Mb311- April 06

Question Paper Business Policy & Strategy (MB311) : April 2006 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. < Answer >

Which of the following is not a key element in Ansoff’s strategic success paradigm? (a) There is a universal success formula for all firm’s (b) The level of turbulence in the environment determines the strategy required for the success of the firm (c) The aggressiveness of the strategy should be aligned with turbulence in the environment to optimize the firm’s success (d) Internal capability determines the firm’s success (e) Management capabilities should be aligned with the environment to optimize the firm’s success.

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As per Mintzberg, in which of the following modes are strategies framed for both proactive search of < Answer > opportunities and a reactive solution to the existing problem? (a) Adaptive mode (c) Entrepreneurial mode (e) Comprehensive mode.

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Which of the following modes of the entry is preferred when high labor skills and technology available < Answer > in developed countries is combined with lower cost labor available in developing countries? (a) Joint ventures (c) Licensing (e) Turnkey operations.

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(b) Leverage

< Answer >

(b) Leverage ratio (d) Profitability ratio

(b) Functional

(c) Divisional

(b) Joint Venture (d) Divestiture

(d) SBU

(e) Matrix. < Answer >

(e) Liquidation.

Which of the following is not a reason for organizations to adopt a liquidation strategy? (a) (b) (c) (d)

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(e) Productivity.

The strategy involved in the sale of a firm or a major component of a firm is known as (a) Merging (c) Diversification

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(d) Profitability

Which of the following types of structures best suits the firm where the increased diversity leads to < Answer > numerous products and project efforts with major strategic significance? (a) Simple

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(c) Activity

Measuring a firm’s efficiency in generating sales and making collections is done by (a) Liquidity ratio (c) Activity ratio (e) Productivity ratio.

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(b) Acquisitions (d) Production sharing

Which of the following ratios is used as an indicator of a firm’s ability to meet its short term < Answer > obligations? (a)Liquidity

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(b) Planning mode (d) Complex mode

< Answer >

More partners withdraw from business Sole proprietor wants to retire or take up another job The value of the assets of the firm are less worthwhile than the rate of return earned by the firm One of the partners withdraw and all other partner’s express their inability to buy the withdrawing partner’s share (e) They receive a highly attractive offer and they may feel that liquidating the business is more worthwhile. In which of the following categories of the BCG matrix does a business unit have a large market share < Answer > in a mature and slow growing industry ? (a) Cash cows

(b) Stars 1

(c) Question marks (e) Both stars and question marks.

(d) Dogs < Answer >

10. Which of the following is true about GE Nine Planning Grid? (a) (b) (c) (d) (e)

It does not allow intermediate ranking between high and low and between strong and weak It does not incorporate a much wider variety of strategically relevant variables It does not stress the channeling of corporate resources to business It cannot effectively depict the position of business units in developing industries It is quite easy to understand.

11. Which of the following is an opportunity for a company to enjoy a competitive advantage ? (a) (b) (c) (d) (e)

< Answer >

Slow market growth Entry of resourceful competitors Increased bargaining power of key buyers or suppliers Identification of new market segment Quick rate of obsolescence due to major technological change.

12. Which of the following is not a strategy in the 3rd quadrant of Grand strategy selection matrix? (a) Concentration (c) Turnaround or retrenchment

(b) Market development (d) Product development

(e) Innovation. < Answer >

13. Which of the following is not a selling process? (a) Competitive bidding (c) Sequential selling

< Answer >

(b) Merging (d) One buyer

(e) Going public.

14. In which of the following strategies does a target company issue bonds which encourages holders to < Answer > cash in at a high price? (a) Golden parachute (d) Leveraged recapitalization

(b) Poison put (e) Green mail.

(c) Poison pill

15. Which of the following is defined as the acquisition primarily financed by borrowing of all the stocks or < Answer > assets of a hitherto public company by a small group of investors? (a) LBO

(b) Joint Venture

(c) Merger

(d) Divestiture

(e) Poison pill.

16. The ruthless use of power particularly coercive power and manipulation to attain personal goals is < Answer > known as (a) Machiavellianism (d) Organizational development

(b) Politics (c) Poison pill (e) Quinn’s investment model.

17. Who acts as an link between the company and the external environment? (a) Manager (c) Board Of Directors

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(b) General Manager (d) CEO (e) Employees.

18. When a firm opens a subsidiary abroad to support its international trading activities in a specific market, < Answer > it is called as (a) Multi national enterprise (c) Global enterprise (e) Multi domestic enterprise.

(b) International enterprise (d) Transnational enterprise

19. Which of the following is not one of the contingencies for the success of a strategy? (a) A down turn in the economy (c) A decrease in the prime rate (e) A shortage of critical materials.

< Answer >

(b) A labor strike (d) A technical breakthrough

20. Diversification into a new business area that has no obvious connection with any of the company’s < Answer > existing areas is defined as (a) Innovation (c) Concentric diversification (e) Horizontal integration.

(b) Conglomerate diversification (d) Vertical integration

21. According to which theory, does a firm move abroad to exploit its monopoly power which is derived < Answer > from unique products , marketing expertise , control of technology and managerial skills or access to 2

capital ? (a) Internationalization theory (c) The tariff’s- jumping hypothesis (e) Monopoly theory. 22.

