Mb311- Jan 05

Question Paper Business Policy and Strategy (MB311) : January 2005 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.

Which among the following is studied with reference to the size, growth rate, age, composition, sex composition, life expectancy etc. of the population? (a) Social environment (c) Ethical environment (e) Economic environment.

2.

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(c) Premise control < Answer >

Which of the following are the characteristics of fragmented industries?

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

Which of the following is not a major stage in the process of technological development? (b) Promotion

(c) Invention

In implementing strategy, all forms of organizational structure are not equally effective In large organizations, structure seems to have a life of their own Sheer growth can make restructuring essential Understanding the structure, strategy relationship is provided by research on corporate segment All of the Above. 1

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(d) Innovation (e) Adaptation.

The structure of organization is based on the strategy of the firm. Which statement supports the choice of structure as a function of strategy? (a) (b) (c) (d) (e)

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To divide firms activities into two major categories To acquire in-depth understanding of firms capability To create competitive advantage To create value for both producer of products or service and its users A process of internal analysis.

(a) Diffusion 9.

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(c) Profitability ratios

The assumption of value chain analysis is based on the belief that

(a) (b) (c) (d) (e) 8.

(b) Special alert control (e) Strategic surveillance.

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(c) Simple structure

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

(a) (b) (c) (d) (e) 7.

(b) Functional structure (e) Geographic structure.

(b) Activity ratios (e) None of the above.

(a) Implementation control (d) Operational control 6.

(b) Ambiguity of words and phrases (d) Multiple levels of analysis

Which of the following ratios measures, how effectively a firm is using its resources? (a) Liquidity ratios (d) Leverage ratios

5.

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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

4.

(b) Cultural environment (d) Demographic environment

Which of the following is not a criticism against the SWOT analysis? (a) The generation of lengthy lists (c) No weights to reflect priorities (e) Ambiguity of decisions.

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10. The vision of an organization becomes more tangible when it is expressed in the form of (a) Objectives (d) Policies

(b) Goals (e) Procedures.

(c) Mission statement < Answer >

11. Which of these structures is sometimes called a holding company? (a) Conglomerate structure (c) Functional structure

(b) Strategic business units (d) Product structure

(e) Matrix structure.

12. Which of these, according to Porter, is not a support activity in a manufacturing firm's value chain? (a) Firm infrastructure (c) Human resource management

(b) Marketing and sales (d) Procurement

(e) Finance.

13. ____________ is the advantage a country has, to produce because of readily available resources (a) Natural advantage (d) Acquired advantage

(b) Comparative advantage (e) Competitive advantage.

(b) Penetration price strategy (d) Virtual price strategy

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Involve diversification into related/unrelated business Are aimed at creating entry barriers in the industry Provide a basic direction to the company’s business Lead to a redefinition of the company’s culture/mission Implementation of new ideas.

18. In the GE Nine - Cell Planning Grid, a company’s business units are rated on (a) (b) (c) (d) (e)

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Market growth rate and Relative Competitive Position Business Strength and Industry Attractiveness Business environment and Business strength Time Horizon and Participants Mutual strengths.

19. When an acquiring firm is focusing purely on the profit pattern of the venture and is little concerned with creating product/market synergy with existing businesses, it is commonly referred to as (a) Concentric diversification (c) Horizontal integration (e) Vertical integration.

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(b) Backward integration (d) Conglomerate diversification < Answer >

20. Two reasons for mergers and acquisitions are (a) (b) (c) (d) (e)

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Diversify into new business categories Use foreign subsidiaries or business agents Establish international purchasing offices Integrate and coordinate worldwide sourcing Recruitment of manpower.

17. Grand strategies refer to the strategies that (a) (b) (c) (d) (e)

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(b) Penetration price strategy (d) Virtual price strategy (e) Profit price strategy.

16. Which of the following is not one of the major sourcing strategies that companies pursue as they move into foreign buying as part of procurement strategy? (a) (b) (c) (d) (e)

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(e) Push strategy.

15. A _____________ is where a company sets its product pricing in terms of its particular financial goal. (a) Skimming price strategy (c) Cost-plus price strategy

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(c) Cultural advantage

14. Which of the following describes the pricing policy where the company brings a product to the market with a remarkably low price? (a) Skimming price strategy (c) Cost-plus price strategy

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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 and to improve economies of scale.

21. A person who generates a new idea and supports it through many organizational obstacles is known as a(n) 2

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a(n) (a) Sponsor (d) Orchestrator

(b) Product champion (c) Technology champion (e) Process specialist.

22. An organizational design appropriate for a new business with a great deal of strategic importance and low operational relatedness is called (a) New product business development (c) Special business unit (e) Indirect integration.

(b) Micro new ventures department (d) Direct integration

23. Focusing on opportunities and not on problems, highlights the important entrepreneurial characteristic of (a) (b) (c) (d) (e)

(a) Survival

(b) Existence

(c) Success

(d) Take-off

(a) Offensive centralization (c) Conglomerate diversification (e) Vertical diversification.

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(b) Defensive centralization (d) Concentric diversification

26. A program which has the purpose of subsidizing primary service programs is called (a) Strategic privatization (b) Strategic maneuvering (c) Strategic piggybacking (d) Strategic centralization (e) Strategic killing. 27. The calculation and analysis of ratios from data in financial statements is known as (a) Investment analysis (b) Ratio analysis (c) Revenue analysis (d) Income analysis (e) Financial analysis.

