licensing agreement. 14.

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In which of the following stages is the rivalry between companies intensified? (a) Beginning stage (d) Shakeout stage

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(e) Proxy contest.

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(e) Acquisition.

An industry in which no firm has a large market share and each firm serves only a small piece of the total market in relation with other competitors is known as 2

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total market in relation with other competitors is known as (a) Multidomestic (d) Transnational 21.

(b) Fragmented (e) International industries.

In which of the following stages of an industry life cycle, the technological know-how diminish as an entry barrier? (a) Embryonic stage (d) Mature stage

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(b) Growth stage (e) Decline stage.

24.

(b) Only (II) above (d) (I), (II) and (III) above

Which of the following is not a financial defensive measure against acquisition?

(c) Activity ratio

The major advantage of the large business organization compared to small business organization is

Which among the following is studied with reference to the size, growth rate, age, composition, sex composition, life expectancy etc. of the population?

Which power is used in the advertisements of shirts like Van Heusen and Arrow to show how group acceptance takes place through wearing their shirts? (b) Coercive power (e) Reward power.

(b) Activity ratios (e) Turnover ratios.

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(c) Profitability ratios

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

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(c) Simple structure

Which of the following ratios measures effective utilization of a firm’s resources? (a) Liquidity ratios (d) Leverage ratios

30.

(b) Functional structure (e) Geographic structure.

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(c) Legitimate power

In which of the following structures, functional and product forms are combined simultaneously at the same level of the organization? (a) Divisional structure (d) Matrix structure

29.

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(b) Cultural environment (d) Demographic environment

(a) Expert power (d) Referent power 28.

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(b) Research and Development (d) Profit margin (e) Human resource

(a) Social environment (c) Ethical environment (e) Economic environment. 27.

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Which of the following reveals a firm’s financial risk statement?

(a) Economies of scale (c) Logistics management. 26.

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Adjustments in asset and ownership structure Leveraged recapitalization Golden parachutes Good cash flow relative to current stock prices Poison puts.

(a) Leverage ratio (b) Liquidity ratio (d) Profitability ratio (e) None of the above. 25.

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Greater trust and collaboration between managers and business units Effective decision making Increased innovation Better customer service and higher profits

(a) Only (I) above (c) Both (I) and (II) above (e) All (I), (II), (III) and (IV) above.

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

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(c) Shake out stage

An organization has various objectives like profits, employees well being, and customer satisfaction. The objective of organizational development is I. II. III. IV.

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(c) Global

(b) Special alert control (d) Operational control END OF SECTION A 3

(e) Strategic surveillance.

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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 following caselet carefully and answer the following questions: 1.

What are the opportunities and threats in the external environment? (6 marks) < Answer >

2.

Is the president correct in refusing the suggestions of sales and marketing people? What are the factors that may hinder the success of the firm in future? (6 marks) < Answer >

Gilbert Brown, the president of IMC, leaned back in his chair and reflected with well-deserved satisfaction on the success of his company, which produces and distributes a line of farm machinery. At a meeting of distributors from various parts of the world, Brown had been urged to introduce new models to satisfy the changing needs of customers. The president, who had an engineering background (did his B.Tech degree from Transworld University, USA), recognized the implications of the distributors’ suggestion. It would require greater investments in research and development, because R & D is an inevitable area to compete in today’s marketing scenario. Furthermore, the changes in the highly automated production line would be very costly indeed. Also having a greater variety of models would require stocking many more spare parts. Depending on the kinds of changes, mechanics also might need to be retrained. Unless and until the front line supporters and workforce understand the changes that are occurred in the organization, the objective for any change would be meaningless. Reflecting on previous staff meetings, the president realized that sales and marketing people always wanted a greater variety of models but have not acknowledged the costs involved in changing models. After all, the company had been extremely successful with just a few models. Some of the models are currently successful in western parts of the country and creating tremendous records in the respective areas. Consequently, the President decided against the introduction of new models. Instead, he considered improving the current models and reducing the cost and price. He felt that what the customer really wants is value. Nevertheless, to test his judgment, the president asked a consultant for an opinion.