(b) Oligopoly theory (d) Obsolescing bargain theory < Answer >

Which of the following is not a stage in the process of LBO ? (a) Arrangements of finance (c) Restructuring LBO.

(b) Taking the company private (d) Reengineering

(e) Reverse < Answer >

23. Which of the following is not an ‘S’ in Mc Kinsey’s 7-S frame work? (a) Shared values

(b) Structure

(c) System

(d) Service

(e) Skills.

24. Which of the following best suits a firm which needs a particular value chain to serve sophisticated mini < Answer > computer buyer with in-house serving capabilities and different value chain to serve small business users? (a) Vertical scope (c) Segment scope

(b) Horizontal scope (d) Geographic scope

(e) Industry scope. < Answer >

25. Which of the following is not anti takeover amendment? (a) Super majority amendment (c) Classified board (e) Authorization of preferred stock.

(b) Fair purchase amendment (d) Post purchase amendment

26. A sale of service and/or direct marketing investments comes under which stage of the three phase < Answer > ‘International Model’? (a) Starting stage (c) Development stage

(b) Growth stage (d) Maturity stage

(e) Decline stage.

27. A company with which of the following orientations believes that the values and priorities of the parent < Answer > organization should guide the strategy decision making of all its operations? (a) Ethnocentric

(b) Polycentric

(c) Geocentric

(d) Regiocentric (e) Physiocentric. < Answer >

28. Political activities in an organization can be described as I. Legitimate or illegitimate. II. Vertical or Lateral. III. Internal or external. IV. Machiavellianism. (a) Only (I) above (c) Both (I) and (II) above (e) All (I),(II), (III) and (IV) above.

(b) Only (II) above (d) Both (III) and (IV) above

29. The statement of the organization’s purpose that acts as an “invisible hand” in guiding people in the < Answer > organization to action is called as (a) The strategic plan (c) The target market (e) The public image of organization.

(b) The mission statement (d) The company objective

30. Which of the following pricing strategies attempts to hasten market development and offers the pioneer < Answer > the opportunity to use the experience curve to gain market share with a low price and dominate the industry? (a) Penetration

(b) Pull

(c) Skimming END OF SECTION A

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(d) Leveraging

(e) Profit plus.

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.

Larry Ellison, the CEO of IBM’s competitor-Oracle corporation said, “IBM? We don’t even think about those guys anymore. They’re not dead, but they’re irrelevant”. In this context explain the problems faced by IBM? (6 marks) < Answer >

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In what was termed as the most remarkable turnaround of any company ever, ten years down the line in the fiscal 2003, IBM reported a net a net income of $7.58 bn on revenues of $89.13 bn. During this period 1994-2003, the share price of IBM shot up by nearly 700%. Under the leadership of IBM’s CEO-Louis v. Gerstner Jr., IBM not only turned around but, was able to significantly boost its financial performance. In this light, discuss turnaround. (10 marks) < Answer >

"Today, the agenda for IBM is dominated by this once-in-a-lifetime opportunity to separate from the pack, to stand apart, and to lead. That's about more than our marketplace performance. We think leaders are expected to lead on multiple dimensions. That means leadership in technology, leadership in imagining how business and society can be changed, and certainly leadership in crafting the public policy frameworks required for a networked world." -Gerstner Summing up his Vision for IBM in April 2001 In 1993, International Business Machines (IBM), a global leader in the IT industry was in deep financial trouble. The company had reported a net loss of $8.1 billion (bn), the largest ever in the history of IT industry. Many analysts wrote off IBM as dead. The authors of the book Computer Wars wrote that IBM's prospects for survival were very bleak. Larry Ellison, the CEO of IBM's competitor - Oracle Corporation said, "IBM? We don't even think about those guys anymore. They're not dead, but they're irrelevant."In what was termed as the most remarkable turnaround of any company ever, ten years down the line in the fiscal 2003, IBM reported a net income of $7.58 bn on revenues of $89.13 bn. During the period 1994-2003, the share price of IBM shot up by nearly 700%. Under the leadership of IBM's former CEO - Louis V. Gerstner Jr. (Gerstner), IBM not only turned around but, was able to significantly boost its financial performance.

IBM was transformed from a company that primarily manufactured mainframes to a company that offered complete IT solutions. The company changed its focus from being product centric to being customer-centric. In March 2002, Sam Palmisano (Palmisano) became the new CEO of IBM. He faced several challenges, the primary one being boosting the revenues and profitability of the company. Amidst fierce competition in the industry, reduced corporate spending on IT products & services and economic slowdown in the US, analysts raised doubts about the long-term sustainability of IBM's new 'services heavy' business model. BACKGROUND In 1914, Thomas J Watson Sr. (regarded as the father of modern IBM) joined Computing, Tabulating and Recording Company (CTR) as its general manager. When CTR's chairman, George W Fairchild died, Watson took over control of the company. Watson renamed the company 'International Business Machines' in 1924. Till the outbreak of the Second World War, IBM concentrated mainly on punched cards for the tabulating business . By this time, IBM had already established a reputation for making custom-built equipment and offering excellent customer service. During the War, IBM systems were used to maintain statistical details of logistics. Revenues increased from $34.8 mn in 1939 to $143.3 mn in 1944. In the mid 1960s, IBM came under the purview of anti-trust legislation. This was the third antitrust suit since the company's inception. The suit dragged through the 1970s and cost IBM several hundred million (mn) dollars in legal fees. In view of the suit, Frank T Cary, the then CEO, adopted a cautious strategy. IBM did not reduce prices, fearing complaints from competitors and did not raise prices to avoid being accused of profiteering. Every strategic move the company took was evaluated for its effect on the anti-trust suit. In the 1960s, IBM's competitive position strengthened further with the launch of System/360 mainframe in April 1964. The product revolutionized computing and propelled 4