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28. One of the profitability ratios is (a) Gross profit margin (d) Dividend payout ratio

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(e) Decline.

25. A strategy in which top management retains all decision-making authority so that low-level managers cannot take any actions to which the sponsors may object is called

(b) Current ratio (e) Asset ratio.

(c) Debt to equity ratio

29. The first step in the strategic decision making process is

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To review corporate governance To evaluate current performance results To analyze strategic factors To scan and assess the internal corporate environment To review the projected business plan.

30. One of the first steps in analyzing financial statements is to (a) (b) (c) (d) (e)

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A sense of urgency that makes them action oriented Ability to identify potential venture opportunities A detailed knowledge of the industry keys to success Access to outside assistance A change in business strategy.

24. The problem of obtaining customers and delivering the promised product or service relates to the small business development substage of

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

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Compare historical statements over time Calculate changes that occur in individual categories from year to year Adjust for inflation Scrutinize historical income statements and balance sheets Provide smooth operationally sound budget plan. END OF SECTION A

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Section B: Caselets (50 Marks) This section consists of questions with serial number 1 – 8. Answer all questions. Marks are indicated against each question. Detailed explaintations 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.

Who are Boeing's and Airbus' customers? Comment on bargaining power of customers in the airline industry. (6 marks) < Answer >

2.

What are Porter's three generic strategies for competition within an industry? Relate them to product development by the two companies. Which of them does the Sonic Cruiser strategy by Boeing represent? What about Airbus' plan for the 380X? (7 marks) < Answer >

3.

What is the time frame for airliner product design? Is it a fixed interval? Is product design a tactical competence or a core competence for Boeing? (6 marks) < Answer > Competitive Strategy Moves for Boeing

Introducing new products into a marketplace can be a response to changes in the competitive landscape. When evaluating the demand for new products, and in deciding whether and how to commercialize new product offerings, firms have to consider how long the demand for a given product will last, as well as how much initial demand they will face. Every product line has a different life cycle (compare washing machines to transistor radios, for example), so some products have to be developed and sold over short time-spans. But there are also products that have very long product development phases, lasting for years or even decades. The airline industry is characterized by longer phases. As the leading manufacturer of jet airliners, Boeing has long been locked in competition with Airbus Industries, a European company. Started as a consortium of European defense manufacturers, Airbus has been increasingly successful with its line of jets, meeting Boeing face-to-face in most product categories, but especially in small- and medium-size segments. Any airline, wherever it operates in the world, is quite likely to have jets from both companies in their fleet. One product category where Airbus has less success is in the jumbo category, in which passenger loads of 300 or more are suitable for trans-Atlantic or trans-Pacific flight. Boeing initiated this product category in the 1970s with its successful 747 series. Early in 2001, Airbus announced its plans to enter this category with a new airplane, the A380, as a “super jumbo” with seats for 550 passengers. Boeing promptly announced that it would re-design the 747-400 – the largest model of the 747 – as the 747X, adding additional passenger capacity. Things changed, however: a few months later, Boeing announced a different strategy, choosing to target a market sector that was not based on size, but on speed and distance instead. Their solution is a “Sonic Cruiser,” which is expected to have around 250 seats, only a medium size. What it lacks in seats is compensated by improvements in speed and distance. It will be able to fly farther and faster, thus making it possible for trans-oceanic customers to get directly to their destination city from major hubs in the U.S. or Europe, or directly to the ultimate destinations in Asia and Australia. Trans-oceanic flight inevitably requires multiple flights and stops. Boeing perceives that passengers will prefer direct flights. Adding thousands of miles to its range and using more powerful engines will make the Cruiser more suitable for airlines to meet the demands of more specific and narrowly defined travel segments. Thinking About the Future! In the complex aviation market, there is interaction between airline manufacturers, airliners, airports and civil aviation authority, labor, and travel customers - each with its own stakeholders. Each of these very different groups work towards greater mobility for goods and services, at a lower cost, and each would also like to harvest the benefit that they desire most for their efforts! For the businesses, it will be profit, return on investment, and market share; human resources and human customers will seek greater service; and competitive and regulated aviation market institutions attempt to implement policy. Successful competitors need expertise in navigating all of these waters simultaneously. For Boeing and Airbus, the gamble that they place with their product development expenditures is billions of dollars in up-front expenditure vs. the uncertain returns from anticipated sales of the airplane. They are betting on certain 4

circumstances to be present that will be favorable to the success of their product – even though that won't be determined for years down the line. Other airplane manufacturers in different product categories face similar competitive choices. For example, numerous commuter airlines are consumers for short-hop, propeller-driven planes to fly less than 500 miles with fewer than 50 passengers. This system feeds well into the major airlines by flying from those airlines' hubs. Bombardier, Embraer, and other airplane manufacturers compete in these segments.

Caselet 2 Read the caselet carefully and answer the following questions: 4.

How should Rockwell evolve its strategy? Should it continue with the conventional approach, with its focus on external environment, in the face of potential competition? (7 marks) < Answer >

5.

Is it feasible to link strategy planning at Rockwell to its core competencies? Or is the competencies-based approach to strategy-development old wine in a new-bottle? Has Rockwell got a grip on its core competencies at all? (7 marks) < Answer >

6.