Caselet 2 Read the following caselet carefully and answer the following questions: 3.

What are the advantages and limitations of planning under a decentralized system such as Sysco’s? (8 marks) < Answer >

4.

Discuss the corporate level strategies in the context of Sysco. (6 marks) < Answer >

5.

Do you think Sysco had a good blend of strategic and operational planning? Discuss with appropriate examples from the caselet.

(8 marks) < Answer > In 1969 John Baugh, president of Houston based Zero Foods, persuaded a former Ford Motor and Cooper Industry executive, John Woodhouse, and the owners of eight other food wholesalers to form a national food distribution company. Sysco’s (the name comes from Systems and Services Company), sales and number of employees stands at $10 billion and 24,000 respectively which is 70 times higher than what it was at the time of inception. Sysco is the largest marketer and distributor of food service products in the United States. Its more than 3,000 suppliers coming from different countries. It has about sixty operating companies selling 150,000 products to a quarter of a million customers in North America. In late 1992 Sysco expanded its customer base and product offerings to include medical and surgical supplies when it contracted with a major Memphis, Tennessee, hospital group for $25 million worth of annual business. Restaurants comprise more than half of Sysco’s sales, and hospitals and nursing homes make up more than 10 percent. Schools and colleges along with hotels and motels also account for more than 5 10 percent of sales.

colleges along with hotels and motels also account for more than 10 percent of sales. Sysco’s growth has been not only through internal expansion but also through a total of more than forty carefully chosen acquisitions. Each acquired firm must be profitable, and the management must plan to stay. Indeed, part of every purchasing price is to be earned through future profits of the firm as a Sysco operating company. Although Sysco tends to sell any manufacturing parts of acquired companies, it also tends to treat each acquisition as a new partner in the business and maintains a decentralized managerial planning and operating system. This decentralized system is necessary to ensure that Sysco accounts for local tastes–chicory coffee in Louisiana and baked beans in molasses in New England–as well as fosters innovation. Indeed, Sysco’s move into medical supplies actually began when the Nebraska sales force began shipping supplies to nursing homes because their customers were unhappy with their regular suppliers. Sysco’s Tennessee unit in Memphis restricted salespeople to certain geographic districts in an effort to reduce travel time and thereby increase selling time. It worked. Its success led to its adoption by other Sysco operating companies. Despite the success of these endeavors, however, no operating manager has been ordered to adopt them. The heads of the operating companies are free to adopt or not adopt such practices as they see fit. Pay-for-performance is one of the few central policies employed by Sysco. Bonuses for all managerial personnel are based on exceeding planned levels of profits as a percentage of revenues and return on capital. That ensures that everyone is striving for the same set of objectives for the overall organization growth. Sysco continues to expand, although it also prunes units that prove not to be profitable. It expects to continue to maintain its performance, especially because it is several times the size of its top five competitors added together.

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

Describe the strategies used by Dow and Du Pont. What are the advantages and disadvantages?

7.

What strategies Dupont adopted to survive in the changed environment?