the company to global commercial leadership for the next two decades. Between 1981 and mid-1983, IBM established 14 global business units to tap a wide variety of opportunities, including biomedical systems, industrial robots, educational materials, directory assistance equipment, analytical instruments and scientific work stations. By 1984, IBM had recorded revenues of $46 bn. However, in the mid-1980s, IBM's competitive position changed dramatically. The shift to smaller, open systems, along with greater competition in all of IBM's segments, gradually weakened IBM's competitive position. After posting a net profit of $6.6 bn in 1984, IBM's financial performance began to slide. In 1985, when John Akers (Akers) became the new CEO of IBM, the company witnessed a decline in earnings for the first time in several years. During the period 1985-1989, IBM's revenues grew at the rate of 6.6 percent per annum compared to the industry average of 13.4 percent. Moreover, the company's global market share decreased from 30 percent to 21 percent and its huge capital investment of about $101 bn in the early 1980s, in new businesses also did not seem to yield the desired results. In addition, delays in launching new products by the company proved costly. In December 1989, Akers announced a drastic restructuring program. He proposed major job cuts (37,000 employees) to reduce total costs by about $1 bn. In November 1991, he issued a news release indicating his intention to split IBM into eleven autonomous businesses. Each of the businesses was expected to emerge as a self- sustaining profit center. Heads of the new businesses would function like CEOs with commitments to pre-declared business plans and profit sharing arrangements. The restructuring program did not yield the desired results and by mid-1992, Akers' policies faced strong criticism. IBM's financial performance continued to decline with the company reporting a loss of $2.86 bn in the fiscal 1991, followed by a net loss of $4.97 bn in the financial year 1992. Akers' inability to turn IBM around finally led to his resignation in early 1993.....

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

What are the advantages and disadvantages of demerging the distribution division into a separate firm? (6 marks) < Answer >

4.

What is your recommended strategy for Alpha? Support with reasons. (7 marks) < Answer >

5.

What are the benefits to companies from spin-offs? Discuss. (5 marks) < Answer >

'The balance of power in the financial services sector hinges on two factors: the size of operations, and the quality of customer relationships,'' said Anil Roy, President, Omega Consultants. ''There is nothing new or profound here. But it is good to be reminded of the basics, particularly when you are changing course.'' Roy, a well-known corporate advisor, was addressing the executive committee meeting of Alpha Finance Ltd. Fifteen years since its inception, Alpha had grown to be a premier non-banking finance firm. It was now moving out of corporate finance-where demand had dried up because of the availability of newer, and economical sources of fundsand focusing on the burgeoning retail finance business. The move from a fund-based business to a fee-based business necessitated suitable changes in internal structure. Roy had been invited by Alpha's MD, Sudhakar Menon to help navigate this transition. ''Let us review the existing structure so that we know where we stand,'' said Roy. ''We have four revenue streams at Alpha,'' said Menon. ''The oldest among these is a corporate finance divisionhandling merchant banking, leasing, hire purchase, and bill discounting. The second one is a stock broking outfit that manages investment portfolios. The mutual funds division manages four sector-specific funds. We have a risk management and insurance wing, just set up in a joint venture with a German major. Each of these is an independent outfit with its own product development, operations, and logistics teams. The autonomy is driven by the regulatory requirements of creating firewalls between one business and the other. Of course, because of the focus it brings to each profit centre, it also makes business sense.'' ''But not any more,'' said Ajay Shah, President, Alpha. ''There are several reasons why a consolidated structure for each business no longer makes commercial sense. The fact that we are moving out of corporate finance is only one reason. Look at our three other businesses. What is the core skill we need there? Distribution. We get a grip on our business, and on the market, once we have a grip on distribution.'' ''A distribution system, in turn, derives its strength from a large customer base,'' said Raj Marwaha, Vice-President (Marketing). ''We have a total of five lakh customers at Alpha, of which about 5 percent are corporates. Incidentally, the largest non-banking finance company (NBFC)-we are the second-has eight lakh customers. We must grow this number in order to enjoy the benefits of scale. The existing structure will only give us an organic growth of 10 to 15 per cent per annum. What we need is a geometric leap-of 50 to 60 per cent-in the 5

