Mb311- Oct 05

Question Paper

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

1.

This section consists of questions with serial number 1 - 30. Answer all questions. Each question carries one mark. Maximum time for answering Section A is 30 Minutes.

I. II. III. IV.

Investments in plant and equipment that have no alternative uses and cannot be sold off. Low fixed costs of exit. Emotional attachment with an industry. Economic dependence on the industry.

(a) Only (I) above (d) Both (III) and (IV) above 2.

(b) Management contracts (e) Turnkey operations.

(c) Production sharing

(b) Economic environment (d) Demographic environment

Which of the following strategies of Porter, assumes that a firm can serve its strategic target market < Answer > more effectively than its competitors who are serving much bigger market? (a) Overall cost leadership (d) Vertical merger

5.

< Answer >

Which of the following environment of an organization constitutes the values, beliefs, attitudes, < Answer > opinions and lifestyles? (a) Social environment (c) Geographic environment (e) Political environment.

4.

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

In which of the following operations, after completion, the facilities are transferred to the host country? (a) Joint venture (d) Licensing

3.

< Answer >

Which of the following is/are exit barriers?

(b) Differentiation (e) Concentration.

(c) Focus

Which of the following is/are the basic characteristics which differentiate functional strategies from < Answer > grand strategies? I. Time horizon covered. II. Specificity. III. Participation in their development. (a) Only (I) above (d) Both (II) and (III) above

6.

Which of the following is a general guide that specifies the broad parameters within which < Answer > organizational members are expected to operate in pursuit of organizational goals? (a) Strategy

7.

(b) Objective

(d) Plan

(e) Control. < Answer >

(b) Foster debate (d) Create consensus

Firms pursue, which of the following strategies to grow while remaining relatively simple? (a) Product development (d) Conglomerate diversification

9.

(c) Policy

Which of the following is not a part of change process? (a) Recognition of need for change (c) Assign responsibility (e) Refreezing.

8.

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

(b) Concentration (e) Joint ventures.

(c) Innovation

Which of the following is/are true of strategic leadership style? I. II.

Small organizations are run democratically. Leadership style also relates to the role of planning and the importance of incremental change in 1

< Answer >

< Answer >

strategic management. III. In relatively stable environments both entrepreneurial leadership style and conservative leadership style can be appropriate and successful. (a) Only (I) above (d) Both (II) and (III) above

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

10. Which of the following refers to the development of long term plans for managing opportunities and < Answer > threats in the external environment and for utilizing the strengths and overcoming the weaknesses within the organization? (a) Strategy formulation (c) Environmental scanning (e) Strategy dismantling.

(b) Strategy implementation (d) Evaluation and control

11. Which of the following is the term used to describe coercive management tactics and which means the < Answer > ruthless use of power, particularly coercive power and manipulation to attain personal goals? (a) Machiavellianism (d) Escapism

(b) Coercision (e) Cooption.

(c) Concentration

12. 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

13. Which of the following is an anti takeover strategy, in which the target company issues bonds which < Answer > encourage holders to cash in at a high price? (a) Poison pill (d) Leveraged recapitalizations

(b) Golden parachute (c) Poison puts (e) Leveraged buy out.

14. Which of the following provides managers with unity of direction that transcends individual, parochial < Answer > and transitory needs? (a) Strategy

(b) Policy

(c) Plan

(d) Vision

(e) Mission.

15. Because which of the following it is possible to manufacture goods at a lower average cost as compared < Answer > to other manufacturers with lower levels of output? (a) Economies of scale (d) Environmental analysis

(b) Product differentiation (e) Concentration.

(c) Diversification < Answer >

16. Which of the following is/are true about fragmented industries? I. A large number of large companies are contained in a fragmented industry. II. Aerospace, automobiles and pharmaceuticals constitute fragmented industries. III. Many fragmented industries possess low barriers of entry and have commodity products that are very hard to differentiate. IV. Low barriers of entry during strong demand and high profits will lead to more new entrants hoping for profitability. (a) Only (I) above (d) Both (I) and (II) above

(b) Only (II) above (e) Both (III) and (IV) above.

(c) Only (IV) above

17. Which of these decision-making modes is characterized by reactive solutions to existing problems, < Answer > rather than a proactive search for new opportunities? (a) Entrepreneurial mode (d) Logical mode

(b) Planning mode (e) Operative mode.

(c) Adaptive mode

18. The essence of formulating a competitive strategy is, relating the company to (a) Its competitors (d) Its environment

(b) Its customers (e) Its suppliers.

< Answer >

(c) Its creditors

19. Which of the following is/are true regarding coalition? I.

Coalitions such as technology licenses, supply agreements, joint ventures and marketing agreements are formed with a long-term orientation. II. Coalitions broaden the scope of operations by broadening the firm. III. The coalitions bestow the cost and differentiation advantages of vertical linkages without the firm 2

< Answer >

having to go in for vertical integration. IV. Entering into a coalition is a laborious and time consuming process, which might involve many compromises and thus can nullify the advantages expected of the coalition. (a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II), (III) and (IV) above.