(8 marks) < Answer > (8 marks) < Answer > Du Pont (E.I. du Pont de Nemours & Co. of Wilmington, Delaware) was founded as a gunpowder manufacturer early in the 1800s. Explosives dominated its business through World War I. After the war, it began to diversify. Acquisitions and joint ventures became more prominent during the last fifteen years. In 1981 it acquired Conoco, a major oil company. In 1991 Du Pont joined with prescription drug company Merck & Co. In 1992, in a joint venture with Crop Genetics, Du Pont moved into the bioinsecticide field. In 1993 it bought Imperial Chemical’s nylon business, and today it remains the largest chemical company in the United States. Dow (The Dow Chemical Co. of Midland, Michigan) was formed in the late 1800s. Its first product was chlorine bleach, and numerous others soon followed. The need for chemicals during each of the world wars resulted in Dow emerging as the second-largest chemical company in the United States. During the 1980s, Dow made several acquisitions, most notably Merrell pharmaceuticals, Texise cleaning products, and Essex Chemical, a leading producer of automotive sealants and adhesives. In the late 1980s, Dow joined with Eli Lilly and Company’s fungicide business to create Dow Elanco, a major producer of agricultural chemicals. Thus, like Du Pont, Dow became a diversified chemical giant. For more than forty years, both Dow and Du Pont employed a similar strategy. Both borrowed heavily and used the funds for expansion, relying on rising demand coupled with price increases to maintain healthy levels of profit. The huge cash flow necessitated by this strategy could sometimes lead to problems. If the expansion was more rapid than the increase in demand, prices would have to be cut and profits would suffer. Although that happened occasionally, it began to occur more and more frequently by the end of the 1980s. In 1991 Du Pont decided to change its strategy by reducing both capital spending and costs. This focused the company on getting cash back quickly. By 1993 Du Pont was able to provide for all capital funding without any substantial borrowing. And 1994 was even better. Analysts were expecting Du Pont to raise its dividend payments to stockholders in 1994. Du Pont also reorganized. It eliminated nearly 14,000 employees early in 1994. Du Pont also decentralized into twenty strategic business units (SBUs) based on products and industry, and it changed its pattern of marketing from a technology-driven approach to a market-driven one. Dow, on the other hand, remained with the traditional strategy. In 1990 it expanded basic chemicals, and the resulting glut caused a drop in prices. As a result, earnings fell in 1992. To raise cash to cover expansion and dividends, Dow had to sell assets-a billion dollars worth in 1993 alone. It also announced that it would focus on global competitiveness and cut back its corporate headquarters workforce. Thanks to cutting back on spending in 1994 and a rebound in ethylene prices, Dow was in good financial shape that year, although analysts were not expecting Dow to be able to raise its dividend payments for several years. Dow did, however, seem to be recognizing the need to change its strategy, too. 6

however, seem to be recognizing the need to change its strategy, too. Du Pont recognized the need to change strategy before Dow did. Given the high cost of capital, a strategy of focusing on return on assets seemed to make more sense than the one that focused on market share. 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.

Explain the economic and financial factors that stimulate Leveraged Buy Outs (LBOs). What are the typical characteristics of firms that can be good targets for LBOs? (10 marks) < Answer >

9.

The development of the Tablet PC has revolutionized the way individuals will work with Laptop. Briefly discuss the different stages of Product Life Cycle. (10 marks) < Answer > END OF SECTION C END OF QUESTION PAPER

Suggested Answers

Business Policy & Strategy (MB311) : April 2005 Section A : Basic Concepts 1.

Answer : (a) Reason : Acquisition is the process of acquiring a smaller firm by a relatively larger firm.

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2.

Answer : (d) Reason : HLL’s strategy for running its cosmetic or food products is a business level strategy which is formulated to meet the goals of a particular business also called line of business strategy while its decision to buy ITC agro division is a corporate level strategy which addresses what business the organization will operate, how the strategies of these business will be coordinated to strengthen the organization’s competitive position and how resources will be allocated.

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3.

Answer : (a) Reason : A generic business level strategy outlined by Michael E. Porter that involves attempting to offer products or services that are unique in the industry.

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4.

Answer : (b) Reason : Advertisements for products and services such as life insurance policies, mouthwash, and deodorants play upon fear. By showing the unfortunate consequences that a consumer faces if he doesn’t use the service or product, advertisers force the consumers to purchase the product or service. Such ads use Coercive power. This is the power to influence behavior through punishment or by withholding rewards. (a) Legitimate power stems from a member’s perception that the group has the legitimate right to influence him (c) Expert power results from the expertise gained in due course of time either by an individual or a group. (d) Referent power is the power that results from being admired, personally identified with, or liked by others. (e) Reward power is based on the perception one has about another’s ability to reward him.

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another’s ability to reward him. 5.

Answer : (b) Reason : Mission is the organization’s purpose of fundamental reason for existence

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6.