number of customers every year. Instead of selling each product individually to the customer, what we should do is cross-sell. We should bundle all our products-loans, investment products, safety products-and offer them from a single source. That will bring in new customers, and retain the existing ones.'' ''In effect, what Marwaha is suggesting,'' said Menon, ''is that all distribution tasks should be demerged from individual business units, and aggregated into an independent business by itself. The new unit, to be headed by a CEO on the same lines as other units, will be responsible for the sales of all our business units while the marketing activities-like new product development, advertising, resource allocation, brand building-will be specific to each unit. The business unit owns the product, while the distribution unit owns the customer.'' ''Here, we can learn from FMCG firms,'' said Roy. ''Some of them have centralised sales and logistics. The results have been mixed. A major downer is that margins tend to fall. Why? The mindset of a salesman is geared towards turnover, not profits. He likes talking big numbers. For him, a sale is basically something that has contributed to volumes, and only incidentally something that has an impact on profits. But the success of your initiative depends upon your objectives.'' ''They are clear,'' said Marwaha. ''But let me deal with the focus on margins first. It is a matter of training. As long as there is a common understanding-right from the CEO of Alpha to the salesman in the field-on key business drivers of the company you are on safe ground. Now, to the objectives of demerger: It helps Alpha develop selling competencieslike negotiating skills, the art of closing the deal, and relationship management-as an integral part of building a critical mass of customers and capturing them for life. It leaves the mainline business free to concentrate on product development.'' ''But the major objective is to enhance revenue streams,'' said Vaman Bajpai, Vice-President (Systems). ''We can sell similar products from multiple providers-including our own competitors. It will be a value addition to the customer. We can use the channel to sell unrelated products-like mobile phones-for a fee. We can even build up back office capacity for processing insurance claims, say, for a fee. It is a world of opportunities out there.'' ''Major groundwork needs to be done in the area of technology,'' said Menon. ''Alpha has been talking informally with three NBFCs to create a mega financial services outfit, through a merger. It will take a while. Would you suggest that we put our internal restructuring on hold till the merger issue is decided?'' ''I don't think so. The merger will be between business units, which are, after all, separate legal entities. That need not preempt internal demerger. There are four considerations a firm should keep in mind whenever a change in organisation structure is planned. Does the new structure build enough management depth in the company? Does it help develop new competencies? Does it provide for cross learning across business units? Does it leverage the company's resources fully? I think the demerger stands the test on all four counts,'' said Roy. And added, after a thoughtful pause, ''Or does it?''

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

Explain the role played by life-cycle assessment in the environmental activities of volvo?

7.

(7 marks) < Answer > Explain about the environmental policies of volvo? Is this a strategy to improve business responsibility towards society? Discuss. (9 marks) < Answer >

Founded in 1927, Volvo is a multinational vehicle manufacturer with production facilities in 25 countries, 74,000 employees, and sales in more than 100 markets. Volvo Group's sales totaled 130 billion SEK in 2000. Volvo's car making division was sold to Ford in 1999.Volvo's stated aim is to contribute actively to the development of efficient, safe, environmentally compatible and economically competitive transport systems for goods and passenger traffic. To this end, life-cycle assessment (LCA) plays a central role in product development activities. Volvo says it is intensifying its 'preventive environmental activities' in order to ensure that the total environmental impact of its products is minimized. The average Volvo vehicle has a lifespan of 19 years, and LCA means paying attention to environmentally safe recycling and disposal techniques 20 years into the future. Volvo cars were among the first in the world to be supplied with an 'environmental product declaration' (EPD), certified by a third party. Covering all phases of the car's life cycle, the EPD is certified by Lloyd's Register Quality Assurance, and is designed to provide a more meaningful and objective description of the environmental impact of the product, from manufacture to eventual recycling. All products must meet the continuous improvement guidelines specified in Volvo's product goal statement. An EPD is 6

now required for all Volvo products in order to enable their environmental impacts to be compared. The use of life-cycle assessment revealed that more than 90% of the total environmental impact of Volvo products is generated during their useful life, as distinct from manufacturing and disposal activities. A particularly significant factor is fuel consumption, and for this reason alternative fuels and power trains are a high priority for research. Volvo has declared that 'all business areas shall have their environmental management systems certified in accordance with ISO 14001 no later than 31 December 2001.' Similar requirements have been introduced for its suppliers, with a deadline two years later. The Volvo environmental management structure is headed by a central 'Group Environmental Council' on which each business unit is represented. Each business area has its own environmental manager, supported by a network of staff and specialists. Volvo regards its commitment to environmental care as a natural extension of its reputation as a world leader in vehicle safety. It believes it will gain competitive advantage by adopting principles of sustainability. Leif Johansson, President and CEO of AB Volvo, says: 'I am convinced that we can create new business opportunities and long-term competitive gains through aggressive, dedicated and comprehensive action programmes. For this reason, environmental issues... were awarded a prominent role in Volvo's strategy for growth... which states that every new vehicle concept must be lighter, safer and more fuel-efficient that the one it replaces.' Quality and environmental programmes are conducted in accordance with ISO 9000 and ISO 14000, respectively. By the end of 2000, 95% of Volvo employees were working in plants and units with ISO 9000 certification. Volvo's environmental policy, adopted in September 1997, is characterized by a holistic view, which strives for continuous improvement, technical development, and resource efficiency. The company's environmental programmes are characterized by: •

• • •

Taking a holistic view to minimize environmental impacts of products and processes requires - for example, taking account of the complete product life cycle, and seeking to ensure that its partners maintain environmental management systems; Striving for continuous improvement throughout the company operations, by formulating, communicating, and monitoring clearly-defined goals and involving all employees; Exceeding customer demands for environmental care through technical development and an active research and development process; Taking account of the complete life cycle of products and processes in order to minimize the consumption of energy and raw materials, and reduce waste.

