Mb311- Jan 06

Question Paper

Business Policy & Strategy (MB311) : January 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.

Firms usually source raw material from external suppliers and process them to produce the desired product. However, some firms may attempt to produce the raw material or some components on their own. For example, Levi’s manufactures the cloth required for making jeans. Which of the following best describes this strategy? (a) Acquisition (c) Backward integration (e) Forward integration.

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(b) Patent protection (e) Protection rights.

(c) Tax laws

(b) Technological (e) Technocommercial.

(b) Imitability (e) Delicacy.

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(c) Political-legal < Answer >

(c) Replicability

(b) Tacit knowledge

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(c)

(e) Protractor knowledge.

Which of the following is not a criticism against the SWOT analysis? I. II. III. IV.

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(c) Premise control

The connections between the way one value activity is performed and the cost of performance of another activity are known as (a) Explicit knowledge Linkages (d) Respected activities

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

The speed with which other firms can understand the relationship of resources and capabilities supporting a successful firm’s strategy is known as (a) Durability (d) Transparency

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(b) Executive leadership (d) Prospective leadership

Which of the following forces regulate the exchange of materials, money, energy, and information? (a) Economic (d) Sociocultural

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Technological variables in the societal environment include (a) Inflation rates (d) Rate family formation

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(c) Simple structure

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

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(b) Functional structure (e) Geographic structure.

The directing of activities towards the accomplishment of corporate objectives is referred to as (a) Transformational leadership (c) Managerial leadership (e) Proactive leadership.

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(b) Horizontal integration (d) Diversification

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

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The generation of lengthy lists. Ambiguity of words and phrases. No weights to reflect priorities. Multiple levels of analysis.

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

(b) Only (IV) above (d) Both (II) and (III) above < Answer >

10. Unique market opportunity that is available only for a particular time is known as (a) Strategic niche (c) Strategic nuance

(b) Strategic window (d) Multiple window

(e) Multiple niche.

11. The examination of corporate strategy in terms of the company’s orientation towards growth is known as (a) Corporate parenting (c) Portfolio analysis (e) Secondary strategy.

(b) Directional strategy (d) Corporate synopsis

12. When a company grants rights to another company to open a retail store, using the franchiser’s name and operations, this is referred to as (a) Franchising (d) Production sharing

(b) Exporting (e) Partnering.

(a) Strategy formulation (c) Strategy manipulation (e) Strategy direction.

(c) Schedules

(d) Techniques

(b) Staffing

(c) Motivating

(d) Leading

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(b) Short-term orientation (d) Cognitive dissonance

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

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(b) Economic value added (d) Market driven philosophy

20. The confusion of means with ends occurs when activities originally intended to help managers attain corporate objectives, become ends in themselves. This is known as the phenomenon of (a) Goal displacement (c) Long-term orientation (e) Target achievement.

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(b) Dynamic industry expert (d) Cautious profit planner

19. The difference between the pre-strategy and post-strategy value for the business is referred to as (a) Market value added (c) Strategy value added (e) Differential value.

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(e) Participating.

18. A challenge-oriented executive whose responsibility is to save a company is known as a(n) (a) Turnaround specialist (c) Analytical portfolio manager (e) Strategic director.

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(e) Reviews.

17. Hiring new people with new skills, firing people with inappropriate skills, and training existing employees are a part of the function of (a) Directing

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(b) Strategy implementation (d) Strategy evaluation

16. The various activities that must be carried out to complete a corporation’s programs are known as (b) Budgets

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(b) Dedicated manufacturing system (d) Transfer manufacturing system

15. The sum total of the activities and choices required for the execution of a strategic plan is referred to as

(a) Procedures

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(b) Sole pricing (c) Skim pricing (e) Demand pricing.

14. Parts grouped into manufacturing families to produce a wide variety of mass-produced items form the (a) Connected manufacturing system (c) Flexible manufacturing system (e) Coordinated manufacturing system.

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(c) Licensing

13. The opportunity to take away the cream from the top of the demand curve with a high price while the product is novel and competitors are few can be referred to as (a) Parallel pricing (d) Penetration pricing

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(b) Product champion (e) Process specialist.

(c) Technology champion

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

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(c) Special business unit (e) Indirect integration.