Answer : (c) Reason : Corporate strategy describes the company’s overall direction in terms of its general attitude toward growth and the management of its various businesses and product lines. Corporate strategies fit in the three main categories of stability, growth, and retrenchment. Answers a, b, d, e are incorrect since, business strategy, functional strategy and firm strategy do not deal with the overall direction of the firm in terms of its general attitude toward growth and management of its various businesses and product lines.

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7.

Answer : (b) Reason : Strategy implementation is the process by which strategies and policies are put into action through development of programs, budgets and procedures. Strategy implementation is conducted by middle and lower management. Answers a, c, d, e are incorrect since, strategy formulation stage is a prerequisite for implementation and control is the post requisite to implementation.

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8.

Answer : (a) Reason : Machiavellianism involves the ruthless use of power, coercion and manipulation to attain personal goals.

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9.

Answer : (b) Reason : In a Joint venture, two or more companies form a temporary partnership for the purpose of capitalizing on opportunities like market access, technology etc. The other cases of merger, takeover or acquisition result in a permanent relationship, as the identity of one of the entities is lost after the event. Proxy contest is a bid for gaining membership on the board of directors of a company, or to unseat the current management.

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10.

Answer : (d) Reason : Rivalry between companies intensifies as an industry enters the shakeout stage.

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11.

Answer : (d) Reason : Two reasons for.

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Mergers and acquisitions are sometimes attempted to increase capacity utilization through accessing new markets for the products, and to gain new technology, which gives a competitive edge in the industry. 12.

Answer : (b) Reason : According to Porter, marketing and sales is not a support activity in a manufacturing firm's value chain. It is a primary activity in the value chain. Infrastructure, Human resource management, procurement and Technology and systems development are considered as the supporting activities.

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13.

Answer : (b) Reason : Management contracts are arrangements whereby, for a fee, one company provides personnel to perform general or specialized management functions for another company.

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14.

Answer : (d) Reason : The factors that often trigger companies to increase sales through international expansion are the maturity of their domestic markets, slower domestic than foreign growth rates, ability to gain foreign product capabilities and the incentive to capture new market opportunities.

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15.

Answer : (c) Reason : Horizontal integration, which involves the merger with a competitor in the same industry, will provide increased economies of scale and competitive advantage to a company, due to higher scale of operations.

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16.

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.

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17.

Answer : (c)

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Reason :

ITC (Tobacco division) starting its own chain of retail stores from which it sells its cigarettes is an example of a forward integration strategy, as the company which is primarily into manufacturing, is moving forward towards its immediate customers in the value chain. In horizontal integration the firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of production-marketing chain. Backward integration takes place when a firm assumes a function previously provided by a supplier. Conglomerate diversification is diversification into a new business area that has no obvious connection with any of the company’s existing areas. It is also called unrelated diversification. Concentric diversification occurs when an organization diversifies into a related, but distinct business. In other words, it involves the acquisition of business that are related to the acquiring firm in terms of technology, markets or products.

18.

Answer : (e) Reason : Suppliers cannot have bargaining power when buyers can integrate backwards.

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19.

Answer : (c) Reason : Vertical merger takes place between firms engaged in different stages of production operations.(a)A horizontal merger is a merger between two firms involved in the same kind of business activity.(b) Conglomerate mergers involve firms engaged in unrelated types of business activity.(d)Synergy is situation in which the whole is greater than its parts. In organizational terms, the fact that departments that interact cooperatively can be more productive than if they operate in isolation. (e) An acquisition is defined as the purchase of a controlling interest in a firm, via a tender offer for the target shares

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20.

Answer : (b) Reason : In a fragmented industry, no firm has a large market share and each firm serves only a small piece of the total market in competition with others. Hence it is difficult for any single company to have a dominant position in the market A multi-domestic industry is one in which the competition within the competition within the industry is essentially segmented from country to country. A global industry is one in which competition within the industry crosses national borders. International industries can be characterized along a continuum from multi-domestic to global. Transnational are organizations, which operates in different continents.

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21.