Is there an alternative to the traditional approach to strategy-formulation? Are the managers of Rockwell asking the right questions? What should the road map for Malhotra and his team be? (8 marks) < Answer >

S.K Malhotra, the CEO of the Rs 620-crore Rockwell, the country’s No.1 air-conditioner manufacturer arranged to meet his friend from B-school, Raj Khanna, 49, one of the foremost strategy thinkers in the world, a professor at the University of Southern California, who was in the country on a leisure tour. “ Some exercise for the brain after a good meal, I guess,” sighed Khanna. “ You want to pick my brains about strategyplanning. Tell me” Malhotra was only too willing. “Rockwell was founded in 1965 by a group of technocrats. Professionally managed since its inception, it went public quite early. When I joined the company as a management trainee 14 years ago, we had a 55 percent share of the local central air-conditioning business. Today, it stands at 40 percent. The rest of the market is fragmented, with our closest competitor, Primecool, accounting for a 15 percent share. Still, every day brings more competition. Primecool itself is a newcomer, having launched its products only in 1994. And it isn’t just competition, even our customers are becoming increasingly unpredictable.” “And that’s what worries you even more,” Khanna finished for Malhotra. “But what is your vision for Rockwell? Have you defined it ever?” “To become a one-stop national shop offering air-conditioning products, systems and services. We have set ourselves the goal of achieving a turnover of Rs.1000 crore by 2005 by growing all our businesses: central air-conditioning, unitary air-conditioners, and ducted systems.” “How much do each of these businesses contribute to your sales?” queried Khanna. “We recorded a turnover of Rs.620 crore in the year ended March 31, 2000. Seventy percent of this came from central air-conditioning, 15 percent from unitary air-conditioners and 15 percent from our trading operations.” “A 60 percent growth-rate over 4 years is a fairly conservative target,” said Khanna. “Do you wish to discuss with me the strategy that can help you achieve this?” “In part, yes,” conceded Malhotra. “What should our business-mix be? Can we achieve our goals faster by focusing on one or two businesses? Those are the questions our strategy needs to address. But I didn’t come to you for the answers; I wanted to reassure myself that we have the strategy-formulation processes to address this as well as any other issue we may later face.” “Describe them to me,” said Khanna. “Every year, in January, I get my senior management team- the functional heads of Finance, Marketing, HR and Operations and the three heads of our business units- for a week-long discussion on the company’s future course. We ask ourselves the kind of questions you’d encounter in any strategy-development process. Where are we today? Where do we want to be three years from now? How do we bridge the gap between our resources and our goals? Who are our competitors today? What is the competitive framework in which we operate? What are the strategies being adopted by our competitors? The answers form the basis of our strategy formulation.” “Oh! So you took the conventional approach. I hope you realize that the only reasons this approach worked over the years are your historical advantage and familiarity with a regulated environment. And both are under threat now.” 5

“ I realize that,” said Malhotra. “ What we need to now look at the developments in electronics and energy-management and incorporate them into our strategy planning. But how?” “ What’s wrong with the conventional approach,” started Khanna, “is that it relies on a static picture of the competition, underplays the role of innovation, exaggerates the role of the environment, and does not account for the varying resource-and competence-levels across companies. Your problems are not exclusive to Rockwell. This malaise can, partly, be attributed to the fact that the planning process itself has become a mundane, annual ritual. Managers view it with no enthusiasm. It takes too much time without, often, leading anywhere, and it is a waste to contemplate long-term strategy in an uncertain atmosphere, where even the next day may bring far-reaching changes.” “What do I do? Dispense with it completely?” asked Malhotra. “ No way. But you should try looking at it from a different perspective. Don’t try to find the most advantageous strategic position in relation to the environment and your competitors. Instead, move towards building and exploiting your resources. Why don’t you base your strategy on your core competencies instead of the environment and the industry? Let me elaborate on the deficiencies of the latter. If you adopt the industry-structure approach to quality, your strategy planning process becomes reactive. You look at your competitors, suppliers or customers- and react. This approach can work as long as the going is good. But it does have its limitations; it is, after all, derived from a theory that sought to explain industry-dynamics, not company-competitiveness. However, if you adopt the competence-based approach, you will look within your organization, find core strengths, and understand how you can leverage them to gain a competitive edge. It will help you realize which strategy is good for Rockwell without blindly following every move that your competitors make. After all, you may not be able to have the expertise to do whatever they are doing. Do what you do well; the rest will just fall into place”. There the luncheon ended and a satiated Khanna left to address a group of managers at a seminar. And a disturbed Malhotra returned to work. Spurred by his discussion with Khanna, Malhotra convened a meeting of his brain trust the next morning. “ I have decided that we need to take a different approach to our strategy-planning,” he told the seven senior executives who assembled in the conference- room. “Let us find out what our internal strengths are. I think there are 3 characteristics of strength. One, it needs to be unique to Rockwell. Two, it should be difficult to emulate. And three, it should be internally sustainable over a period of time.” Shekhar Mathur, 38, Director (Finance), was the first to speak about, expectedly, finance: “Our working-capital requirements are met by client-funds rather than bank finance. Loan constitutes less than 5 percent of our total working-capital requirements. We have always ensured an optimal level of liquidity in our operations: by setting a modular schedule for each project, completing each module on time and collecting a part-payment at the end of each module. This sets us apart from our competitors. Their emphasis on unitary air-conditioners and ducted systems makes it difficult for them to emulate us.” T.R Pal, 45, Director (Operations), was next: “Our core strength is our project-management skills. We ensure the best deliverables, in terms of service and adherence to schedules.” Atul Iyer, the Head of the Ducting Systems business unit, agreed: “Our competitors do not have the capabilities that Rockwell has in terms of engineering, procurement and construction”. Ashutosh Sen, 43, Director (HR), predictably, picked people: “At Rockwell, we have a disproportionately large share of the talent in the air-conditioning industry. With 650 qualified engineers and 1200 trained technicians, we can boast of the largest concentration of specialists in the country. Their competence has contributed to our monopoly in central airconditioning. That, in turn, enables us to attract talent.” Deepak Sharma, 49, the Head of the Central Air-Conditioning business unit, picked relationship-management: “we have built, over a period of time, excellent relationships with architects, interior designers, construction firms and suppliers. This network functions as an entry-barrier to competition.” Puneet Gupta, 35, the Head of Trading Operation, stuck to his business unit: “we have the finest logistics support for our trading operations. Over the years, we have not only built and nurtured our distribution-channels, but also diversified the range of products on offer. We have 200 dealers marketing products we source from 65 companies today.” “And” Continued Rakesh Jain, 41, Director (Marketing), “our strategy of going in for margins instead of volumes seems to have worked in our trading division. We choose products based on emerging technologies, and develop the brands over a period of time. Several technology-intensive products that we distribute have benefited from this. Given the number of inquiries we generate, we seem to be among the most sought-after distributors for any company manufacturing such products.” Malhotra spoke last, and he picked an unlikely strength: “Our major internal strength is our structure. We have 4 layers of management and this has made decision-making flexible in contrast to our competitors. Given that pace is the fifth P, I think our structure gives competitive advantage. But which of these is our core competence? I believe that a company cannot have more than two or three core competencies. Going by that logic, our core competence is our turnkey abilities. Should we divest our interests in manufacturing and trading, and focus on just this?” 6