23. Focusing on opportunities and not on problems, highlights the important entrepreneurial characteristic of

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I. A sense of urgency that makes them action oriented II. Ability to identify potential venture opportunities III. A detailed knowledge of the industry keys to success IV. Access to outside assistance (a) Only (I) above (c) Only (IV) above (e) (I), (III) and (IV) above.

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

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

(b) Existence

(c) Success

(d) Take-off

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

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(b) Current ratio (e) Asset ratio.

(c) Debt to equity ratio

29. The first step in the strategic decision making process is (a) (b) (c) (d) (e)

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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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(b) Ratio analysis (c) Revenue analysis (e) Financial analysis.

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

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(b) Strategic maneuvering (d) Strategic centralization

27. The calculation and analysis of ratios from data in financial statements is known as (a) Investment analysis (d) Income analysis

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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 (c) Strategic piggybacking (e) Strategic killing.

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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 – 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 case carefully and answer the following questions: 1.

Value added activities in Insurance sector provide competitive advantage. Substantiate in the light of given caselet. (9 marks) < Answer >

2.

Making use of porters five-force model analyze insurance industry. (6 marks) < Answer >

3.

The configuration and economies of the value chain has powerful effect on competitive scope. Discuss in the light of insurance industry.

(8 marks) < Answer > Service. That's likely to be single-most important plank on which private players in the insurance business are going to differentiate themselves from the public sector major, the Life Insurance Corporation (LIC). An initial look at the products being launched by HDFC Standard Life Insurance and ICICI Prudential Life Insurance does not show major differences in the product offerings of the private players and the LIC. Even the products have been christened similarly. So, if LIC has money back policies (its best-selling products), ICICI-Prudential calls its variant as ICICI Pru CashBak and HDFC Standard Life actually calls it Money Back. Says Pankaj Seith, Head of Marketing, HDFC Standard Life: "That's deliberate because when the company and the product is new, a customer may not be able to appreciate too innovative a product. We will soon introduce more innovative products." The innovations come in terms of the flexibility private players' offer; the way products can be customised to suit individual requirements. For instance, ICICI Prudential, offers a set of basic products to which a consumer can add health and term (maturity period) riders and design his policy depending on his or her needs. Says Saugata Gupta, Marketing Head, ICICI Prudential: "the basic philosophy of our product design is to give the consumer freedom to choose and pay only for what he needs." So, ICICI has five basic products, which come with four add-on riders like Level Term Cover (double the cover), Critical Illness Benefit, Accident and Disability Benefit, and Major Surgical Assistance Benefit. The idea: a customer who buys a basic product (say, a pizza), and depending on his age and need, he can take the add-on riders (toppings) by paying a nominal premium. HDFC Standard Life provides similar flexibility. For instance, a customer may not take a critical illness benefit if he's young and not married. But as he gets married, he may like to double his cover by taking a level term cover. As he grows old, he may take the critical illness benefit and the major surgical assistance benefit. Similarly, someone having a credit card may not need an accident benefit. A common plank that cuts across spectrum: need-based selling. What's more, the products launched by the private players are competitively priced. LIC, though taking note of competition, doesn't seem to be too impressed with the product offerings. Says P.N. Subramanian, Executive Director (Marketing), LIC: "The add-on riders provide a lot of flexibility to a product. Right now, we may not have products that match on a product-to-product basis with those being offered by private players. But we have 61 schemes which can be combined to offer customized solutions." LIC believes that a customer's prime concern in an insurance product is the kind of cover he's getting and how much he is likely to earn upon maturity. "In some cases, while the premium installment could be less than ours, upon maturity we offer a better maturity value," says Subramanian. "They promise guaranteed additions at the end of 20 years; we offer the same. They promise guaranteed loyalty additions; we don't but we have a track record of providing loyalty additions, "adds Subramanian. Any new player entering the insurance business would try to differentiate its product offering, but it's in the service delivery system, which could become the key differentiator. Both pre-sell and post-sell service. For instance, the agents (private players euphemistically call them consultants or insurance advisors) are being specially trained---after they get the 100-hour mandatory training from institutes like NIS SPARTA, ILFS-promoted Schoolnet, College of Insurance---to customize solutions after assessing individual needs. Companies are also investing heavily in back-end infrastructure, especially IT systems. HDFC Standard Life, for instance, will connect all its branches that will allow for real-time access, enable its consultants with MIS support and premium calculator in a specially designed 'Consultants Corner', and set up call centers. ICICI Prudential is also putting in place a host of systems to provide superior customer service. LIC has also undertaken a major exercise to jack up its 4

service. Already, it has started IT subsidiary in eight metropolitan cities.