Answer : (b) Reason : By the time an industry enters its growth stage, the importance of technological know-how as an entry barrier diminishes. Other entry barriers also tend to be low because few companies manage to achieve significant economies of scale or have differentiated their product sufficiently to guarantee brand loyalty. An industry that is just beginning to develop is referred to as an embryonic industry. Growth at this stage is slow due to factors such as buyers unfamiliarity with the industry’s product etc. In the Shake out stage the rate of growth slows down in course of time. In Mature stage the market is completely saturated and demand is limited to replacement demand.

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22.

Answer: (e) Reason: The objective of organizational development is, greater trust and collaboration between Managers and business units, effective decision-making, increased innovation and better customer service and higher profits.

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23.

Answer : (d) Reason : Organizations generally put some financial defenses to thwart acquisitions. They are, adjustments in asset and ownership structure; leveraged recapitalizations; golden parachutes; and poison puts. But, good cash flow relative to current stock prices make the firm attractive for acquisition.

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24.

Answer : (a) Reason : Leverage ratio reveals a firm’s financial risk statement.(b) Liquidity ratios measure a firm’s capacity to meet its short-term financial obligations.(c) Activity ratios reflect a firm’s efficiency in resource utilization.(d) Profitability ratios provide a firms overall economic performance.

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25.

Answer : (a) Reason : The major advantage for the large business organization compared to small business organization is economies of scale ,where the large organization can produce product or service in large numbers thus reducing the unit cost of product.(b) Research and 9

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service in large numbers thus reducing the unit cost of product.(b) Research and Development is the work directed towards the innovation, introduction, and improvement of products and processes.(c) Logistics is the organization of services and supplies or organization of any complex operations.(d) Profit margin is the relationship of gross profits to net sales in a business (e) Human resource management is the management of various activities designed to enhance the effectiveness of an organization’s work force in achieving organizational goals. 26.

Answer : (d) Reason : Demographic environment is studied with reference to the size, growth rate, age, composition, sex composition, life expectancy etc. of the population.(a)Social environment has an impact on the strategic management process with in the organization in the areas of mission, setting of objectives and decisions related to products and markets.(b) Cultural environment often helps to pinpoint market opportunities. Companies often gain a competitive edge by meeting the cultural needs that have been so far ignored by their competitors. (c) Ethical environment is the identification of the moral principles and standards that guide behavior in the world of business.(e) Prime interest rates, inflation rates and trends in the growth of the Gross National Product(GNP), the general availability of credit, the level of disposable income and the propensity to spend at the national and international levels influence the strategic planning of the organization. All these factors constitute the economic environment of the organization

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27.

Answer : (d) Reason : Referent power is used in the advertisements of shirts like Van Heusen and Arrow to show how group acceptance takes place through wearing their shirts. i.e. referent power is the power that results from being admired , personally identified with or liked by others.(a)Expert power is the power that is based on the possession of expertise that is valued by others.(b)Coercive power is the negative side of reward power, based on the influencers ability to punish the influence.(c) Legitimate power is the power that stems from a position’s placement in the managerial hierarchy and the authority vested in the position. (e)Reward power is the power based on the capacity to control and provide valued rewards to others.

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28.

Answer : (d) Reason : Matrix structures are functional and product forms combined simultaneously at the same level of the organization.(a) Divisional structure is a type of departmentalization in which positions are grouped according to similarity of products, services or markets. The Divisional structure does not promote specialization of labor (b) Functional structure is a type of departmentalization in which positions are grouped according to their main functional area or specialized area.(c) In simple structure all the strategic and operating decisions are under the control of the owner-manager(e)Geographic structure is a form of divisional structure involving divisions designed to serve different geographic areas.

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29.

Answer : (b) Reason : Activity ratios measure how effectively a firm is using its resources I, e to say this reflects a firm’s efficiency in resource utilization.(a) Liquidity ratios measures a firm’s capacity to meet its short-term financial obligations.(c) Profitability ratios provide a firm’s overall economic performance. (d) Leverage ratios indicate a firm’s financial risk.