“That wouldn’t make sense,” countered Jain. “ In most parts of the world, companies in our industry focus their efforts on manufacturing and marketing and outsource project-management expertise. And the capacity is set to grow at 30 percent a year, where Primecool, with a market share of 30 percent, is the leader. Should we not aim for a larger slice of that market?” Even as Malhotra tried to think of an answer, Sen spoke: “What is new in our Perspective of strategy? I think we have looked at our internal strengths in our previous attempts at strategy-formulation. Only, we combined this with an analysis of the external environment, which was, and is, critical. Even if we want to carry this approach to its logical conclusion, which should we focus on? After all, between the 7 of us, we have listed 6 core competencies!”

Caselet 3 Read the caselet carefully and answer the following questions: 7.

What is the strategic advantage Starbucks deriving from the installation of Kiosks named Media Bars? (5 marks) < Answer >

8.

Music sales make less than 1% of the total revenues of Starbucks; to what extent the new concept is responsible for the growth of Star bucks? (4 marks) < Answer >

Starbucks has never been primarily about the coffee. Its pell-mell growth, which last year earned it the No. 25 ranking on the Business Week 50 list of top-performing big companies, has always been about selling an experience. Now the Seattle Company is making a major push to add new ways of listening -- and buying -- music for its 35 million weekly customers. Collaborating with record labels is just one element of that strategy. In October, Hear Music, an alternative record retailer that Starbucks bought five years ago for $8 million, launched a satellite radio station that plays the kind of adult-oriented jazz, blues, and alternative rock that Starbucks has long featured in its stores. The company is also installing kiosks, called Media Bars, in its shops that let customers listen to digital music, create their own compilations, and purchase them while waiting for their Grande double latte. The next step: Starbucks is investing in new retail outlets that will be music stores first and coffeehouses second. The first two Hear Music Coffee Houses are already operating in Santa Monica and Berkeley, Calif. "This is not a gimmick, and this is not an approach to take to sell more coffee," says Kenneth T. Lombard, president of Starbucks Entertainment, the unit overseeing the music efforts. "This is a firm commitment to take advantage of our unique platform to discover and acquire music." Many Starbucks customers, of course, fall into the baby boomer demographic that tends to have both disposable income and a fear of the technology involved in finding and downloading music from the Internet. Those people also have drifted away from the traditional music business in recent years. But early on, Starbucks co-founder and Chairman Howard Schultz noticed that customers, while waiting for a mocha frappuccino, would ask about that catchy tune playing in the background. That got the chain selling CDs from the same artists at the cash register. Now, with the in-store kiosks, it's possible to mix and match. You sit down on comfortable lounge chairs and use a stylus to click through different genres of music, picking out a single song or up to a dozen. You select from a choice of generic packaging. The bill -- 99 cents a song -- is paid with a Starbucks card or credit card. Hit a button, and a CD burner spits out your disk in less than 10 minutes. The kiosks are in 45 stores in Seattle and Austin, Tex., and are rolling out nationally. For those who don't have time to sip and browse, Starbucks launched its XM Satellite Radio subscriber service. Staffers program the music and will do live concert broadcasts with some of the musicians. In addition, the channel will become the new house music for all Starbucks outlets. So far, record labels are letting Starbucks sell some of the music from their catalogs -- partly because they see it as a chance to crack the market for new adult music that they have largely ignored. Music sales make up less than 1% of Starbucks' total revenues, and it might be years before they turn a profit. That's not a problem, since Starbucks' earnings rose 44%, to $288 million, through the first nine months of this year, on revenues of $3.8 billion, up 28%. Still, with more than 3,000 of its stores offering wireless Internet access, Starbucks may create its own portal for music downloads. That would put it into competition with WindowsMedia.com, iTunes, and other digital music powers. When that day comes, Schultz could be in for a fight. But for now, he sees music as another way to signal that his baby won't be pigeonholed. "We are much more than a retail store. Much more than a coffee store," Schultz says. "We are becoming alternative distribution." By cup, disk, or airwaves, the Starbucks lifestyle marches onward. END OF SECTION B

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Section C : Applied Theory (20 Marks) This section consists of questions with serial number 9 - 10. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.