Caselet 2 Read the case carefully and answer the following questions: 4. To what extent is restyling of cars important for Ford to sustain the market share? (7 marks) < Answer > 5.

Is Ford's basic strategy correct?

(8 marks) < Answer > In the 1990s, Alex Trotman, Ford Motor's current CEO, has faced the problem of how best to compete in an increasingly competitive car industry. On the one hand, Ford like other large U.S. carmakers, has been forced to find ways to reduce costs to compete effectively against low-priced competitors from Japan and Europe. On the other hand, Ford has to differentiate its cars and make them and will buy them rather than the cars of its rivals. To reduce costs, Ford has forged ahead with a global cost-cutting plan named Ford 2000. The plan includes producing very similar models of cars and trucks that can be sold globally to customers in all the countries of the world in which Ford does business. It also means centralizing all car design activities at five global design centers to reduce costs. Finally, the plan reduces the number of different car platforms (the frames on which the car models are based) and the number of component parts, again to reduce costs. For example, Ford used to use more than thirty different kinds of car horns. Now it employs only three, which it buys in bigger volume from a few manufacturers. Ford projects a $ 1 billion saving in engineering costs and $11 billion in reduced plant investment costs from this plan. To make Ford's products unique, CEO Trot man also authorized a radically new program of car styling. Throughout the 1970s and 1980s, Ford had been known for the big, boxy, plain look of its cars, a look that had changed little in decades. From the mid 1980s on, Ford began to restyle all its cars. Trot man's multibillion dollar program culminated in the radical redesign of the best-selling car in the United States, the Ford Taurus, which Ford launched in the fall of 1995. The accentuated curves and oval shape of the Taurus reflected the redesign of Ford's other cars, such as the Lincoln Continental, the Mustang, and the Mondeo, Ford's first world car. By 1996, however, it became clear to Trot man and other top Ford executives that the dual push to reduce costs on a global level while launching a whole new series of redesigned global cars was not working. The enormous development costs of the new cars had raised costs dramatically and forced up car prices. The typical well-equipped Taurus, for example, was retailing for more than $20,000, more than $3,000 above the old model, and customers were experiencing sticker shock. In essence, all the cost savings brought about by the Ford 2000 plan were being eaten up by the high costs associated with its push to produce a radically new, differentiated line of cars. By mid 1996 the Honda Accord had once again become the best selling car in the United States, Ford's profits had plunged 58 percent, its stock price was flat; and, many analysts were worried that Ford's new strategy was not working. In May 1996, Trot man announced a new plan to bring together the cost and differentiation sides of Ford's businesslevel strategy. Trot man argued that Ford's basic strategy was correct and that all the benefits of the launch of new cars and the saving in costs would be reaped well into the next century. In the short term, however, to boost sales Ford announced that it would bring out stripped-down models of the Taurus and other cars to reduce price and attract more customers. Furthermore, recognizing that its new cars were costing too much to develop, Ford announced that it would close down two of its global design centers and further consolidate its design program to reduce development costs. Trot man and his top management team have continued to search for ways to align both the cost and differentiation sides of the business-strategy equation to provide Ford's customers with a well-designed car at a price they are willing to pay. By the fall of 1996, there were signs that this was paying off, as sales of Ford's car rose sharply.

Caselet 2 Read the case carefully and answer the following questions: 6.

Discuss how auction can be used as an effective tool for divestiture of a company?

7.

Describe the advantages that auction offers a seller during the divestiture process.