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

20. Which of the following is not one of the five types of organizational structures identified by Mintzberg? < Answer > (a) Simple structure (d) Professional bureaucracy

(b) Machine bureaucracy (e) Divisionalized form.

(c) Matrix structure

21. Which strategy would be effective when the new products have a counter cyclical sales pattern < Answer > compared to an organization's present products? (a) Forward integration (c) Horizontal diversification

(b) Retrenchment (d) Market penetration

(e) Divestiture.

22. 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 (c) Joint venture

(b) Product development (d) Horizontal integration

(e) Divestiture.

23. Which of the following statements is/are true about value chain analysis?

< Answer >

I.

Value chain analysis is based on the assumption that a business’s basic purpose is to create value for its suppliers. II. In this method of analysis, managers divide the activities of their firms into sets of separate activities that add value. III. When managers divide the activities of their firms into sets of separate activities, the activities of the organization have to be identified and examined by managers. IV. Managers acquire an in depth understanding of their firm’s capabilities, its cost structure and how these create competitive advantage or disadvantage. (a) Only (I) above (c) Both (III) and (IV) above (e) (II), (III) and (IV) above.

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

24. As per Mintzberg, in which of the following modes, strategies are framed by one powerful individual < Answer > and focus solely on the organization’s opportunities? (a) Adaptive mode (b) Planning mode (d) Exhaustive mode (e) Comprehensive mode.

(c) Entrepreneurial mode < Answer >

25. Which of the following cultures are cautious and conservative? (a) Inert

(b) Adaptive

(c) Mixed

(d) Complex (e) Competitive.

26. Which of the following is/are not the growth strategies? I. II. III. IV.

< Answer >

Concentration. Horizontal integration. Divestiture. Joint ventures.

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

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

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

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

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

(b) Only (II) above (c) Both (I) and (II) above (e) All (I), (II), (III) and (IV) above. 3

28. Which of the following is not one of the key elements of Ansoff’s strategic pradigm?

< Answer >

(a) There is a universal success formula for all firms (b) The level of turbulence in the environment to optimize the firm’s success (c) The aggressiveness of the strategy should be aligned with the turbulence in the environment to optimize the firm’s success (d) The management’s capabilities should be aligned with the environment to optimize the firm’s success (e) Different internal capabilities variables jointly determine the firm’s success. 29. Banking organizations in India have seen a lot of radical changes. One of the changes being the < Answer > implementation of voluntary retirement scheme for their employees. This type of strategic change is called (a) Re-engineering (d) Capacity building

(b) Restructuring (e) Diversification.

(c) Innovation < Answer >

30. On which of the following, do grand strategies focus? I. II. III. IV. (a) (c) (e)

Concentration. Market development. Product development. Turnarounds. Only (I) above Both (II) and (III) above All (I), (II), (III) and (IV) above.

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

END OF SECTION A

4

Section B : Caselets (50 Marks) This section consists of questions with serial number 1 – 5. 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.

Comment on the strategic planning adopted by Mattel against the backdrop of lost opportunity in the video games business? (6 marks) < Answer >

2.

Mattel adopted brand extension strategy for its toy brand. How far was this successful? (8 marks) < Answer >

3.

Toy industry was hemmed with lack of creativity. Is this the reason Mattel emphasize on established brands over innovation. Comment. (6 marks) < Answer >

On August 22, 1996, Jill Barad was named the new Chief Executive Officer (CEO) of Mattel. At 45 years of age, she had become one of the youngest women to head a major U.S. corporation. For Barad, the announcement was the fulfillment of a fifteen-year career at Mattel during which she was best known for transforming Mattel’s flagging line of Barbie dolls into the most profitable toy brand in the world. As product manager for Barbie, she had pioneered a brand extension strategy that had tripled Barbie sales to $1.4 billion between 1988 and 1995. In the process, she had gained a reputation for being a hard-driving manager and skilled marketing visionary. As CEO, one of Barad’s first tasks was to decide on a strategy that would enable Mattel to grow earnings per share in line with the company’s stated goal of 15 percent per annum. Mattel is the world’s largest toy maker, with 1995 revenues of $3.64 billion. The company’s strengths lie in its Barbie brand; its Fisher-Price line of toys for young children, which generated 1995 revenues of more than $1 billion; the Hot Wheels brand; and its Disney licenses. Negotiated in 1988, the Disney licenses give Martel exclusive rights to make products based on Disney’s movies for kids. In 1995, Mattel earned revenues of $450 million from its Disney connection alone. Between 1988 and 1995, these four core product areas helped power Mattel to a compound annual growth rate of 20 percent for sales and 38 percent for operating income. In total, Mattel commands about 16 percent of the market share for toys sold in the United States, although its share in Europe, the other great toy market, is less than 8 percent. Despite Mattel’s glittering past and Jill Barad’s own starring role in it, many knowledgeable observers of the toy industry believe that the company’s goal of 15 percent growth in earning represents a difficult challenge for the new CEO. Barad takes over the top spot at a time when Mattel’s growth rate appears to be slowing. In June 1996, Mattel’s growth rate appeared to be slowing. In June 1996, Mattel reported that sales for its most recent quarter would be “approximately the same as last year,” marking the first time quarterly results had been flat in eight years. To be sure, part of the slowdown was due to lackluster sales of its toys based on Disney’s latest film, The Hunchback of Notre Dame. Although this shortfall could easily be made up by a strong showing from toys linked to future Disney films, critics charge that the toy industry in general seems to be suffering from a chronic lack of creativity. Of the fifteen topselling toys in 1996, only three were toy company inventions that originated within the last year. Mattel is very much a case in point. The Barbie brand has been around since 1959; hot Wheels and Fisher price were acquired rather than developed internally; while the creative minds behind the Disney line of toys clearly lie with that company, not Mattel. Of course, it can be argued that given the fickle nature of the toy business, in which last year’s mega-hit can become this year’s bust (remember Cabbage Patch Kids?), Mattel is right to focus on established and enduring brands. However, by emphasizing established brands over innovation, Mattel runs the risk of missing out on successful new blockbusters. That’s what happened with videogames. Having given up after some early forays into video games, Mattel watched Nintendo and Sega take that business from zero to $6 billion in sales. So what strategy will Barad pursue in order to attain the goal of 15 percent growth in earnings? The early signs are that her strategy for Mattel will have four main elements. First, she has made it clear that she intends to continue with the highly profitable practice of extending the company’s existing brands. For example, she has plans to develop a line of collectable Barbies. Second, she intends to develop new product categories, particularly in boys’ toys and board games, 5

