Mb311- July 06

Question Paper Business Policy & Strategy (MB311) : July 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.

Which of the following functional strategies is the basis for decisions regarding equipment placement, < Answer > plant location, plant size and manner of utilization of facilities? (a) Marketing (c) Research and development (e) Human resources.

2.

Which of the following represents repurchase of a substantial stockholder’s ownership interest at a < Answer > premium above the market price? (a) Golden parachutes (c) Poison pills (e) Leveraged recapitalizations.

3.

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

In which of the following stages of industry life cycle, mergers are undertaken to achieve economies of < Answer > scale in research, production and marketing in order to match the low cost and price performance of other firm’s domestic or foreign? (a) Introduction Final.

5.

(b) Exploitation

(b) Split on

(e)

(c)

(e) Equity curve-out. < Answer >

(b) Entrepreneur (d) Resource allocator (e) Negotiator.

Which of the following takes place when change patterns are accepted and followed willingly? (a) Reengineering (c) Reshaping

8.

(d) Decline

Which of the following is not a decisional role performed by a manager? (a) Monitor (c) Disturbance handler

7.

(c) Maturity

Which of the following is an independent company producing a product or service similar to that < Answer > produced by the entrepreneur’s former employer? (a) Split off Spin off (d) Divestiture

6.

(b) Poison puts (d) Green mail

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

4.

(b) Finance (d) Production/operation management

(b) Restructuring (d) Refreezing

< Answer >

(e) Rewarding.

Which of the following is defined as the highest price paid by the bidder during a specific period, and is < Answer > sometimes required to exceed the book value of the target? (a) Fair price (c) Over pricing (e) Under pricing.

(b) Stock price (d) Goodwill

(e) Under pricing. 9.

Which of the following can be established through premium buy-backs, standstill agreements, anti- < Answer > takeover amendments and proxy contests? (a) Company mission (c) Corporate control (e) Competitive advantage.

(b) Cost leadership (d) Change < Answer >

10. Which of the following is not an indicator to assess the power of external stake holders? (a) The status (c) Support services (e) Symbols.

(b) Resource dependence (d) Negotiating arrangements

11. In which of the following industries, the competition within the industry is essentially segmented from < Answer > country to country? (a) Multi-domestic (c) Multinational (e) Transnational.

(b) Global (d) International

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

(b) Environmental organization (d) Strategic organization

13. Which of the following describes a company’s product, market and technological areas of thrust, and < Answer > reflects the values and priorities of the strategic decision makers? (a) Company’s profile (c) Company’s objective (e) Company’s vision.

(b) Company’s mission (d) Company’s strategy

.

14. Which of the following is/are the structural determinants of competition in declining industries?

< Answer >

I. Conditions of supply. II. Exit barriers. III. Volatility of rivalry. IV. Conditions of demand. (a) Both (I) and (II) above (c) (I), (III) and (IV) above (e) All (I), (II), (III), and (IV) above.

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

15. Which of the following statements is/are correct with regard to competitive scope of the value chain?

< Answer >

I. II.

In segment scope, the buyers are served by a variety of products. The extent to which activities are performed by independent firm instead of in-house is analyzed under vertical scope. III. In industry scope the firms view with a coordinated strategy in the range of related industries. (a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II) and (III) above.

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

16. Which of the following variables is/are related to rivalry among existing firms? I. Access to distribution channels. II. Alternative suppliers. III Alternative buyers. IV. Product differentiation. V. Amount of fixed costs. (a) Only (I) above (c) Both (II) and (III) above (e) Both (I) and (V) above.

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

< Answer >

(e) Both (I) and (V) above. 17. Which component in a mission statement represents an organization's basic beliefs, values, aspirations < Answer > and ethical priorities? (a) Philosophy (c) Concern for public (d) Culture (e) Technology.

(b) Self-concept

18. An organizational design appropriate for a new business with a great deal of strategic importance and < Answer > low operational relatedness is called (a) (b) (c) (d) (e)

New product business development Micro new ventures department Special business unit Direct integration Indirect integration.

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

< Answer >

(b) Strategic window (d) Multiple window

20. A strategy in which top management retains all decision-making authority so that low-level managers < Answer > cannot take any actions to which the sponsors may object is called (a) Offensive centralization (c) Conglomerate diversification (e) Vertical diversification.

(b) Defensive centralization (d) Concentric diversification

21. Which of the following requires its practitioners to justify every dollar they spend each new period? (a) Expenditure budget (c) Functional budget (e) Zero-Base budget.

< Answer >

(b) Standard budget (d) Master budget

22. Which of the following factors is not considered in determining the industry attractiveness as per the GE < Answer > Nine-cell planning grid? (a) (b) (c) (d) (e)

Entry and exit barriers Economies of scale Knowledge of customers and markets Caliber of management Industry profitability.

23. Which of the following does not support the contingency approach to strategic choice? (a) A downturn in the economy (c) A technological break through (e) Shortage of critical material.

< Answer >

(b) A labor strike (d) Change in firm’s management

24. The connections between the way one value activity is performed and the cost of performance of another < Answer > activity are known as (a) Explicit knowledge (c) Linkages (e) Protractor knowledge.

(b) Tacit knowledge (d) Respected activities

25. A person who generates a new idea and supports it through many organizational obstacles is known as a < Answer > (n) (a) Sponsor (c) Technology champion (e) Process specialist.