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30.

Answer : (b) Reason : 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 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.

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Section B : Caselets 1.

The marketing environment includes the forces of competition, policies, society, economic conditions and technology. These external forces directly or indirectly influence the organizations’ activities. IMC has the following opportunities: • •

As a well-experienced company, IMC has a fair chance to enter into new markets as well as new products. The company has the opportunity to improve its technological capabilities that will improve the product quality. • There is a good chance to acquire new customers easily. Threats: As the company has no plans to improve new models, competitors may take advantage of this opportunity. • New-comers will enter the segment with niche strategies. • • Changing customer needs, fashion and styles. • Cut-throat competition < TOP >

2.

In an open system the companies are always open to the ideas, suggestions and views given by the employees, customers, distributors etc. The type of open climate will improve the identity of employees where they can feel the sense of belongingness to the organization. Customers will understand the efforts of organization in providing high quality goods and distributors will be encouraged to get their goods according to their specifications and requirements. In the case, it is clear that the company is not encouraging an open system. Mr. Brown has not shown interest in taking ideas of its distributors and he insists on developing the existing products instead of introducing new models. As change is a continuous process. Any organization in today’s competitive environment has to constantly adopt to the changing environment. The president is not correct in his decision to refuse change. < TOP >

3.

Advantages of decentralization i. Relieves the top-level management of some burden of decision-making. ii. Encourages decision-making and assumption of authority and responsibility iii. Gives managers more freedom & independence in decision-making. iv. Promotes establishment and use of broad controls that increases motivation. v. Comparisons of different departments made possible. vi. Facilitates setting up of profit centers vii. Facilitates product diversification viii. Facilitates the development of general managers. ix. Aids in adapting to changing environments. Limitations of Decentralization: i. It becomes difficult to have a uniform policy. ii. More complexity in coordination of decentralized units iii. The upper-level management may lose control iv. May be limited by inadequate control techniques v. May be constrained by inadequate planning and control system. vi. Can be limited by availability of qualified managers. vii. Involves considerable expenses on training for managers viii. May be limited by external sources, such as government. ix. Economies of scale of operations may not favor < TOP >

4.

Corporate level strategy addresses the businesses that the organization will be in and how the strategies of those businesses will be coordinated to strengthen the firm’s competitive position and also for a better allocation of resources among businesses. A company, such as Sysco, which is operating in different lines of businesses with about sixty operating companies, cannot do without a corporate strategy. Sysco seems to follow a value based approach. Value based strategies provide general guidelines rather than a narrowly focused plans. That is why the heads of operating companies are given freedom to adopt a policy or practice of their choice while they contribute to the overall organizational goals. < TOP >

5.

Strategic planning is the top-management level activity whereas operational planning is taken care by the lower 11

6.

level. The strategic planning provides the guidance and boundaries for operational planning. Strategic planning is concerned about (effectiveness) doing the right things, such as acquisition of new business units and pruning the unprofitable one, whereas, operational planning deals with (efficiency) getting those things done right. At Sysco, the top management lays down the rules of profitability and return in form of salaries and incentives and the operational planning decides upon the usage of resources in day-to-day operations < TOP > Both Du Pont and Dow companies were contemporaries, each started with a single product in 1800s. Over the years both the companies have expanded through diversification. The diversification was through mergers, acquisitions and joint ventures. For more than 40 years both the companies pursued the same strategy of funding the expansion: they borrowed heavily for the expansion, relying on the rising demand coupled with price increases to maintain healthy levels of profit. Some times the expansion was more rapid than the demand, which led to price cuts that affected profits. It seems that both the companies were trying to increase their market shares. In 1991 Du Pont changed its strategy of expansion. The company chose to use Return on Investment (ROI) rather than market share as the criterion for capital investments. The company also took measures to control and reduce costs. The company eliminated nearly 14,000 employees, went for reorganization in terms of decentralization and setting up of SBUs based on products and industry. Its marketing approach has changed from technology -driven to market-driven. The strategy of borrowing funds for expansion, adopted by both Du Pont and Dow, yields better results when the ROI is greater than the cost of funds. The return on shareholders capital will be more with the use of leverage. Using debt capital does not allow dilution of ownership control. Use of debt capital leads to the cash flow problems and has adverse effect on shareholders wealth. When the demand is less than the supply the company will not be able to service the debt it results in erosion of capital. Du Pont’s new strategy proves to be successful compared to the traditional strategy followed by Dow. The SBUs will be able to assess the performance of each product or industry. The decentralized approach leads to better and quick decision making at unit level. However, the new structure may prove to be costly. < TOP >