9.

BALCO is a company in the Aluminum sheet manufacturing business. Over the years it had identified that there is no great increase in demand for its products. The top management had decided to, some how, keep the company afloat and ensure very stable returns year on year to its shareholders. Is stability really a strategy or just a term for no strategy? Discuss. (10 marks) < Answer >

10. The combination of resources, capabilities and core competencies for mutual business gains leads to strategic partnerships and associations. Elucidate the rationale behind the joint venture. (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Policy and Strategy (MB311) : January 2005 Section A : Basic Concepts 1.

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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2.

Answer : (d) Reason : a, b, and c are valid criticisms of SWOT. SWOT does not have multiple levels of analysis. The SWOT analysis has been criticized for the issue that it only accounts for a single level of analysis. Answers a, b c, e are incorrect due to the explanation given above.

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3.

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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Answer : (b) Reason : Activity ratios measure how effectively a firm is using its resources I, e to say this reflects a

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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. 5.

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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6.

Answer : (d) Reason : A value chain is a linked set of values-creating activities beginning with basic raw material s coming from suppliers ,moving on to a series of value added activities involved in producing and marketing a product or service ,and ending with the distributor passing the final products into the hands of customer. (a) The assumption of value chain analysis is based on the belief that to divide firms activities into two major categories is incorrect.(b) The assumption of value chain analysis is based on the belief that, to acquire in-depth understanding of firms capability is incorrect.(c) The assumption of value chain analysis is based on the belief that, to create competitive advantage is incorrect.(e) The assumption of value chain analysis is based on the belief that it is a process of internal analysis is incorrect.

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7.

Answer : (e) Reason : In a Fragmented Industry there are large number of small medium sized companies Ex. Video rentals, where high profits may lead to new players coming into the industry and product differentiation is low. (a) Low barriers to entry in case of a fragmented industry is incorrect.(b) High barriers to entry in case of a fragmented industry is incorrect.(c) High barriers to entry; with low product differentiation in case of a fragmented industry is incorrect.(d) Low barriers to entry; with high product differentiation in case of a fragmented industry is incorrect.

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8.

Answer : (b) Reason : Promotion is not a major stage in the process of technological development.All other options are not true.

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9.

Answer : (e) Reason : Options (a), (b) ,( c) and (d) are valid statements statement that supports the choice of structure as a function of strategy.

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10.

Answer : (c) Reason : A vision describes aspiration for the future ,but without specifying the means to achieve those desired ends. A mission statement verbalizes the beliefs and direction towards which organization moves in future. (a) Objectives are guide points in defining standards of what the organization should accomplish in providing direction and motivation.(b) Goal is a major planning component that is a future target or end result than an organization wishes to achieve.(d) Policies are general guidelines for decision-making.(e) Procedures are the guides to action that explain in detail the manner in which activities are to be performed.

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11.

Answer : (a) Reason : A conglomerate structure is sometimes called a holding company. Multinationals typically operate in this way, to control the operations of their subsidiaries in which they hold a controlling stake.

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12.

Answer : (d) Reason : According to Porter, Procurement is not a support activity in a manufacturing firm's value chain. It is a primary activity in the value chain. Infrastructure, Marketing and sales, Human resource management and Finance are considered as the supporting activities.

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13.

Answer : (a)

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Reason : Natural advantage is the advantage that a country has, to produce because of readily available natural resources in its territory 14.

Answer : (b) Reason : A penetration price strategy describes the pricing policy where the company brings a product to the market with a remarkably low price, to gain market share

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15.

Answer : (c) Reason : According to a cost-plus price strategy, a company sets its product pricing in terms of its particular financial goal, which could be the profit margin or return on investment

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16.

Answer : (a) Reason : The major sourcing strategies that companies pursue as they move into foreign buying as part of procurement strategy, includes using foreign subsidiaries or business agents, establishing international purchasing offices, and integrating & coordinating worldwide sourcing.

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17.

Answer : (c) Reason : Grand strategy is otherwise termed as a statement of means that indicates the method for achieving the objectives and it provide a basic direction to the company’s business. All other options refer to different strategies like growth etc.

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18.

Answer : (b) Reason : In the GE Nine - Cell Planning Grid, a company’s business units are rated on business strength and industry attractiveness.(a) BCG developed a model for managing a portfolio of different business units(or major product lines). This matrix takes into consideration the Market growth rate & relative competitive position.(c) Arthur D. Little approach takes into consideration the business environment and business strength.

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Answer : (d) Reason : 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 (a) 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.(b) Backward integration takes place when a firm assumes a function previously provided by a supplier (c) 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.(e) Vertical integration involves effecting growth through the production of inputs previously provided by suppliers or through the replacement of a customer role by disposing ones own inputs

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Answer : (d) Reason : Two reasons for mergers and acquisitions is to increase capacity utilization through accessing new markets for the products, and to gain new technology, which gives a competitive edge in the industry.

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21.