Today, Volvo's LCA software and database are used as a 'compass' to indicate the direction in which long-term environmental improvements are most needed. A computerized tool known as Environmental Priority Strategies (EPS) aggregates the data from the life cycle assessment into a single value - the so-called environmental load unit (ELU). Volvo is proud of its achievements in reducing toxic emissions. In 1976, it became the first automaker in the world to introduce a three-way catalytic converter. Since 2000, Volvo has offered an optional exhaust filter that reduces emissions of carbon monoxide, hydrocarbons and particulates by 80 to 90%. Volvo's environmental policy is constantly evolving. In January 2000, Volvo introduced 'quality gates' (or evaluation points) into the product development process. Meanwhile the E-FMEA (Environmental Failure Mode and Effect Analysis) is a systematic method of analyzing the environmental hazards associated with new products, and of monitoring the chemicals used in products and manufacturing processes. The company has been producing environmental reports since 1992, and undertaking environmental audits since 1989. The latter have resulted in cleanup measures costing SEK50 million. A total of 23 environmental audits were carried out in 2000. Volvo also carries our environmental risk assessments prior to any significant decisions, particularly those relating to acquisitions. While the company's scientists are actively developing cleaner fuels and engines, Volvo acknowledges that 'the problems of congestion, noise, and atmospheric pollution in the world's conurbations will not be solved by improved engines and fuels alone.

END OF SECTION B

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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.

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 >

9.

Firms, in assessing and acting upon cost position, make common errors. what are the pitfalls in cost leadership strategies ? (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Policy & Strategy (MB311) : April 2006 Section A : Basic Concepts 1.

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Answer : (a) Reason: According to Ansoff there is no universal formula for all firms. Answer : (b) Reason: The planning mode encompasses both a proactive search for opportunities and a reactive solution to sxisting problems. Answer : (d) Reason: The higher skills and technology available in developed countries with the lower cost labor available in developing countries is combined by production sharing. Answer : (a) Reason: A company’s ability to meet imminent financial obligations is known as liquidity. Liquidity ratios are used as an andicators of a firm’s ability to meet its short-term obligations. Answer : (c ) Reason: An Activity ratio s measures a firms efficiency ingenerating sales and making collections. Answer : (e) Reason: In large firms ,inreased diversity leads to numerous product and project efforts with major strtegic significance.The organizational form that provides and controls skills and resources when and when they are required most is the matrix organization. Answer : (d) Reason: A divestiture is the sale of a part or a division of a company to a third party.the division may include assets ,product lines,or subsidiaries 8

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Answer : (c) Reason: Liquidation occurs when the value of assets of a firm are more worthwhile than the rate of return earned by the firm. Answer : (a) Reason: In cash cows the business units hold a large market share in a mature and slow growing industry. These businesses have a strong business position and negligible investment reqirements and hence the returns from these business often more than their investment requirements. Answer : (d) Reason: The potential strengths of the GE Nine Cell Planning grid are : 1) It allows for intermediate ranking between high and low and between strong and weak. 2) It incorporates a much wider variety of strategically relevent variables than the BCG matrix. 3) It stresses the channeling of corporate resources to business with the greatest probability of achieving competitive advantage and superior performance. Answer : (d) Reason: Opportunities for a firm to enjoy competitve addvantage are: 1) Identification of new market. 2) Changes in the regulatory environment. 3) Technical changes. 4) Improved buyer or supplier relationships. Answer : (c) Reason: The strtegies in the 3rd quadrant of the Grand strategy selection matrix are: 1) Concentration market. 2) Development. 3) Product development. 4) Innovation. Answer : (b) Reason: Various selling process are : 1)competitve bidding. 2)Seqential selling. 3)One buyer. 4)Going public Answer : (b) Reason: Poison Put : in this strategy the target company issues bonds which encourages holders to cash in at a high price. As a result of athe cash drainage. The target becomes unattractive. Answer : (a) Reason: An LBO is defined as the acquisition ,primarily financed by borrowing of all the stock or assets of a hartherto public company by a group of investors. Answer : (a) Reason: Machiavellianism is the term used to dscribe coercive management tactics . It means the ruthless use of power . Particularly coercive power and manipulation to attain personal goals. Answer : (c) Reason: The board of directore acts as an link between the company and the external environment like government , customers ,local public ,social institutions, etc.. Answer : (b) Reason: The international enterprise opens a subsidary abroad to support its international trading activities in a spcific market. 9

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support its international trading activities in a spcific market. 19. Answer : (c) Reason: Contengies in the success of the strategies are as follows : 1) A downturn in the economy . 2) A labor strike . 3) An increase in the prime rate. 4) A technological breakthrough . 5) A shortage of critical materials. 20. Answer : (b) Reason: Conglomerate diversification is a diversification into a new business area that has no obvious connection with any of the company’s existing areas .It is also called as unrelated diversification. Organisations that adopt this diversification strategy are often referred as conglomerates . 21. Answer : (b) Reason: ;Oligopoly Theory : According to this theory , firms move abroad to exploit their monopoly power , which is derived from unique products , marketing expertise , control of technology and manegerial skills , or acess to capital.Firms may move abroad as part of their averall competitive strategy , or to gain a permanent advantage over their competitors , or to block their opponents move and prevent their competitor from gaining an advantage that threatens their very survival . 22. Answer : (d) Reason: There are four distinct but related stages of in the process of an LBO : 1) Arrangement of finance . 2) Taking the company private . 3) Restructuring . 4) Reverse LBO. 23. Answer : (d) Reason: The McKinsey 7-S framework constitues of : 1) Shared values . 2) Structure . 3) Systems . 4) Style . 5) Staff . 6) Skills . 7) Strategy . 24. Answer : (c) Reason: Segment Scope : Here the emphasis is on the variety of products and the types of buyers. A firm can employ different focus strategies while serving different product or buyer segments . For example a firm may need a particular value chain to serve sophisticated minicoputer buyers with in-house serving capabilities and different value chain to serve small business users. 25. Answer : (d) Reason: The Anti Takeover mendaments are : 1) Super majority amendaments. 2) Fair price amendaments. 3) Classified boards. 4) Authrization of preferred stock. 26. Answer : (c) Reason: Acompany expands internationally throug four stages : 1) Starting stage : Sale of physical goods through indirect marketing investment (export). 10