(b) Product champion (d) Orchestrator

(e) Process specialist. 26. The marketing tool which uses multiple factors to assess industry attractiveness and business strength is (a) GE grid (c) Five forces model (e) PEST analysis.

< Answer >

(b) BCG matrix (d) SWOT analysis

27. Which of the following is not an appropriate Question Mark division strategy for a product in the BCG < Answer > Matrix? (a) Product development (b) Divestiture (c) Market penetration (d) Conglomerate diversification (e) Innovation. 28. In which of the following operations, after completion, the facilities are transferred to the host country? (a) Joint venture (b) Management contracts (c) Production sharing (d) Licensing (e) Turnkey operations.

< Answer >

29. What type of strategy is recommended when new channels of distribution are available that are reliable, < Answer > inexpensive and of good quality? (a) Market development (b) Product development (c) Joint venture (d) Horizontal integration (e) Divestiture. 30. The firm’s capacity to meet its short term financial obligation is best described by (a) Profitability ratio (b) Liquidity ratio (c) Leverage ratio (d) Activity ratio (e) Growth ratio.

< Answer >

END OF SECTION A

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

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

Caselet 1 Read the caselet carefully and answer the following questions: 1. “It makes an unusual cover for an annual report; instead of attractive photographs on the cover page; the company puts the names of all its employees on the front and back cover pages.” Why do you think that Nucor has used names of all its employees on the cover pages instead of attractive photographs? (7 marks) < Answer > 2.

“In the age of downsizing and layoffs, Nucor has not lay off a single employee nor shut down any of its plants. It is also credited with not reporting loss in any business quarter for last 30 years (1972 - 2002). Both analysts and company sources attribute the company's success to its culture.” In this light, explain how the culture of Nucor is responsible for the company’s success. (9 marks) < Answer >

3.

"The standard joke in the company is, if you are a janitor and you get five promotions, you have Correnti's job. If you take a typical organization chart, it is the pyramid. You take our company, you turn the pyramid upside down 6,800 people do not work for me, I work for 6,800 people.” In this regard, explain the different roles played by the CEO. (7 marks) < Answer >

It makes an unusual cover for an annual report; instead of attractive photographs on the cover page, the company puts the names of all its employees on the front and back cover pages. The company is Nucor Corp (Nucor) - the largest producer of steel in North America. Nucor is known for its culture and its commitment towards employees. In the age of downsizing and layoffs, Nucor has not lay off a single employee nor shut down any of its plants. It is also credited with not reporting loss in any business quarter for last 30 years (1972 - 2002). Both analysts and company sources attribute the company's success to its culture. According to company sources, Nucor's recruitment process, reward system and work culture are responsible for the company's success over the years. The Nucor recruitment process focuses on employing people with the right frame of mind rather than people with relevant skill sets. The reward system at Nucor emphasizes fair pay based on productivity. Nucor gave more preference to their employees in providing benefits when compared to their senior executives. Benefits such as Nucor’s profit-sharing and scholarship programs, its employee stock purchase plan, and its service awards, were not available to Nucor’s officers. Further, Nucor also established a fair grievance redressal system which allows any employee to approach the management with his or her complaints. Analysts are of the opinion that Nucor is a perfect example of how a company's organizational culture can influence its performance. The history of Nucor dates back to 1899, when Ransom E. Olds (Olds) established a car manufacturing company called Olds Motor Works. After running Olds Motor Works successfully for seven years, Olds sold the unit in 1906. He established Reo Car Company (Reo), which manufactured trucks and buses in addition to cars. Reo stopped making cars in 1936 and by 1955 formed Reo Holding which merged with Nuclear Consultants Inc to form Nuclear Corporation of America (Nuclear). Nuclear was originally set up to manufacture nuclear instruments and other electronic gadgets, besides providing expertise in conducting radiation studies. While this business was profitable at the time, it failed to gather momentum. Nuclear then acquired a number of high-tech companies. The company however continued losing money till 1960, when it was acquired by a New York based investment banker. In the early 60s, the company made an unsuccessful bid to acquire Coast Metals. At this juncture, Nuclear requested Ken Iverson (Iverson), a Coast Metals employee to help it identify other companies in the metal business that it might acquire. On Iverson's recommendation, Nuclear acquire Vulcraft, a steel beam manufacturing firm in Florence, South Carolina. In 1962, Iverson joined Nuclear as Vice President and took charge of the 200-person beam division. In late 1963, Iverson built a second plant at Nebraska. By 1965, the Vulcraft division was doing well. It was manufacturing steel beams at a time when a good building boom was underway. However Nuclear as a whole was losing around $400,000 on annual sales of $20 million. By the middle of 1965, the company had also defaulted on two major loan payments. The President resigned and in September 1965, the board approached the 39 year old Iverson to take his place. Compared to the typical Fortune 500 Company with 10 or more management layers, Nucor's Structure was decentralized, with only the four management layers, illustrated below:

"We have a very flat organization structure," said president and-CEO John Correnti. "The standard joke in the company is if you are a janitor and you get five promotions, you have Correnti's job. If you take a typical organization chart, it is the typical pyramid. You take our company, you turn the pyramid upside down; 6,800 people do not work for me, I work for 6,800 people.” In 1998 Nucor's board of directors had only six members: the current chairman, president, and chief financial officer, and three retired Nucor executives. Only 22 employees (including clerical staff) worked at the corporate head office,

which was located in an unassuming office building across the street from a shopping mall. All other employees worked in one of the company's 25 plants, each of which employed, on average, between 250 and 300 people. The general manager at each plant was granted considerable autonomy, essentially operating the facility as an independent business. Each plant could source its inputs either from another Nucor plant or from the outside market. With the day-to-day decisions being made on site and the lines of communication to employees kept open and informal, problems could be solved quickly without having to wait for decisions from headquarters. "We are honest-to-God," said the general manager of one plant. "That means that we duplicate efforts made in other parts of Nucor Nucor was very selective in recruiting employees and was able to choose from a large applicant pool. Noted Iverson, "Darlington [S.C.] needed eight people, and we put a little ad in the county weekly newspaper that said, 'Nucor Steel will take some applications on Saturday morning at 8:30 for new employees.” When we went out there for interviewing, there were 1,200 people lined up in that plant. We couldn't even get into the plant to get to the personnel department. Finally, we called the state police and said, "You've got to do something. We've got a traffic jam out here.' And the cop on duty said, 'We can't do it, because we've got three people out there applying for jobs ourselves! Employee relations at Nucor were based on four principles: I. Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity. II. Employees should feel confident that if they do their jobs properly, they will have a job tomorrow. III. Employees have the right to be treated fairly. IV. Employees must have an avenue of appeal when they believe they are being treated unfairly. As part of its commitment to fairness, Nucor had a grievance procedure that allowed any employee to ask for a review of a grievance if he or she felt the supervisor had not provided a fair hearing. The grievance could move up to the general manager level and, if the employee was still not satisfied, could 'be submitted to headquarters management for final appeal.

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

Why do you think that Honda had decided to sell off their 51% stake to Kinetic Honda though they have more chances to buy out Kinetic’s 19% stake? (8 marks) < Answer >

5.

With reference to the caselet, explain the reasons for the failure of joint ventures?

(6 marks) < Answer > "We are proud that we have set an unprecedented example, of a small Indian company, Kinetic Engineering Limited, buying out the majority stake of a multinational giant like Honda."- Arun Firodia, Chairman, Kinetic Group, in 1998. It was in August 1998 that the first chinks in the Kinetic Honda Motors Ltd. (Kinetic Honda) armor were reported by Business India. Both Honda and the Firodias of Kinetic were quick to deny rumors of a split, though reports of the Firodias quietly raising resources to buy out Honda's stake kept surfacing. The Firodias were even reported to have securitized the assets of their two-wheeler finance company - 20th Century Kinetic Finance (TCKF) - to raise this money. Trouble had been brewing since the company recorded a loss of Rs.6 crore in the first quarter of 1998. Eventually Honda decided to put the matter to rest and called Arun Firodia (Firodia) to Japan in December 1998. Honda made Firodia an offer - either he buys their 51% stake or Honda would buy out his 19% stake. Analysts remarked that it was difficult for Firodia to let go of the company that he had nurtured for the best part of his life. Eventually, Firodia negotiated a deal with Honda, to acquire its stake at Rs.45 per share, (when the market price was almost double), at a total cost of Rs.35 crore. He also signed an agreement with them for continuing to manufacture and sell the existing Kinetic Honda models. Honda also agreed to continue providing technical know-how support in return for royalty and technical fees from Kinetic. Considering the fact that Honda was the world's biggest and most successful scooter manufacturer, the pullout came as a surprise to industry observers, as it was quite uncharacteristic of Honda Motor to give up a segment. More so, as just a couple of months earlier, Honda had been reported to be planning to make further investments in Kinetic Honda. This was seen as a major setback for the company. It was also perhaps the only instance of a Honda failure anywhere in the world. In 2001, the Kinetic Group had two automobile companies - Kinetic Engineering Ltd. and Kinetic Motor Company Ltd. After the December 1998 deal, Kinetic Honda Motor Ltd. was renamed Kinetic Motor Company Ltd. Kinetic's story