Answer : (b) Reason : Product champion supports it through many organizational obstacles. Answers a, c, d, e are incorrect since they do not pertain to the question in discussion

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Answer : (c) Reason : Special business unit has great deal of strategic importance and low operational relatedness to the existing business. The special business unit should have specific objectives and time horizons. Answers a, b, d, e are incorrect since the options do not have high strategic importance and low operational relation to the existing business.

23.

Answer : (b) Reason : The entrepreneurial characteristic that makes an entrepreneur focus on opportunities and not on the problem is the ability to identify potential venture opportunities. Entrepreneurs are goal oriented and have a strong impact on the emerging culture of an organization. Answer a, c, d, e are incorrect since they do not pertain to the question in discussion.

24.

Answer : (b)

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Reason : Existence deals with problem of obtaining customers and delivering the promised product or service in a small business development stage. The organizational structure in the existence substage is simple. Answers a, c, d, e are incorrect since they do not pertain to the question in discussion. 25.

Answer : (b) Reason : Defensive centralization deals with retaining all decision making authority at the top management level. The top management of a not-for-profit organization must always be alert to the sponsors' view of an organizational activity. Answers a, c, d, e are incorrect since they do not pertain to retention of all decision making authority at the top management level.

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Answer : (c) Reason : Strategic piggybacking deals with subsidizing the primary service programs. The program is related typically in some manner to the not-for-profit's mission. Answers a, b, d, e are incorrect.

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27.

Answer : (b) Reason : Ratio analysis deal with the calculation of ratios in the financial analysis. Ratio analysis is done to identify possible financial strengths or weaknesses. Answers a, c, d, e are incorrect since they deal with other than ratios.

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28.

Answer : (a) Reason : Gross profit margin deals with gross profit figures of the profit and loss statement. Gross profit margin indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Answers b, c, d, e are incorrect since others do not deal with gross profit figures.

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29.

Answer : (b) Reason : The first step in the strategic decision making process is to evaluate current performance results. One way to evaluate performance is to examine profitability. Answers a, c, d, e are incorrect since the first step to review the existing and then proceed to take strategic decisions

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30.

Answer : (d) Reason : The first step is to scrutinize historical income statements and balance sheets. Historical income statements and balance sheet statements provide most of the data needed for financial analysis. Answers a, b, c, e are incorrect since they are not pertaining to the first step.

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Section B : Problems 1.

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

• • • • •

A customer purchases a large portion of the seller’s product or service A customer has the potential to integrate backward by producing the product itself Alternate suppliers are plentiful because the product is standard or undifferentiated Changing suppliers costs very little The purchased product represents a high percentage of a customer’s costs, thus providing an incentive to shop around for a lower price

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

2.

Porter's three generic strategies for competition within an industry are: Cost Leadership Differentiation Focus Porter argues that to be successful, a company must achieve one of the generic competitive strategies. Otherwise, the company is stuck in the middle of the competitive marketplace with no competitive advantage and is doomed to below-average performance. Although Porter agrees that it is possible for a company to achieve low cost and differentiation simultaneously, he argues that this state is often temporary. However, Porter does admit that many different kinds of potentially profitable competitive strategies exist. Although there is generally room for only one company to successfully pursue the mass market cost leadership – because it is so dependent on achieving dominant market share, there is room for an almost unlimited number of differentiation and focus strategies – depending on the range of possible desirable features and the number of identifiable market niches. Quality, alone, has eight different dimensions – each with the potential of providing a product with a competitive advantage. Most entrepreneurial ventures follow focus strategies. The successful ones differentiate their product from those of other competitors in the areas of quality and service, and they focus the product on customer needs in a segment of the market, thereby achieving a dominant share of that part of the market. Adopting guerrilla warfare tactics, these companies go after opportunities in market niches too small to justify retaliation from the market leaders. So, no one competitive strategy is guaranteed to achieve success. Each of the generic strategies has its risk. Both of the major industry players in airplane manufacturing have different generic strategies at different points of time. Their competitive tactics involve timing tactics and market location tactics too. Boeing’s Sonic Cruiser represents a Differentiation and Focus strategy for a first mover (or pioneer) advantage. The product is for a different market niche and focused towards a market segment. On the other hand, Airbus' 380X is represented by cost leadership and focus strategy for achieving cost leadership in production of larger airplanes with a focus for a general market.

3.

Time frame for airplane manufacturing design and development takes place for longer phases. They extend for years or ever decades. There is no fixed interval time for design and development of an airplane. As and when the manufacturers identify the potential niches in the market they tend to cater to that market with a new product design and development of an airplane for such market niche in the shortest possible time interval to have the first mover advantage. Core competence of airplane design and development depends on three tests: Customer Value – The competency must make a disproportionate contribution to customer perceived value. Competitor Unique – The competency must be unique and superior to competitor capabilities. Extendibility – The competency must be something that can be used to develop new products or services or enter new markets. Tactical competency on the other hand involves: Timing Tactics – When to Compete – First mover advantage – industry leader, gain learning curve effect to move towards cost leadership position, earn temporary high profits, and set industry standards. Late mover advantage – imitates technological advances of

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others (R&D costs low), and keeps risks down. Market Location Tactics – Where to Compete – Offensive Tactics – Defensive Tactics. < TOP >

4.