(6 marks) < Answer > (6 marks) < Answer > Sierra Pacific's roots go back 147 years to the California Gold Rush and the discovery of rich silver and gold deposits on the Comstock Lode. The company's Farad Hydroelectric Plant, built alongside the Truckee River in 1899, was the first electric generating plant on the eastern slope of the Sierra Nevada. Mining interests bankrolled the project so they could pump water out of the Virginia City silver mines as the mineshafts were sunk deeper and deeper into the earth. The Virginia City electric distribution system - Nevada's first -- was one of only a handful nationwide designed by genius inventor Thomas Alva Edison and for electricity grew quickly as Nevada's mines prospered in the early 1900s and more pioneers migrated to the Silver State. Reliance on imported power lasted until the 1960s by the time Sierra Pacific Power was incorporated from an amalgamation of numerous predecessor companies in 1928, electricity was 5

purchased from other utilities and "imported” to northern Nevada over high voltage electric transmission lines. Beginning in 1963, the company started constructing its own natural gas and oil-fired power plants, reducing its dependence on imported power. Coal-fired generation was added to the electric mix in the 1980s. Today, Sierra Pacific's customers are served by a combination of imported power and electricity produced by the company's three major power plants. The region's first natural gas pipeline was constructed to deliver fuel to the Tracy Power Plant east of Reno. Sierra Pacific was able to enter the natural gas distribution business in the Reno-Sparks area. The company was already well established as the water provider for Reno-Sparks. Pacific Power's common stock was first traded on the New York Stock Exchange in 1968. Sierra Pacific Resources, the holding company for Sierra Pacific Power, was formed in 1984. Mining still accounts for a significant portion of Sierra Pacific's electric sales as it did when the Farad hydroelectric plant began generating electricity at the turn of the century. However, Nevada's rapidly growing economy is becoming increasingly diversified as new companies take advantage of the state's favorable tax structure and probusiness environment. Sierra Pacific Power has served customers in northern Nevada and northeastern California for over 140 years and Nevada Power has served Las Vegas and southern Nevada since 1906. Nevada Power and Sierra Pacific Resources merged in July 1999 to create one of the fastest growing energy companies listed on the New York Stock Exchange. Their service area covers over 54,531 'square miles of the fastest growing state in the U.S. Sierra Pacific's vision is to create a premier distribution, transmission and energy services company. Sierra Pacific and Nevada Power merged in 1999 creating a premier utility distribution, transmission and energy services company serving approximately 1 million customers. In November 1999 Sierra Pacific Resources and Enron Corp. entered into a purchase and sale agreement for Enron's wholly owned electric utility subsidiary, Portland' General Electric (PGE). As a requirement, of the merger between Sierra Pacific and Nevada power, Sierra Pacific Resources has planned for the divestiture of, the electric generating facilities owned by Sierra Pacific and Nevada Power. Sierra Pacific Resources and its wholly owned subsidiaries, Sierra Pacific Power Company and Nevada Power Company agreed for divestiture of its 2900 MW of power generation facilities. Power plants in Southern and Northern Nevada. Power plants offered for sale include the Clark, Sunrise, Reid Gardner, and Harry Allen facilities in Southern Nevada, and the Valmy, Fort Churchill, Tracy and Pinion Pine facilities in Northern Nevada. "These plants are valuable assets with great profit potential," said Jack Byrom, director of strategic business development for Sierra Pacific Resources. "They will provide their new owners with both a substantial regional presence in the fastest-growing utility market in the nation and interconnections to many of the major energy markets on the West Coast and in the Great Basin region." Byrom added that the outstanding performance of these plants, coupled with their strategic location in the West, places them in an excellent position to take full advantage of the new competitive market for power generation. By purchasing generation assets in both Northern and Southern Nevada, a company can enhance their value by providing access to multiple markets from various delivery points. Each of the facilities offers a multitude of features including access to attractive commercial markets, locations close to major transportation corridors - including railways, operational flexibility, a highly skilled workforce and site-expansion capabilities. Preliminary information regarding the facilities and the auction process was sent to 600 potential bidders. The auction of the facilities will consist of a two stage, sealed-bid process. During the first stage of the auction, Sierra Pacific Resources will be seeking non-binding proposals for each of the asset bundles. Potential bidders may provide proposals for anyone or a combination of the seven asset bundles. Currently, the first stage bids are scheduled to be due in April. Sierra Pacific Resources intends to complete the sale and transfer of its asset bundles by early 2001.

END OF SECTION B

Section C : Applied Theory (20 Marks) 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. 8.

In a dynamic business environment explain how culture is related to values. (10 marks) < Answer >

9.