began in 1972 with the founder H.K.Firodia buying the 'Luna' moped's design from a foreign company. The moped, which aimed at capturing the bicycle market, went on to become such a huge success, that Luna became a generic name for mopeds. In 1985, under Arun Firodia's (H.K.Firodia's son) leadership, Kinetic tied up with Japanese auto major Honda Motor to form Kinetic Honda Motors Ltd. (KHML) with both the partners holding an equal stake of 28.56%. The company's primary business was manufacturing scooters. Sales of spare parts formed a minor part of the turnover. The 'KH-100,' the first ungeared scooter in India, proved to be a huge success in the initial stages. Throughout the 1980s, Kinetic remained India's largest moped manufacturer with a 44% market share and a 15% share of the overall two-wheeler market. A decade later, the company's moped market share halved to 22% and the overall market share figure reached an abysmal 5%. Also, in 1991, Kinetic, with a turnover of Rs.121 crore, was competing on an equal turf with the Rs140 crore TVS Suzuki and the Rs.150 core Hero Honda. But by 1999, while TVS and Hero Honda grew seven times over to Rs.1,018 crore and Rs.1,146crore respectively, Kinetic just managed to double its turnover. A major reason for this was the fact that Kinetic seemed to have missed the pulse of the market, which was fast moving towards motorcycles. Kinetic had no motorcycles to offer - mainly due to the Honda joint venture stipulations. (Kinetic could not make motorcycles because that meant competing with Hero Honda.) Kinetic's financial position also took a beating in the late 1990s. While sales grew slowly, compared to its competitors, its operating margin was the lowest in the industry because of the high import content of raw materials. Kinetic also had to shelve its plans to launch a small, 500cc, 2-cyclinder car after a substantial sum was spent on the project. With Kinetic Honda's fortunes declining, Firodia agreed to let Honda increase its stake to 51% in 1993, perhaps hoping that if Honda were in control, it would bring in new products more quickly and thereby improve the company's prospects. But Firodia soon realized that this was not to be. At a time when its competitors were spending 1-1.5% of the turnover on R&D, Kinetic Honda did not move beyond 0.31%. On advertising, Honda spent just Rs.20 crore during 1993-98. As a result, Kinetic Honda's market share declined steadily during 1996-98. In 1997-98, Kinetic Honda's sales grew marginally to Rs.353 crore over the previous year, but profit after tax dipped to Rs.2.16 crore from Rs.2.30 crore. This coupled with the Rs.6 crore losses for the first quarter of 1998 made the Firodias give serious thought to parting ways with Honda. Firodia said, "There was no growth, so we decided to review the contract." The new agreement involving the Honda stake sell-off and the technical collaboration arrangement was signed after this. Commenting on this, Firodia claimed, "It's a win-win scheme for everybody." Though Firodia claimed that Honda's equity sale decision was taken jointly by both partners, media reports had a different story to tell.

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

7.

What were the different entry options available for Coca-Cola to enter into the Indian market? Do you think that Coca-Cola’s entry strategy a successful one? Give reasons. (6 marks) < Answer > Coca-Cola faced many problems after the reentry into the Indian market. Why do you think that Coca-Cola had faced problems though it was a reentry to them? (7 marks) < Answer >

In 2003, the Indian subsidiary of the Coca-Cola Company was awarded the Robert W. Woodruff Award for outstanding business performance. Coca-Cola's turnaround in India had come after a period of heavy investments. During the period 1993-2002, the company had invested $1 billion in India. In 2003, Coca-Cola had 17 manufacturing units, 60 distribution centers catering to 5,000 distributors and one million retail outlets, serviced via trucks and three-wheelers. Coca-Cola directly employed 10,000 people. Coca-Cola's reentry into India was driven by both competitive factors and Coca-Cola's own global plans. Pepsi had entered India in 1990 and by 1993 had garnered a 25% market share. Coca-Cola could not stay behind. Moreover, the parent company had realized the need to expand its presence in emerging markets as growth was tapering off in developed countries. In late 1993, to make a quick entry into the market and neutralize Pepsi's early mover advantage, Coca-Cola decided to buy out a local soft drink company, Parle, which had a 60% market share. But Coca-Cola found itself facing several problems. It focused on establishing the Coke brand quickly, positioning it as an international brand and not emphasizing local association. Neglect of Parle brands led to their decline in market share. The operations of the small bottlers acquired from Parle system were inefficient and increased costs. The bottlers also had problems adjusting

to Coca-Cola's work culture. Instability at the top also created problems for Coca-Cola. Between 1993 and 2000, Coca-Cola had five presidents. During the tenure of the founding CEO, Jayadev Raja (1992-May 1995) and Richard Nicholas (June 1995- March 1997) Coca-Cola seemed to fritter away the jump-start it got from the Parle acquisition. Donald Short (April 1997-November 1999) streamlined the bottling operations and the supply chain. Douglas Jackson (November 1999-January 2000) had a short stint before being replaced by Alex Von Behr (Von Behr). Meanwhile, the push for increase in volume had taken its toll on the internal systems of the company. In March 2000, Coca-Cola received reports of gross violation of discounting terms and credit policies and dubious cash management practices by its North Indian operations. The company initiated an enquiry into the matter with the help of consultants Arthur Anderson. The team inspected regional offices, distribution centers and bottling plants in the Northern region to verify the accounts and other transactions. Investigations revealed that discounts were as high as five times as those offered in other regions. There had also been arbitrary appointments and cancellations of dealerships. The findings were followed by a detailed performance appraisal, which led to the resignation of 70 managers during the period, July-November 2000. The employees alleged that the top management had approved the discounts and the whole appraisal exercise was a thinly veiled effort to cut down the managerial strength. As the managers left and doubts about the whole episode remained, distrust towards the top management crept into the lower and middle management. Von Behr along with Sanjiv Gupta (Gupta), Vice President, Operations and Navin Miglani, the head of Human Resources realized the need for a complete overhaul of the system. They felt an urgent need to decentralize operations even as they established stronger systems and processes. The top management team decided to reposition Coca-Cola as a beverage company rather than as a carbonated soft drinks (CSD) company. They convinced the Atlanta headquarters to introduce new affordable package sizes to increase beverage consumption and revamp Thums Up and other Parle brands. Von Behr launched several new marketing initiatives, influenced by the direction the parent company was taking under CEO, Douglas Daft. Daft believed rapid globalisation had made the company highly centralized in its decision-making and insensitive to local needs. Daft had embarked on a "think local, act local" strategy, which marked a major shift from the one-size-fits-all mindset. The parent company expanded its portfolio to 300 brands, mostly local. In emerging markets, the company focused on making products affordable for consumers. Coca-Cola also realized the importance of maintaining good relations with the government in a country, where many politicians continued to whip up public sentiment against MNCs. In 1997, Coca-Cola had signed an agreement with Government of India to disinvest 49% in favor of the Indian public to bring in $700 million into India But, in 2000, with return on investment being only Rs.3 per share for a face value of Rs.10 per share, Coca-Cola was reluctant to go ahead with the divestment. This led to friction between the government and Coca-Cola. In August 2002, to keep the government happy, Coca-Cola divested 49% stake in its bottling subsidiary Hindustan Coca-Cola Beverages Pvt Ltd (HCCB) through private placement (33%), employees and stock option trusts (10%) and bottlers (6%). In the process, Coca-Cola raised $41.6 million. END OF SECTION B