Rockwell is, truly, at the crossroads. Competition is intensifying, and its choice of strategy will play a critical role in its survival. Obviously, the decline in Rockwell’s share in the central-air-conditioning business from 55 to 40 percent is a wake-up call. Malhotra has legitimate reason to wonder about the efficacy of the traditional approach to strategy planning in his company. Perhaps the conventional way of looking at the competition through the rear-view mirror, and doing just enough to stay ahead will no longer do. If I were Malhotra, I would not be too worried about the strategies being adopted by my company carefully. To find out whether our products and services meet market needs. To find out whether our products and services meet market needs. To find out whether customer satisfaction is the driving- force behind all our activities. I’d also revisit the quality paradigm. A monopolistic position is a breeding-ground for poor quality. Quality, like personal health, is a matter of routine. It requires continuous nurturing even if a company merely wishes to maintain the status quo. In the absence of such initiatives, the ability to compete will, as a rule, decline. Are continuous improvements in quality a strategic a priority at Rockwell? While quality is a factor that will contribute to customer satisfaction, traditional strategy-planning exercises are rarely based on customer expectations. Instead, the activities of its competitors remain the company’s primary focus. That’s why it fails. There is also a relationship between innovation and continuous improvement. All companies need to innovate; however, innovations come about only once in a while. The trouble with most of them is that they become outdated as soon as they are introduced. Given that most companies have access to the same quantum and kind of resources, there are few innovations that result in a sustainable competitive advantage. To retain its competitiveness, a company needs to couple innovation with incremental improvements. Only then can priorities like quality, cost and delivery be sustained. Strategic business planning should be the result of disciplined strategic thinking, which starts with an analysis of customer-needs, industry structure, and competitive strategy, and moves on to an understanding of the company’s internal workings. Malhotra and his core team need to do this, they will be able to identify what they need to focus on to succeed. < TOP >

5.

In the rapidly changing scenario, the concept of core competence, which was revolutionary in the eighties, is a matter of the past. All over the world, we see huge, complex organizations successfully operating for years in many areas requiring many different competencies-not just one- works for the benefit of customers, investors and employees. The only indispensable core competence appears to be the ability to think strategically, and to align the company’s operation’s in such a way as to optimize the benefits of the strategy. Hence, it is not feasible to link strategy-planning at Rockwell to its core competency because there seem to be not one, but six core competencies of Rockwell and the management is not sure about which competency to focus on. Rockwell’s perception of its core strengths is not accurate. Finance, for instance, is not really its strength. The company could increase its revenues by offering a more flexible credit-schedule, while increasing the efficiency of its working capital utilization, could well turn away potential customers, who wish to pay for a project only after it has been completed and not in stages. Most of the strengths listed by the senior management team are not core competencies; they are merely positive attributes. Only those that result in adding value- from the customer’s perspective, not the company’s- are core competencies. Understanding them should be the basis of strategydevelopment at Rockwell.

6.

There is an alternative to the traditional approach to strategy-formulation and that is the competency-based approach to strategyformulation. The managers at Rockwell are not asking the right kind of questions. The questions that need to be answered are: Can Rockwell come up with a distinctively superior product strategy to increase customer satisfaction? Can it generate enough repeat orders and become the customer’s first and most preferred choice? Having done its homework along these lines, Rockwell’s senior management team should look not just at Primecool or other close rivals, but also at potential competition from the world’s best air-conditioning companies. It must think in terms of what Rockwell must do differently over the next three years to gain a sustainable competitive advantage. Perhaps it should invest in in-house R&D activities not only mean adaptation of technologies from elsewhere, but also the creation of new-generation products, systems and services. Such investments pay off handsomely over a 10-12 year period. Unfortunately, Indian corporates are not dedicated to the advancement of science and technology. Our interest is limited to buying tried-and-tested technologies from elsewhere. There is, of course, nothing wrong in this. It makes good commercial sense, but we must remember that we will not have access to advanced technology. What we get is what the technology-provider has already used to maximize his benefits, not the latest. This is where the need to develop in-house R&D becomes critical. There is, simply, no option if you wish to be the customer’s first – and the most preferred-choice in the global market place. Another glaring lacuna in the process is that it does not factor in the possible threat that the company may face from innovations in the air-conditioning business. Innovations happen suddenly-often, without notice-and when they strike, the impact on a business is dramatic. It is only by tracking changes in technologies-even those remotely linked to air conditioning that the company can maintain its leadership. However, at Rockwell, technology-management is conspicuous by its absence, which is a risk that will imperil it, sooner rather later. Malhotra can address this either through collaborations with global technology-providers, or through in-house research. There is little evidence to show that he focused on either. There seem to be two dilemmas confronting Malhotra. One concerns the merits and demerits of increasing manufacturing-capacity. The other deals with the contrast approaches of the traditional and the competency-based methods of strategy planning. There are three

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ways in which Rockwell can address the situation even as it enhances the efficacy of its strategy-development process by looking for value-drivers. The first option is outsourcing. Rockwell can expand its capacities by identifying a contract-manufacturer, which should help it increase its output of unitary air-conditioners without making sizeable investments. This, coupled with aggressive marketing, should enable the company to increase its share in the unitary air-conditioning market. The second requires the company to diversify into the manufacture of water-coolers and refrigerators- where Rockwell can leverage its skills and brand-equity- to build new business. Again, the company can choose between manufacturing these products itself and outsourcing them from contract-manufacturers. The third option requires the company to adopt the joint-venture route. Given the growth in customer air-conditioners segment, a separate company to target it could be created, perhaps as a joint venture a leader in the unitary and ducted air-conditioner markets. But, before doing so, Rockwell needs to work out the modalities of such a venture. < TOP > 7.