‘Each of the short-term strategies must form one of the key blocks to build the long term “building”. To achieve this the annual objective should be consistent and realistic. Discuss the consistency in annual objectives and elaborate the benefits. (10 marks) < Answer > END OF SECTION C END OF QUESTION PAPER

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Suggested Answers

Business Policy & Strategy (MB311) : January 2006 Section A : Basic Concepts 1.

Answer : (c) Reason : Levi’s manufacturing the cloth required for making jeans, the process is termed as backward integration which takes place when a firm assumes a function previously provided by a supplier.

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2.

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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3.

Answer : (b) Reason : Executive leadership directs the activities toward accomplishment of corporate objectives. Executive leadership sets the tone for the entire corporation. Answers a, c, d, e are incorrect since, transformational leadership deals with the activities to turnaround a business from wrong direction to align towards the objectives. Managerial leadership deals those activities pertaining to operations of the enterprise.

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4.

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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5.

Answer : (b) Reason : Patent protection is a technological variable in the societal environment. Improvements in technology result in advances in several areas, including the manufacturing, agricultural, and service sectors. Answers a, c, d, e are incorrect since, inflation rates pertain to economic environment, and tax laws relate to financial and legal environment.

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6.

Answer : (a) Reason : Economic forces regulate the exchange of materials, money, energy, and information. Economic forces include GDP trends, unemployment levels, and money supply. Answers b, c, d, e are

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incorrect since, technological forces regulate the product environment. 7.

Answer : (d) Reason : The speed with which other firms can understand the relationship of resources and capabilities supporting a successful firm’s strategy is known as transparency. Transparency is a component of imitability. Answers a, b, c, e are incorrect due to the understandability factor described in the correct answer.

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8.

Answer : (c) Reason : Linkages enables the firms to establish connections between the way one value activity is performed and the cost of performance of another activity. The examination of linkages lends itself to the enhancement of a competitive advantage. Answers a, b, d, e are incorrect since, they do not tend towards linkages nor establish connections.

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9.

Answer : (b) 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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10. Answer : (b) Reason : A strategic window is a unique market opportunity that is available only for a particular time and is served by the competitors as soon as possible. The first firm through a strategic window can occupy a propitious niche and discourage competition. Answers a, c, d, e are incorrect due to the above explanation.

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11. Answer : (b) Reason : Directional strategy emphasizes the company’s orientation towards growth. One issue of directional strategy is the company's growth strategies. Answers a, c, d, e are incorrect due to the explanation as given for directional strategy.

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12. Answer : (a) Reason : Granting rights to another is through franchising. The franchisee pays the franchiser a percentage of its sales as a royalty. Answers b, c, d, e are incorrect, since others forms do not grant rights.

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13. Answer : (c) Reason : Skimming (in terms of price) the market means high price for a novel product with few competitors. Skim pricing may be an appropriate option for new-product pioneers. Answers a, b, d, e are incorrect since they do not form part of the explanation.

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14. Answer : (c) Reason : Flexible manufacturing system uses various grouped parts to produce wide variety of mass produced items. Flexibility allows for more efficiency in operations. Answers a, b, d, e are incorrect since others do not produce wide variety of mass produced items through various grouping of parts.

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15. Answer : (b) Reason : Strategy implementation stage deals with the requirements after formulation. Strategy implementation is a key part of strategic management. Answers a, c, d, e are incorrect since they do not deal with the stage after formulation.

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16. Answer : (a) Reason : Procedures are the activities that must be carried out to complete a strategic program. Procedures ensure that the operations will be

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consistent over time. Answers b, c, d, e are incorrect since, they do not form the activities to complete a strategic program. 17. Answer : (b) Reason : Staffing function deals with people skill sets, hiring, firing and training. The implementation of strategy affects human resource management priorities and a different use of personnel. Answers a, c, d, e are incorrect since they do not deal with the functions related to people.

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18. Answer : (a) Reason : Turnaround specialist is a challenge oriented executive who shoulder’s the responsibility to save a company. Weak companies in a relatively attractive industry may hire a turnaround specialist to save the company. Answers b, c, d, e are incorrect since, they do not form the challenge orientation nor shoulder the responsibility to save a company.

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19. Answer : (b) Reason : Economic Value Added is a concept that measures the difference between pre and post strategy implementation. EVA may replace ROI as the standard performance measure. Answers a, c, d, e are incorrect as they do not measure the difference between pre and post strategy.