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2) Development stage : Sale of services and/or direct marketing investment ( sales subsidaries ). 3) Growth stage : Sale of system and /or direct investment production operations. 4) Mature stage : Sale of know-how and/or direct investment production operations ( manufacturing subsidiary ). < TOP 27. Answer : (a) > Reason: A company with a ethnocentric orientation believes that the values and priorities of the parent organization should guide the strategic decision making of all its employees. < TOP 28. Answer : (e) > Reason: Political activities in an organization can be described in terms of legitimate or illegitimate, vertical or lateral, internal or external and machiavellianism. Hence all the options are correct. < TOP 29. Answer : (b) > Reason: The mission statement provides unanimity of purpose within the organization. It develops a base or standard, for allocating organizational resource. Mission statement facilitates the translation of objective and goals into a work structure involving the assignment of task s to responsible elements within the organization.(a) A strategic plan is a process of determining objectives and then adopting courses of action and allocating resources necessary to achieve these objectives. (c)Target market is an area where all the activities of the company would be centered for the achievement of organizations objectives.(d) Company objectives show the way to a desired future state that a company attempts to realize.(e)The issue of public image is important to a growing firm that is involved in redefining its mission. Customers attribute certain qualities to a particular business based on its image. < TOP 30. Answer : (a) > Reason: 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.(b) Value pricing is an attempt to win the loyal customers by charging a fairly low price for a high-quality offering (c)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.(d) 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. (e) Virtual pricing is a generic term

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Section B : Problems 1.

In the mid-1980s, IBM's competitive position changed dramatically. The shift to smaller, open systems, along with greater competition in all of IBM's segments, gradually weakened IBM's competitive position. After posting a net profit of $6.6 bn in 1984, IBM's financial performance began to slide. During the period 1985-1989, IBM's revenues grew at the rate of 6.6 percent per annum compared to the industry average of 13.4 per cent. Moreover, the company's global market share decreased from 30 percent to 21 percent and its huge capital investment of about $101 bn in the early 1980s, in new businesses also did not seem to yield the desired results. In addition, delays in launching new products by the company proved costly. In December 1989, Akers announced a drastic restructuring program. He proposed major job cuts (37,000 employees) to reduce total costs by about $1 bn. In November 1991, he issued a news release indicating his intention to split IBM into eleven autonomous businesses. Each of the businesses was expected to emerge as a self- sustaining profit center. Heads of the new businesses would function like CEOs with commitments to predeclared business plans and profit sharing arrangements. The restructuring program did not yield the desired results and by mid-1992, Akers' policies faced strong criticism. IBM's financial performance continued to decline with the company reporting a loss of $2.86 bn in the fiscal 1991, followed by a net loss of $4.97 bn in the financial year 1992

2.

A turnaround occurs when a firm perseveres through an existing-threatening performance decline ;ends the threat with a combination of strategies, system, skills and capabilities; and achieve sustainable performance recovery. The obverse of performance recovery is failure and eventual death. IBM (International business machines )was earlier known as CTR (Computing ,tabulating machine). Till the outbreak of the Second World War, IBM concentrated mainly on punched cards for the tabulating business . By this time, IBM had already established a reputation for making custom-built equipment and offering excellent customer service. During the War, IBM systems were used to maintain statistical details of logistics. The IBM's competitive position strengthened further with the launch of System/360 mainframe. The product revolutionized computing and propelled the company to global commercial leadership for the next two decades. IBM established 14 global business units to tap a wide variety of opportunities, including biomedical systems, industrial robots, educational materials, directory assistance equipment, analytical instruments and scientific work stations. The shift to smaller, open systems, along with greater competition in all of IBM's segments, gradually weakened IBM's competitive position. After posting a net profit of $6.6 bn, IBM's financial performance began to slide. During the period 1985-1989, IBM's revenues grew at the rate of 6.6 percent per annum compared to the industry average of 13.4 per cent. Moreover, the company's global market share decreased from 30 percent to 21 percent and its huge capital investment of about $101 bn in the early 1980s, in new businesses also did not seem to yield the desired results. In addition, delays in launching new products by the company proved costly. The restructuring programs implemented by the then CEO John Akers also did not proved to be effective. The IBM was desperate to turnaround. The strategies and policies implemented were not giving any fruits. It was a tough task for IBM to turnaround from being a failure to a profit making company. It has to analyze the situations that had driven a profit making company to a ill company. It was not going to be easier for such accompany to turn around as there were more competitors in the industry when compared to previous. But the company started to turn around only when it made necessary changes in its approach. IBM was transformed from a company that primarily manufactured mainframes to a company that offered complete IT solutions. The company has changed is focus from being product centric to being customer-centric.s

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3.