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

8.

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

Politics is a key aspect of strategy implementation because it enables managers to be proactive and to influence their environment rather than being manipulated and dominated by external events. In this context, what does Politics and Machiavellianism mean. Also explain the various political tactics applied to obtain results. (12 marks) < Answer >

9.

Briefly outline the advantages and disadvantages of functional structure and multidivisional structure in organizations. Also identify the advantages of centralization and decentralization of decision-making in

organizations. (8 marks) < Answer > END OF SECTION C END OF QUESTION PAPER

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

< TOP Answer : (d) > Reason: Production/operation management strategy is the basis for decisions regarding equipment placement, plant location, plant size and manner of utilization of facilities

2.

< TOP Answer : (d) > Reason: Green mail following represents repurchase of a substantial stockholder’s ownership interest at a premium above the market price.

3.

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

4.

< TOP Answer : (c) > Reason: In maturity stage mergers are undertaken to achieve economies of scale in research, production, and marketing in order to match the low cost and price performance of other firm’s, domestic or foreign.

5.

< TOP Answer : (c) > Reason: Spin off is an independent company producing a product or service similar to that produced by the entrepreneur’s former employer < TOP Answer : (a) > Reason: The decisional roles of a manager are : (1) Entrepreneur (2) Disturbance handler (3) Resource allocator (4) Negotiator. < TOP Answer : (d) > Reason: refreezing takes place when change patterns are accepted and followed willingly. Often rewards are influential in ensuring that refreezing takes place.

6.

7.

8.

< TOP Answer : (a) > Reason: Fair pricing is defined as the highest price paid by the bidder during a specific period, and is sometimes required to exceed the book value of the target, an amount determined relative to accounting errors.

9.

< TOP Answer : (c) > Reason: Corporate control can be established through premium buy-backs, standstill agreements, anti-takeover amendments and proxy contests.

< TOP 10. Answer : (c) > Reason: The indicators to assess the power of external stakeholders are : (1) The status (2) Resource dependence (3) Negotiating arrangements (4) Symbols. < TOP 11. Answer : (a) > Reason: A multi-domestic industry is one in which the competition within the industry is essentially segmented from country to country. < TOP 12. Answer : (a) > Reason: A learning organization is one that is skilled at creating, acquiring and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights < TOP 13. Answer : (b) > Reason: The mission statement is enduring statement of instruction of an organization; it refers to the philosophy of business in order to build the image of the company by activities currently pursued by the organization and its future status. While, Vision statement describes the aspiration for the future, but without specifying the means to achieve those desired ends. < TOP 14. Answer : (b) > Reason: Declining industries are industries that have experienced an absolute decline in unit sales over a sustained period. This decline cannot be attributed to one single business cycle, or strikes, or material shortages. The decline in these industries results due to slower economic growth, product substitution and continued technological changes in areas such as electronics, computers and chemicals. However, the decline in the industry can be reversed some times through innovations, cost reduction and changes in other circumstances. Factors that influence competition in a declining industry include conditions of demand, exit barriers and volatility of rivalry. Hence option (b) is the correct answer. < TOP 15. Answer : (c) > Reason: The following statements are correct with regard to competitive scope of the value chain i.e., the segment scope, the buyers are served by a variety of products and in industry scope the firms view with a coordinated strategy in the range of related industries.

< TOP 16. Answer : (e) > Reason: Access to distribution channels is a cause of rivalry among existing firms as the channels are limited and all the players are vying for the given distribution channels. Amount of fixed costs also leads to rivalry among existing firms as the proportion of fixed costs in the cost structure (i.e operating leverage) decides the responsiveness of the firms to business risks. Existence of alternative suppliers, buyers and product differentiation leads to reduction in rivalry among existing firms. < TOP 17. Answer : (a) > Reason: Philosophy component in a mission statement represents an organization's basic beliefs, values, aspirations, and ethical priorities. < TOP 18. 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. < TOP 19. 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. < TOP 20. 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. < TOP 21. Answer : (e) > Reason: Zero-Base budget requires its practitioners to justify every dollar they spend. < TOP 22. Answer : (a) > Reason: GE matrix takes two factors into consideration – Business strength and industry attractiveness. Exit and entry barriers is considered in determining the business strength and not the industry attractiveness. Hence the correct answer is (a).