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20. Answer : (a) Reason : Goal displacement refers to the concept of confusion of means with ends. Two types of goal displacement are behavior substitution and suboptimization. Answers b, c, d, e are incorrect since the concept is confusion of means and ends is goal displacement.

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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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22. 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.

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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.

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24. Answer : (b) 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.

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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

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authority at the top management level. 26. 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 : Caselets 1.

Every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. In competitive terms value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, a reflection of the price a firm product commands and the units it can sell. Value activities can be divided into two broad types, primary activities and Support activities. Primary activities are the activities involved in the physical creation of the product (In Insurance sector the product is service which is intangible) and its sale and transfer to the buyer as well as after sale assistance. In any firm, primary activities can be divided into five generic categories •

Inbound logistics

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Operations

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Outbound logistics

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Marketing and sales

Service • Support activities support the primary activity and each other' by providing purchased inputs technology, human resources and various firm wide functions. Firm infrastructure is not associated with particular primary 'activities but supports the entire chain. Value activities are therefore the discrete building blocks of competitive: advantage. How each activity is performed determines cost relative to competitors and also determine contribution to buyer needs and hence differentiation. With in each category of primary and support activities, there are three activity types that playa different role in competitive advantage. Direct: activities directly involved in creating value for the buyer, such as assembly, parts making, sales force operations, advertising, product design, recruiting etc. Indirect: activities that make it possible to perform direct activities on a continuous basis, such as maintenance, scheduling, operation of facilities, R&D, vendor record keeping etc. Quality assurance: related to quality aspects. Insurance sector offers "security" as the product, which is intangible. The very nature of service where in the role of primary activities which can add value to the service relatively has less scope, however marketing and sales, service activities try to give a tangible shape to the product in adding value through "marketing communication strategy", speedy settlements of claims (post sell service) etc. Products of insurance are complimentary in nature and are also in bundling mode. Complimentary products offering full range rather than leaving some of them to be supplied by others. Most of the firms offer many insurance services however some are prominent in specific segments. duet to their good marketing abilities in those segments. LIC offers 61 schemes each of them compliment the other if they are properly arranged and made into a bundle, which can cater, and may become more appealing to the buyer segment. The choice and selection of these products which are complimentary and bundling them will determine competitive advantage over other firms in the industry. < TOP >

2.

In any industry whether it is domestic or international, produce a product or service, the rules of competition are embodied in five competitive forces. •

The entry of new competitors

•

The threat of substitutes

•

The bargaining power of buyers

•

The bargaining power of suppliers

• Rivalry among existing competitors. The collective strength of these five forces determine the ability of firms in an industry to earn, and determine industry profitability as they influence the prices, costs and required investment of firms in an industry. If the five competitive forces and their structural determinants were solely a function of intrinsic industry characteristics then competitive strategy would rest heavily on picking the right industry and understanding the five forces better than competitors. If a firm can shape structure, it can fundamentally change an industry attractiveness for better or for worse. Strategies that change industry structure can be a double edged sword because a firm can destroy industry structure 11

and profitability as readily as it can improve it. (A new insurance product design that undercuts entry barriers or increase the volatility of rivalry, for example may undermine the long run profitability of an industry, though the initiator may enjoy higher profits temporarily or a sustained period of price cutting (premium reduction) can undermine differentiation. Insurance Industry five forces Entry Barriers: Low The services can be copies and are easily imitated due to the low proprietary learning curve, no patent protection Bundling, complimentary products are innumerable. Low cost of the product or service design pro government policies like deregulation of insurance industry in our country will automatically open ways for many MNC's. Bargaining power of suppliers: Low Relative absence of intermediaries. Potential threat of allied group of companies entering into the segment to offer insurance products. (Banks, Financial institutions etc.) Bargaining power of buyers: High Buyers' information levels are high. Though switching costs are relatively stable however once hooked up, he remains loyal buyer to sustain the policy. Initial service buying decision is complex, price sensitive (premium) Threat of Substitution: High Buyers' propensity to substitution is high. Since several institutions can also render similar or perhaps more beneficial services the threat for substitution is more. Intensity of rivalry: High Deregulation resulted in both general as well as captive insurance and in specific insurance segments. Competitions increased many firms on their own or with complimentary service with other firms in the form of JV are operating in the market. < TOP >

3.