Star bucks always believe in selling experience rather than a concepts or products. Collaborating with the reputed recording companies had given them the strategic advantage both for the recoding companies and the Starbucks. Music and coffee are like complimentary to each other. Music is to relax and coffee is to reduce physical strain so, selling of music make more sensible, and this strategy really worked out for Starbucks. < TOP >

8.

The strategy of selling music CDs and the installations of Kiosks in the retail out lets of star bucks attracted more customers as Music is to relax and coffee is to reduce physical strain so, selling of music make more sensible, and this strategy really worked out for Starbucks. < TOP >

Section C: Applied Theory 9.

Stability strategies – A corporation may choose stability over growth by continuing its current activities without any significant change in direction. Although sometimes viewed as a lack of strategy, the stability family of corporate strategies can be appropriate for a successful corporation operating in a reasonably predictable environment. They are very popular with small business owners who have found a niche and are happy with their success and the manageable size of their firms. Stability strategies can be very useful in the short run, but they can be dangerous if followed for too long. Some of the more popular of these stability strategies are: Pause/Proceed with Caution Strategy – it is a temporary strategy to be used until the environment becomes more hospitable or to enable a company to consolidate its resources after prolonged rapid growth. No Change Strategy – a choice to continue current operations and policies for the foreseeable future. The strategy is more to do with if the corporation has probably found a reasonably profitable and stable niche for its products. Profit Strategy – to do nothing new in a worsening situation. Act as though the company’s problems are only temporary. Management defers investments and or cuts expenses to stabilize profits during this situation. < TOP >

10. Rationale behind Joint Ventures. 1. To augment insufficient financial or technical ability to enter a particular line of business 2. To share technology and/or generic management skills in organization, planning, and control. 3. To diversify risk 4. To obtain distribution channels or raw materials supply 5. To achieve economies of scale 6. To extend activities with smaller investment than if done independently 7. To take advantage of favorable tax treatment or political incentives (particularly in foreign ventures) In view of alternative forms of business relationships, a basic issue is why the use of joint ventures versus other forms of contractual arrangements is justified. The literature suggests that the underlying theoretical justification for joint ventures lies in the transaction cost theory of the firm. Every exchange between productive agents involves transaction costs. The benefits of interaction arise from using resources efficiently, but resources are used up by the organizing activity itself through obtaining information on exchange opportunities, negotiating and enforcing contracts, and so on. The exchange and organizational patterns viewed in the marketplace are responses to varying levels of transaction costs, which affect the allocation of resources in society. According to the theory, resource misallocation cannot exist in the 14

absence of transaction costs. Complementary production refers to the joint use of assets or inputs to create products which cannot be unambiguously attributed to any single input. Nor can the inputs simply be summed to yield the total output of the process, that is, synergy. A complementary asset is one whose value in a production process depends on its combination with other assets or a specifically chosen technology. The difficulty arises when these inputs are owned by different firms. In general, an asset’s productivity increases with its specialization to other inputs used in the production process. However, specialization also increases the risk of loss to the owner of the complementary asset if the other inputs are withdrawn. Complementary or composite quasi-rent is the economic term for the investment cost of the complementary asset which is nonrecoverable if the other inputs with which it is used are withdrawn. Thus, the owners of the other inputs, by threatening to remove their inputs, can expropriate the owner of the complementary asset by taking a larger share of the return from the process (which, by definition, cannot be unambiguously attributed to any single input). Input owners will choose the organizational form which minimizes transaction costs. Long-term explicit contracts and common ownership of the complementary assets are possible solutions to the problem. However, a flexible contract may result in litigation for interpretation. A comprehensive contract is costly both to write and to enforce. These costs may outweigh the benefits of the contract. Business complexity increases the number of contingencies that might arise, thus increasing the cost of enumerating contingencies, the risk of omitting to specify contingencies, and costs of monitoring in a contractual relationship. Finally, the greater the frequency of exchange of inputs, the greater the likelihood of joint ownership. The prospect of recovering the investment cost of specialized assets increases with the frequency of the transaction. In a contractual relationship, repetitive activity would mean repetitive contracting and thus higher contracting costs. The specialized organizations required in common ownership are easier to justify for recurring transactions than for identical transactions occurring only occasionally. In some cases, common ownership might extend to complete merger, but in general, joint venture is appropriate where: 1. Complementary production activity involves only a limited subset of the firms’ assets. 2. Complementary assets have limited service life. 3. Complementary production has limited life. Joint ventures are a form of a long-term contract. Like all contracts they are subject to difficulties. As circumstances change in the future, the contract may be too inflexible to permit the required adjustments to be made. There is also evidence that in many joint ventures, the participants early become enamored of the idea of the joint activity, but do not spend sufficient time and effort to lay out a program for implementing the joint venture. About 70 percent of joint ventures was found to fall short of expectations or be disbanded. Other studies suggest that on average joint ventures do not last as long as one half the term of years stated in the joint venture agreement. An independent survey by the present authors uncovered many examples of joint ventures that came apart either before they started or early into the venture. Some of the reasons for the abortive lives of joint ventures are: 1. The hoped-for technology never developed. 2. Preplanning for the joint venture was inadequate. 3. Agreements could not be reached on alternative approaches to solving the basic objectives of the joint ventures. 4. Managers with expertise in one company refused to share knowledge with their counterparts in the joint venture. 5. Management difficulties may be compounded because of inability of parent companies to share control or compromise on difficult issues. < TOP >

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