23. Answer : (d) Reason: Change in firms management does not support the contingency approach to strategic choice

< TOP >

contingency approach to strategic choice < TOP 24. 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. < TOP 25. 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. < TOP 26. Answer : (a) > Reason: The GE Grid uses multiple factors to assess industry attractiveness and business strength < TOP 27. Answer : (d) > Reason: Conglomerate diversification is not an appropriate Question Mark division strategy in a BCG Matrix, as the viable strategy for question mark business would be to divest the weaker businesses and invest heavily in high potential businesses to turn them into stars in the near future.(a)(b)(c)(e) Product development, divestiture, market penetration and innovation does form the appropriate strategy in the question mark division in a BCG matrix. < TOP 28. Answer : (e) > Reason: In turnkey operations, after completion, the facilities are transferred to the host country < TOP 29. Answer : (a) > Reason: Market development strategy is recommended when new channels of distribution are available that are reliable, inexpensive, and of good quality. This will help in increasing revenues for existing product range. < TOP 30. Answer : (b) > Reason: The firm’s capacity to meet its short term financial obligation is best described by the liquidity ratio. Profitability ratios indicate how effectively a firm is being managed. Leverage ratios identify the source of a firm’s capital. i,e owners or outside creditors. Activity ratios measure a firm’s efficiency in generating sales and making collections.

Section B : Problems 1.

Nucor is a company which believed in humans rather than anything else. They gave top most priority to its employees. It strongly believed that a good and healthy culture in any organization will bring success. The company right from the recruitment stage took necessary precautions in selecting its employees. They gave preference to people with right attitude which suits the company’s culture over those with relevant skill sets. The words of the then President and CEO John Corrent, “If you take a typical organization chart, it is the typical pyramid. You take our company, you turn the pyramid upside down; 6,800 people do not work for me, I work for 6,800 people.” Clearly shows his perception towards his employees. The company also believed that motivated and satisfied employees make the impossible things possible, and run

organizations into profits. So, they formulated policies and provided employees with compensations, rewards, awards, benefits, what not everything which they felt will motivate its employees. And they are successful in doing it. Employee relations at Nucor were based on four principles: 1. Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity. . 2. Employees should feel confident that if they do their jobs properly, they will have a job tomorrow. 3. Employees have the right to be treated fairly. 4. Employees must have an avenue of appeal when they believe they are being treated unfairly. Nucor gave more preference to their employees in providing benefits when compared to their senior executives. Benefits such as Nucor’s profit-sharing and scholarship programs, its employee stock purchase plan, and its service awards, were not available to Nucor’s officers. This clearly shows the importance given to common employees. Nucor published names of its employees rather than attractive photographs in order to show the world and its people how important are their employees to them. By doing this they have developed a feeling in their employees that the company is theirs. This has motivated their employees and thus did wonders for the organization. What ever it may be a ‘strategy’ or a ‘belief’, it had served its purpose. < TOP >

2.

Organizational culture is the set of important assumptions that members of an organization share in common. Culture is strength as well as a weakness. It is strength since culture eases and economizes communications, facilitates organizational decision-making and control. It may generate higher levels or cooperation and commitment in the organization. The result is efficiency in that these activities arc accomplished with a lower expenditure of resources such as time and money that would not be otherwise possible. The stronger the culture, the greater its efficiency. Culture, on the other hand, becomes a weakness when important shared beliefs and values interfere with the needs of the business, its strategy, and the people working on the company's behalf. To the extent that the content of a company's culture leads its people to think and act in inappropriate ways, culture’s efficiency will not help achieve effective results. This condition is usually a significant weakness because it is hard to change a culture’s content. The five basic processes that lie at the heart of any organization are cooperation, decision-making, control, communication and commitment. Cooperation True cooperation cannot ultimately be legislated. Managements can resort to carefully worded employment contracts, spell out detailed expectations, and devise clever incentive schemes to reward first the right behavior. However, even, veil thought out formal procedures can never anticipate all contingencies. When something unforeseen occurs, the organization is at the mercy of the employee’s willingness to act in the spirit of cooperation, which involves intent, goodwill, and mutual trust. The degree of true cooperation is influenced by the shared assumptions in tills area, usually, shared beliefs and values of informality and family spirit generates high levels of true cooperation within organizations. Nucor’s success lies in the true cooperation from the employee’s in all kinds of situations. Decision Making Shared beliefs and values give organizational members a consistent set of basic assumptions and preferences. This leads to a more efficient decision making process since fewer disagreements arise over which premises should prevail. However, efficiency does not imply effectiveness. If the shared beliefs and values are not in keeping with the needs of the business, its strategy, and its members, dysfunctional consequences will be a result. These assumptions had to change for better. Nucor’s decision making involved the participation of every body which focused on the benefits of the company. Control The essence of control is the ability to take action to achieve planned results. The basis for action is provided by two different control mechanisms - formal procedures and clans. Formal procedures rely on adjusting rules, procedures, guidelines, budgets and directives. The clan mechanism relies on shared beliefs and values. In effect, shared beliefs and values constitute an organizational "compass" that members' rely on to choose appropriate courses of action. Clan control derives itself from cultural settings. A strong culture facilitates the control process by enhancing the clan control. Clan control is highly efficient in selective environments. But again, efficiency and effectiveness should not be confused. Nucor was always in control of the situation. It is in a position to take necessary steps when ever needed. .