Competitive scope can have a powerful impact on competitive advantage, because it shapes the configuration and economics of the value chain. Four dimensions of scope affect the value chain of a firm •

Segment scope

•

Vertical scope

•

Geographic scope

• Industry scope Segment scope: Differences in the needs or value chains required to serve different product or buyer segments can lead to a competitive advantage of focusing. For example the value chain required to serve corporate firms (captive insurance) is different from that required to serve small business or individuals. Vertical scope: Vertical integration defines the division of activities between firm and channel buyers. The activities that a firm can perform internally and what value activities a firm perform or purchase externally. In Insurance industry product design, communication strategy, target segment selections are all internal activities (presell). However inspection activities are outsourced from specific qualified professionals. (Doctors, engineers) Geographic scope: Geographic scope may allow a firm to share or co-ordinate value activities used to serve different geographic areas. Insurance sector depending on the vulnerability of geographic boundaries, potential risks associated with people, products or services in each segment, socialistic obligations, concerns are met with different products or bundle of packaged services. Which allow differentiation and distinctive competitive advantage. Industry scope: Achieved through coalitions. Coalitions are long-term agreements among firms that go beyond normal market transactions but fall short of outright mergers. Example of coalitions is Joint ventures. Coalitions are ways of broadening scope. Without broadening the firm to share activities. < TOP >

4.

Strategy, at all levels is important for an organization to keep its competence level. So, the strategy should be framed in such a way to attract customer groups. The plan of action that strategic that mangers adopt to use a company's resources and distinctive competencies to gain a competitive advantage over its rivals in a market or industry. This can be maintained by customer satisfaction. Customer's needs are desires, wants, or cravings that can be satisfied by means of the characteristics of a product or service. In order to satisfy customer needs of different customers, companies tend to differentiate their product to create a competitive advantage. All companies must differentiate their products to a certain degree in order to attract customers and satisfy some minimal level of needs. However, some companies differentiate their products to a much greater degree than others, and this difference can give them a competitive edge. But, in this case, Ford went beyond that level and forget the other influencing factors which tilt the customers 12

towards a particular product. Ford, with frequent switching of styles, where the product is quite complex, lead to increase in product costs. So, restyling of cars is not all that decisive after a certain extent. < TOP > 5.

Companies in an industry can pursue many different kinds of business-level strategies that differ from each other with respect to choice of product, market segment, product quality, technological leadership, pricing policy etc. As a re;mlt within most industries, strategic groups emerge, each of which is composed of companies pursuing the same generic strategy. The concept of strategic groups has a number of implications for business -level strategy. First, a company's immediate competitors are those companies pursuing the same strategy in its strategic group. Consumers tend to view the products of such enterprises as being direct substitutes for each other. Thus, a major threat to a company's profitability may arise primarily from within its own strategic group, not necessarily from the other companies in the industry pursuing different generic business-level strategies. So, the companies have a different standing with respect to competitive forces. Therefore, the basic strategy adopted by Ford is quite good but emphasis should be given to cost factor also. < TOP >

6.

Auction is an alternative method of selling a company. As a tool of divestiture, it has evolved over the past few years and is used very effectively with high visibility companies. Merger and acquisition auction is usually applicable to the divestitures of divisions of both large and small public companies. Just as any other methodology used in the sale of a business, sellers should be aware of a number of factors before committing themselves to the use of this technique In the case of Sierra pacific the auction consisted of two stages, Sealed bid process At the first stage Sierra Pacific resources will be sold for non binding proposals for each of the assets, potential bidders may provide proposals for anyone or a combination of the seven asset bundle. < TOP >

7.