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The traditional approach followed by Dow is useful in growing markets and when the company’s portfolio of products is small. The expansion can be funded with debt instead of equity so that ownership remains in the same hands. However, when the market is stagnating or becoming very competitive ROI approach proves to be better, as the market share may not guarantee a rate of return. When the company is small it need not have SBUs as it cannot afford. But when the company diversified into so many products and industries the decentralized organization structure and SBUs will be of immense help to the management. In a competitive market it is better to have market-driven approach than a technology driven-approach. Cost control is very much essential in such markets. Its has also taken the following steps to survive in the changed environment: 1.

Layoffs

2.

Decentralization

3.

Diversification < TOP >

Section C: Applied Theory 8.

General economic and financial factors stimulating LBOs – Responses to threat of unwanted takeovers – Q-ratio declining sharply — cheaper to buy capacity in financial markets than in real asset markets – Opportunities to realize tax savings through recapitalization – Financing innovations — high-yield bonds (junk bonds) making public financing available to companies below investment grade Typical target industries •

Basic, non-regulated industries – Predictable and/or low financing requirements – Predictable/stable earnings – Low income elasticity of demand – Sales fluctuate less with GNP 12

– •

Mature industry with limited growth opportunities

High-tech industry less appropriate – Shorter history of profitability – Greater business risk – Fewer leveragable assets – Command high P/E multiples well above book value

•

Likely industries for LBOs – Retailing, Textiles, Food processing, Apparel, Soft drinks, FMCG Other target characteristics •

Track record of capable management

•

Strong market position within industry to enable it to withstand economic fluctuations and competition

• Highly liquid balance sheet – Little debt, either short or long term – Large unencumbered asset base — for collateral – High proportion of tangible assets with fair market value above net book value Sources of MBO targets •

Divestitures of divisions by public companies

• Private companies with low growth records Public corporations selling at low P/E multiples representing large discounts from book values < TOP >

9.

A product that is just beginning to develop (for example Tablet P.C) is referred to as introductory stage. Growth at this stage is slow due to factor such as buyers unfamiliarity with the product, inability of companies to reap any significant economies of scale resulting in high prices a nd poorly developed distribution channel. At this stage in a product evolution, barrier to entry tend to be based access to key technological know- how, rather than cost economies or brand loyalty. As a product develops and it enters the growth stage, the demand of the product picks up. As several new customers enter the market, first time demand of Tablet P.C will expand taking the product from introductory to growth stage. In growth stage consumer’s familiarity with Tablet P.C increases, prices fall due to attainment of experience and economies of scale by companies and the distribution channel starts developing. As the Tablet P.C enters the growth stage the importance of technological know -how as an entry barrier for companies diminishes. Other entries barrier also tend to be low because few companies manage to achieve significant economies of scale and are not in a position to differentiate their product to create brand loyalty. Threat from potential competitor is therefore highest at this point. Usually, however, high growth in the product means, that new entrants can be easily absorbed in the industry without any significant increase in competitive pressure .In this stage the Tablet P.C market will expand. The rate of growth in product slows down in course of time and it enters the maturity stage were demand approaches the saturation level. Most of the demand that exist is replacement demand. Here rivalry among industry intensifies due excess supply and often price war can be seen between the companies in this stage. The end of the maturity stage leads to decline stage where, the market is completely saturated and demand is limited. Growth is limited and it’s due to demographic factor. < TOP >

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