Communication The major reasons people miscommunicate daily in organizational and every day life include the technical problem of distortion between the point where a communication starts out and the point where it is received. A second and more important hurdle in communication concerns difficulties in interpretation. No two people will interpret a statement the same way. Culture reduces these dangers of miscommunication in two ways. First, there is no need to communicate in matters for which shared assumptions already exist. Certain things go without saying. Second, shared assumptions provide guidelines and cues to help interpret messages that are received. Thus, a strong culture encourages efficient and effective communication. The advantage of this efficiency and effectiveness should not be underestimated - since communications are the lifeblood of organizations. Nucor took every necessary step to reduce the communication gap. A worker can directly contact the General manager if he is having some problem. Commitment A person feels committed to an organization when he or she identifies with it and experiences some emotional attachment to it. A variety of incentives – salary, prestige, personal sense of worth - tie the individual to the organization. Strong cultures foster strong identification and feelings through multiple beliefs and values that the individual can share with others. In making decisions and taking actions, committed employees automatically evaluate the impact of alternatives on the organization. Committed people will put out the extra effort needed to get the organization out of a bind. Culture has a pervasive influence on organizational life. Nucor concentrated more on the well being of its workers as it feels that this will help them to motivate the employees. And the work can be done efficiently only by the commitment of the employees. Nucor is a successful company since it has a strong culture, which has all the components needed for the success of a company. < TOP >

3.

The chief executive officer (CEO) or the Managing Director is the person responsible for the functioning of the entire organization. The CEO has to play crucial and multiple roles in formulating and implementing mission, objectives, policies and strategies. His multiple roles include: Organization Builder The CEO has the responsibility for organization building through organizational change. But in general, people resist change due to reasons such as misunderstanding and lack of trust, low tolerance for change, etc. The CEO can deal with resistance through •

Education and communication

•

Participation and involvement

•

Negotiation and agreement

•

Manipulation and cooperation

• Explicit and implicit coercion Organization Leader The CEO must have a base for leadership. The CEO should have leadership skills such as: •

Favorable attitude towards those in positions of authority, such as supervisors

•

Desire to assist oneself to take charge

•

Desire to behave in a distinctive and different way

•

Sense of responsibility in carrying out routine duties associated with managerial work.

• Desire to engage in competition. Success Sharing by CEO Monitoring, sponsoring and helping others is an important activity of CEO. The CEO has to help the organization staff by training, coaching, assisting informing, writing letters of correspondence, etc. Executive Qualities Personalities of successful CEOs .tend to vary but they have some commonalties such as: • •

Knowing the strengths and spend most of their time in performing those activities in which they are strong Managing time effectively

• • • • •

CEOs are intuitors in the sense that they deal well with ideas, theories and innovations He is generally an organized thinker Motivated by power and ability to make things happen Comfortable with a wide range of people, but prefers casual associates Has a high energy level. < TOP >

4.

In 1985 kinetic was tied up with Japanese auto major Honda Motor to form Kinetic Honda Ltd. Both the partners were holding an equal stake of 28.56%. In 1990’s the market share of kinetic Honda declined to 5% to that of 15% in 1980’s. Though the two wheeler market was increasing at a brisk pace Kinetic Honda was not able to improve its business. Kinetic Honda agreed to let Honda increase its stake to 51% in 1993, perhaps hoping that if Honda were in control, it would bring in new products more quickly and thereby improve the company’s prospects. But this did not happen. Kinetic Honda faced problems because though the market was moving towards motorcycles they could not make motorcycles due to the Honda joint venture stipulation. Honda was not spending much either on R&D or on advertisements. As a result, kinetic Honda’s market share declined steadily during 1996-98. Honda called Arun Firodia the chairman of Kinetic Group to Japan to take a decision regarding their contract. Honda asked Kinetic to buy sell their 19% stake to Honda or buy 51% stake. The various reasons behind this may be: •

Honda was not able to concentrate much on Kinetic Honda and wanted to exit.

•

Honda did not have good relations with Kinetic’s management so wanted to quit from the venture.

•

Honda wanted to launch its products in the ungeared segment on its own.

• •

Honda felt that they were tied up with the venture and were not able to take decisions regarding introduction of new models, advertising expenditure, marketing strategies, etc. Honda might have seen large scope for their products. They did not want to share the profits with Kinetic.

•

Honda felt that they can enter into the country directly with out any ventures as they have the advantage of technology and also they have gained a good image in the market.

•

Both Honda and Kinetic blamed each other for the losses and wanted to prove that they are more efficient without the partner.

•

Honda might have thought that any way they will get royalty from Kinetic for allowing them to manufacture and sell existing Kinetic Honda and providing them with technical know-how support in addition to the revenue from their own products

•

Honda might have thought that it is impossible for kinetic to buy 51% stake. This has proved to be a blunder. < TOP >

5.

The reasons for the failure of joint ventures are: •

The contract may be too inflexible to permit required adjustments in the future.

•

Lack of commitment and time in implementing the project

•

Inability or failure to develop the desired technology

•

Lack of adequate pre-planning for the joint ventures

•

Failure to reach an agreement on alternative approaches to achieve the basic objectives of the joint venture

• • •

Refusal by managers possessing expertise in one company to share knowledge with their counterparts in the joint venture Inability of parent companies to share control or compromise on difficult issues Critical issues of public policy and long-term strategies of individual business firms may arise in certain joint ventures. < TOP >

6.