An auction offers a seller the following advantages: (1) efficacy, (2) simplicity, (3) control and (4) visibility. Efficacy An auction makes it possible to attract the greatest number of interested parties into the activity in the minimum possible time span, lowest possible selling cost, and with a minimum business interruption. Simplicity By approaching select target buyers, an auction eliminates the slower, more complicated method of seeking a buyer. Control The seller is able to control in a better way the momentum of a particular transaction because of the inherent nature of an auction (take it or leave it). Early setting of time deadlines and ability of the seller to meet its target for dissemination of information to the buyers enable him to control the timing and response in a competitive atmosphere, thereby eliminating bidder delays. If the bidder fails to respond in time, he stands to lose not only the investment opportunity, but also the time, effort, and dollars he has invested to examine this opportunity. Visibility Companies that are divesting often go "public" which apart from enlarging the market potential, allows the seller to reach the largest buyer market within the shortest time span. In doing so, the seller sometimes reaches too many potential buyers, who may include a combination of real players and casual opportunities as well as competitors whose motives may not be apparent. The sheer volume of interested parties may lead to virtual elimination of the primary motive for M&A (Merger and Acquisition) auction, that is, speed. < TOP >

Section C: Applied Theory 8.

Values_are basic assumption about which ideals are desirable or worth striving for. They derive from personal experience and identification with those who have had an important influence on one’s personal development since early children. Values represent preferences for ultimate end-states, such as striving for success or avoiding debt at all costs. It is important to note that these definitions do not refer to what people say are their beliefs and values but rather to the beliefs and values they actually hold, whether consciously or otherwise. For instance, an import professional assumption for a banker is client confidentiality. This value is taken for granted, and a banker may become conscious of it only if it is challenged or violated. For example, a client might question the banker about it, or a fellow banker might violate it, either of which would draw attention to it, this value remains present and potent. It is usually hard to change, as are other beliefs and values that the individual actually holds, consciously (openly) or otherwise. 13

With this classification of culture as assumptions involving personal beliefs and values, the meaning of shared in the definition of culture can be made more explicit with the discussion of value system in organizations. Shared assumptions are internalized beliefs and values that organizational members hold in common. A member of an on organization can simply be aware of the organization’s beliefs and values without sharing them in a personally significant way. Values and beliefs have more personal meaning if an individual complies with the set of values as a guide to appropriate behavior in the organization. The individual becomes fundamentally committed to the organization’s beliefs and values when that individual internalizes such beliefs and values. That is to say, when the person comes to hold them as personal beliefs and values. These when shared across the organization becomes the shared values and beliefs into a meaningful value system of an organization. The important aspect of such value system is that the individual by way of derivation of personal satisfaction because of congruence with corresponding personal beliefs and values. < TOP >

9.

In setting up objectives, consistency is very important to be considered. Let us consider any organization with different departments. The mangers pertaining to their departments vary in their ideas. Apart from this the experience also counts to the maximum extent in developing objectives. So, different managers come out be consistent. Due to this, the units may not be comparable, commitment to the objectives may differ and the interdependence of units may be dysfunctional. For example, if the marketing area of the firm set up certain objectives regarding the delivery time to the customers while the manufacturing area’s objectives may not coincide with the marketing area’s objectives, eventually creating obstacles in the strategic success of the firm. Annual objectives are more consistent when each objective clearly states what is to be accomplished, when it will be done, and how accomplishment will be measured. In order to monitor both the effectiveness of an operating unit and collectively progress towards the business’s long-term objectives, annual objectives are used. If the objectives are measurable and state what is to be done and when it will be achieved in a clear understandable manner then the misunderstanding is les likely to occur among the interdependent operating manager in the implementation of grand strategy. Benefits Of Annual Objectives If the objectives are developed systematically, they give meaningful focus through which managers can translate long-term objectives and grand strategies into specific action. These annual objectives also give better understanding to the operating managers and personnel regarding their role in the business mission. This clarity of purpose can be a major force in effectively mobilizing the “people asset” of a business. A second benefit involves the process required to derive annual objectives. These objectives are developed through the participation of managers responsible for their accomplishment. Political factors should be considered in developing these objectives. Otherwise, these factors can impede the strategic effectiveness. The annual objectives, which are effective, can become the essential link between strategic intentions and operating reality. If the annual objectives are well developed, they provide another major benefit: a basis for strategic control. The powerful benefits of annual objectives are in developing budgets, schedules, trigger points and other mechanisms for controlling strategy implementation. Annual objectives can provide motivational pay offs in strategy implementation. The objectives can be powerful motivators of managerial performance, particularly when they are linked to the business’s reward structure, provided these objectives clarify personal and group roles in a business’s strategies and are also measurable, realistic and challenging. Annual objectives provide a powerful tool in operational zing business strategy. Functional strategies help in successful completion of these objectives. < TOP >

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