Advantages of demerging the distribution division • Adopt a customer-centric Approach By offering multiple products to the customer from a single window •

Setting up a separate distribution outfit will create a strong sales bias and culture.

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It is a natural extension of owning a set of customers who are loyal to the Alpha brand.

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Offers an opportunity to leverage the existing customer base by serving products manufactured not only by in-house divisions, but even by competitors.

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By enhancing the power of choice at the customer end, you are reinforcing the customer's bonding with the company.

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The payoffs from an independent distribution business unit are that you get a critical mass.

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The productivity of channels improves.

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The speed of response increases. 12

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A single-window provides simplicity to the customer in meeting his requirements.

• Can develop cutting edge competencies in the sales system. Disadvantages of demerging the distribution division • May not function at a level that gives economies of scale, •

Difficult to manage if it does not possesses the required core competence among its people.

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Need for balancing the volumes-margins issue.

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Need to ensure that the basic product cost of each of the products is low, in relation to competitors, even as you top it up with customer service and product superiority.

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This may require creation of a CRM platform to distribute products to a continuously evolving customer.

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The cost of setting up a distribution network is high. May not be able to recoup the investments by just distributing own products

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Without a proper degree of control over operations, costs can go haywire.

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A pure distribution set-up, without manufacturing capabilities, is a vulnerable proposition, as it does not always give you enough throughput and margins to justify the costs of distribution.

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Small-time direct selling agents with no overheads can wipe you out of business. < TOP >

4.

It is important to review the strategy of each of the four business units. What is the source of competitive advantage in each? What is the basis on which it competes in the market place? What specific skills are required at the sales level vis-à-vis competitors-product knowledge, customer access, and speed of response? It is necessary to look for complementarities across units. Without those synergies, putting a new structure in place will not deliver any results. Alpha can go ahead and merge the distribution divisions into a new firm. By this, it can enhance brand value by offering a diverse range of products. It can choose to stick to its traditional product-centric approach. It can become a reinsurer, an insurer, or a manager of mutual funds. It can build value propositions for customer groups. It can track and analyse customer database for trends, to cross-sell more products. It can also set up strong frontend solutions units to increase customer satisfaction Potential Pitfalls of this strategy are the absence of product specific sales teams. The company will also have to manage culturally diverse alliance partners, and focus on volumes rather than profits. It has to keep up the pace of new product launches, and manage coordination among different product units when dealing with customers It can make own products and distribute both own and others' products. It can manufacture products for others on contract, and distribute them through own channels. But the best alternative is to manufacture some products where scale can be achieved, and use ones own network to distribute both own and competitors' products. An Own portfolio of products gives a depth to the business. It is necessary to ensure that there is no misalignment between the sales unit and the business units. It is important to ensure a common understanding of business objectives, and key success factors across Alpha. The company has to focus on the following aspects to make its strategy work: Goals The ease of getting new business in a particular segment might motivate salesmen to focus on that segment in preference to others. This could lead to a perception among business units that the sales team is giving ''unequal focus'' on some products. It is therefore necessary to fix, right in the beginning, the templates of each business with clearly defined goals and time frames. Performance Measures This is also the right time to review the performance measures at Alpha, both at the strategic and operating levels. If increasing the number of customers is a business priority-as is the case at Alpha-then the number of 'new' customers acquired should become a major performance measure. Growth The distribution business is an opportunity for rapid growth, if the company has a large customer ownership, which is not fully catered to by its independent business units. A single-product business centre approach is very risky in the context of open markets. Today's customer has access to multiple products and options and, therefore, is sure to run away if the company does not offer all products that are available in the market. Customer Relationship & Product Development The focus should be on relationships and customised product development. Such a focus is a key necessity in a distribution-driven company. This approach however, needs a good training plan, quality relationships and motivated manpower. A good technology infrastructure is crucial in maintaining good service standards. The transition would have to be carried through carefully, with considerable training of the staff. Affiliations and 13

product choices should be based on customer needs, rather than on the revenues generated by the factories. To have the financial factories as a partner will be an advantage for the distribution business. However, no single partner should have a majority stake in the company. That alone will pre-empt conflicts with the customer-centric approach of Alpha. < TOP >

5.

Information – Subsidiary true value hidden – Preference for pure-play (single-industry) securities – Increased availability of information Managerial efficiency – Management's inability to manage complex organizations – Sell-offs sharpen focus, get rid of poor fit subsidiaries, eliminate negative synergy Management incentives – Bureaucracy and consolidation of financial statements stifle entrepreneurial spirit — hide good (bad) performance – Conflict of objectives between parent and subsidiary – Tie compensation directly to subsidiary performance Tax and/or regulatory factors – Tax motives — subsidiaries can take forms that shelter income – Regulatory motives — spin-offs can free parent from regulatory scrutiny < TOP >

6.