The various options available for Coca-Cola to enter into the Indian market are : •

Indirect Exporting

•

Direct Exporting

•

Licensing

•

Joint Ventures

•

Direct investment

•

Acquisitions

•

Production Sharing

•

Management Contracts

•

Turnkey operations Coca-Cola’s strategy to acquire Parle and enter into the Indian market was successful because by the time Coca-Cola decided to enter into the market, Pepsi has already positioned itself in the market. It was not very easy for Coca-Cola to enter directly into the market has it would take lot of time to build its network and also its brand image. Thus they took a wise step to acquire Parle which already had 60% market share and then enter. This strategy has worked out because it had made easy for them to enter into the market using Parle’s distribution channel. Though it had faced some problems initially due to its association with a local brand, the end result was a successful one. By doing this they also converted a major competitor with 60% market share into a collaborator. < TOP >

7.

Coca-Cola faced many problems after the reentry into the Indian market. Though it was a reentry to them, they faced problems for the following reasons •

Coca-cola didn’t have favorable relations with the Government.

•

Coca-cola’s old rival Pepsi already had gained the first mover advantage with 25% of market share.

•

Coca-cola focused on establishing the Coke brand quickly, positioning it as an international brand and not emphasizing local association. This had affected them in an adverse manner.

•

They neglected Parle products like Thumps-up, etc, led to decline in the market share and also proved to be costlier in the later stage.

•

The operations of the small bottlers acquired from Parle system were inefficient and increased costs.

•

Cultural differences with Bottlers. Bottlers had problems adjusting ton Coca-cola’s work culture.

•

Instability at the top has also proved to be costlier for the company.

• •

Push for increase in sales resulted in many unfair practices like violation of discounting terms and credit policies and dubious cash management practices. Many changes occurred in the market during the absence of the company. < TOP >

Section C: Applied Theory 8.

Organizational politics are tactics that strategic managers engage in order to obtain and use power to influence organizational goals. In other words, organizational politics is the process by which differing interests reach accommodation. These accommodations relate to the behavior that is not prescribed by the policies established within the organization. Politics can be described in terms of three dimensions. •

Legitimate or illegitimate.

•

Vertical or lateral.

• Internal or external to the organization. For instance, a suggestion/complaint by an employee to a senior manager, by passing an immediate superior, would be classified as legitimate, vertical and internal. Threats and attempts of sabotage is illegitimate. Politics is a key aspect of strategy implementation because it enables managers to be proactive and to influence their environment rather than being manipulated and dominated by external events. Machiavellianism Machiavellianism is the term used to describe coercive management tactics. It means the ruthless use of power, particularly coercive power and manipulation to attain personal goals. Sometimes, coercive power is used effectively by managers but it is not easy to justify coercive power especially if other alternatives are available. Moreover, coercion is not carried out recedes quickly. The strategic leader, while developing and strengthening the strategic perspective should concentrate his efforts outside the organization. In order to be able to do this, the managers must be supportive of proposals from the top. This implies that the internal structure and systems must be sound and effective. The general and functional managers should be free to operate and make changes, but their overall power should be contained.

In considering the feasibility of changes and how to implement them, it is important to examine the underlying political abilities and behavior within the firm. Without taking this into account the implementation of change is likely to be hazardous. Political tactics to obtain results Develop liaisons: As mentioned above, it is important to develop and maintain both formal and informal contacts with other managers, functions, and divisions. Again it is important to include those managers who are most powerful. Present a conservative image: It can be disadvantageous to be seen as too radical as an agent of change. Diffuse opposition: Conflicts need to be brought out into the open and differences of opinion aired rather than kept hidden. Divide and rule can be a useful strategy. Trade-off and compromise: In any proposal or suggestions for change it is important to consider the needs of other people whose support is required. “Strike while the iron is hot”: Successful managers should build on successes and reputation quickly. Research: Information is always vital to justify and support proposals. Use a neutral cover: Radical changes, or those which other people might perceive as a threat to them, can sometimes be usefully disguised and initiated as minor changes. This is linked to the next point. Limit communication: A useful tactic can be to unravel change gradually in order to contain possible opposition. Withdraw strategically: If things are going wrong, and especially if the changes are not crucial, it can be a wise tactic on occasions to withdraw – at least temporarily. < TOP >

9.

Functional Structure •

Advantages – Task grouping facilitates specialization and productivity – Better monitoring of work processes, reduced costs – Greater control over organizational activities

Disadvantages – Functional orientation creates communication problems – Performance and profitability measurement problems – Location versus function problems (coordination) – Strategic problems due to structural (vertical and horizontal) mismatches Multidivisional Structure •

•

Advantages – Enhanced corporate control by division – Enhanced strategic control of each SBU in portfolio – Growth is easier. New units don’t have to be integrated across organization – Stronger pursuit of internal efficiencies. Performance of individual units is readily measurable.

•

Disadvantages – Establishing the divisional-corporate authority relationship – Distortion of information by divisions – Competition for resources by divisions – Transfer pricing problems between divisions – Short-term research and development focus – Bureaucratic costs. b. Advantages of decentralization – Reduced information overload on upper managers – Increased motivation and accountability throughout organization – Fewer managers; lower bureaucratic costs Advantages of centralization – Easier coordination of organizational activities

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Decisions fitted to broad organizational objectives Exercise of strong leadership in crisis Faster decision making and response. < TOP >

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