Life-cycle assessment (LCA) plays a central role in product development activities. Volvo says it is intensifying its 'preventive environmental activities' in order to ensure that the total environmental impact of its products is minimized. The average Volvo vehicle has a lifespan of 19 years, and LCA means paying attention to environmentally safe recycling and disposal techniques 20 years into the future. Volvo cars were among the first in the world to be supplied with an 'environmental product declaration' (EPD), certified by a third party. Covering all phases of the car's life cycle, the EPD is certified by Lloyd's Register Quality Assurance, and is designed to provide a more meaningful and objective description of the environmental impact of the product, from manufacture to eventual recycling. The use of life-cycle assessment revealed that more than 90% of the total environmental impact of Volvo products is generated during their useful life, as distinct from manufacturing and disposal activities. A particularly significant factor is fuel consumption, and for this reason alternative fuels and power trains are a high priority for research. < TOP >

7.

Volvo's environmental policy, adopted in September 1997, is characterized by a holistic view, which strives for continuous improvement, technical development, and resource efficiency. efficiency. The company's environmental programmes are characterized by: • Taking a holistic view to minimize environmental impacts of products and processes requires - for example, taking account of the complete product life cycle, and seeking to ensure that its partners maintain environmental management systems; • Striving for continuous improvement throughout the company operations, by formulating, communicating, and monitoring clearly-defined goals and involving all employees; • Exceeding customer demands for environmental care through technical development and an active research and development process; • Taking account of the complete life cycle of products and processes in order to minimize the consumption of energy and raw materials, and reduce waste • This strategy of volva of being conscious towards the environment can be taken as an responsibility towards socity. • This strategy also helped the company as an competitive strategy. By producing environmental friendly vehicles the company has built a strong image in the market ,thus improved the sales of the company. < TOP >

Section C: Applied Theory 8.

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 14

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 >

9.

PITFALLS IN COST LEADERSHIP STRATEGIES Finns, in assessing and acting upon cost position. make common errors. some of which include: Exclusive Focus on the Cost of Manufacturing Activities The mere mention of "cost'" makes most managers instinctively think of manufacturing. However. activities such as marketing. sales. service. technology development. and infrastructure generate a significant. if not overwhelming. share of total cost. These activities. however, often receive very little attention... in cost analysis The entire value chain. when examined. often results in relatively simple steps that can significantly reduce cost. For example. dramatic impacts can be seen on the cost of performing research as a result of recent advances in computers and computer-aided design. Ignoring Procurement Many firms consider purchasing as a staff function and devote few' management resources to it. Though the firms work hard to reduce labor costs. they pay scant attention to purchased inputs. Purchase price of key raw materials is often the central focus of analysis within the purchasing department. Individuals with little expertise or motivation to reduce cost are often allowed by the firm to purchase many items. As a result. linkage between the purchased inputs and costs of other value activities go unrecognized. Major cost benefits for many firms can ensure from modest .changes in purchasing practices of the firm. Overlooking Indirect or Small Activities Large cost activities and/or direct activities like. fabrication and assembly of components are usually the focus of cost reduction programs. Insufficient' attention is paid to activities representing a small fraction of total cost. and indirect activities, such as maintenance and regulatory costs. are often altogether ignored. False Perception of Cost Drivers Misdiagnosing of their cost drivers is a common mistake committed by firms. Due to a failure to understand the sources of its cost advantage. a firm may attempt to reduce cost by increasing its national share. This may further worsen its cost position by reducing its focus on regional operations. The firm may also concentrate its defensive strategies on national competitors and ignore the more significant threat posed by –powerful regional competitors. Failure to Exploit Linkages All the linkages affecting cost, particularly. linkages with suppliers and linkages among activities such as quality assurance, inspection. and service. arc rarely recognized by firms. The success of many Japanese firms can be attributed to their ability to exploit linkages. For example, Matsushita and Canon. in spite of the fact that their policies contradict traditional manufacturing and purchasing practices. are known for their ability to recognize and exploit linkages. Errors such as. requiring each department to cut costs by the same amount, even though raising costs in some of the departments may lower total costs. result from the failure to recognize linkages. Contradictory Cost Reduction 15

Finns often employ contradicting me(1ns of reducing cost. For example. a firm. in order to reap benefits of scale economics. might try to gain market share. while at the same time it may go in for model proliferation thus dissipating scale economies. Also, firms may locate close to buyers with a view to reduce freight costs but at the same time emphasize weight reduction in new product development. Sometimes. cost drivers work in opposite directions. This makes it essential for a firm to recognize the tradeoffs. Unwitting Cross Subsidy The failure of firms to recognize the existence of segments in which costs behave differently makes them often engage in unwitting cross subsidy. Rarely is it possible to measure the cost difference among products. buyers, channels. or geographic areas by using the conventional accounting systems. Competitors that understand costs may often make use of unwitting cross subsidy as an avenue to use costs to tll1dercut a firm's prices and improve their market position. A firm may also. as a result of cross subsidy, be exposed to focussed competitors who compete only in the overpriced or premium segments. Thinking Incrementally Rather than finding ways to reconfigure the existing value chain. firms often strive ,for incremental cost improvements in the value chain. Incremental cost improvements may result in the point of diminishing returns. while reconfiguring the value chain can result in a whole new cost platform. Undermining Differentiation Elimination of a firm's sources of uniqueness to the buyer as a result of a cost reduction can undermine its differentiation. This action of a firm should be the result of a conscious choice even though doing so may be strategical1y desirable. Activities that do not contribute to a firm' s differentiation should form the focus of its cost reduction efforts .Further. if a cost leader differentiates in activities wherever differentiation is not costly, it will result in the cost leader improving its performance. < TOP >

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