two areas in which Mattel has traditionally been weak. This could be accomplished either by developing the toys inhouse or by acquiring an existing company and then growing its business through further investments. Third, she intends to focus more effort on expanding sales in overseas markets, where Mattel’s presence is more limited than in the United States. Her goal is to increase overseas sales to more than 50 percent of Mattel’s total, up from 40 percent today. Finally, she will try to increase earnings by driving down costs. Cost reductions will be achieved by moving production to low-cost foreign factories in places such as China and Thailand. This will represent a major shift of Mattel, which currently manufacturers two-thirds of its core product lines in its own plants.

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

Discuss the difficulties to be faced by the new entrants to enter the Japanese beer industry and why the barriers for new entrants are declining after 1994 in Japanese breweries industry? (10 marks) < Answer >

5.

The owners of restaurants appear to be loyal to the big brewer and reluctant to take on competing brands that might alienate their main suppliers. Comment? (8 marks) < Answer >

In 1556, an English visitor to Japan noted that the Japanese “feed moderately but they drink largely.” This is still the case today; the Japanese have one of the highest levels of beer consumption per capita of any country in the world. In 1994, for example, 56 liters of beer were sold for every man, woman, and child in the country, making Japan’s per capita level of beer consumption similar to that of big beer-drinking nations such as Australia, Britain, and Germany. The vast Japanese market is dominated by just four companies: Kirin, Asahi, Sapporo, and Suntory. In 1994 these four had a combined market share of 98 percent. Collectively, these companies enjoy one of the highest profit rates of any industry in Japan. Suntory is the only successful new entrant in the last thirty years, and its market share stands at no more than 6 percent. Normally, a lack of new entry into a profitable industry indicates the presence of high barriers to entry, and that is certainly true in this case. As with large brewers all over the world, Japan’s big four spend heavily on advertising and promotions. The resulting product differentiation and brand identification have certainly helped to limit the potential for new entry. However, there is more to the story than this. Japan’s big brewing companies have also been the beneficiaries of significant regulatory barriers to entry. However, there is more to the story than this. Japan’s big brewing companies have also been the beneficiaries of significant regulatory barriers to entry. Brewers in Japan must have a license from the Ministry of Finance (MOF). Prior to 1994, the MOF would not issue a license to any brewer producing less than 2 million liters annually. His restriction represented an imposing hurdle to any potential new entrant. Interestingly enough, the reason for the licensing scheme was bureaucratic convenience rather than a desire to protect brewing companies from new entry; it is easier to collect tax from 4 companies than from 400. Another significant barrier to entry has been Japan’s distribution system. In Japan there are often close ties between distributors and manufacturers, and this is the case in the brewing industry. Roughly half the beer consumed in Japan is sold in bars and restaurants. Their owners appear to be loyal to the big brewers and reluctant to take on competing brands that might alienate their main suppliers. Small liquor stores are the other main distribution outlet for beer, and they, too have traditionally maintained close ties with the big brewers and are unwilling to sell the new products as they fear the big brewers might “punish” them by denying them access to adequate supplies. However, it now appears that the barriers to entering Japan’s brewing industry are declining. As part of an economic liberalization plan, in 1994 the MOF reduced the production threshold required to gain a license from 2 million liters to 60,000 liters; low enough to allow for the entry of microbreweries using the same technology that is now found in many brew pubs in the United States and Britain. Moreover, regulatory changes have also allowed for the establishment of large new discount stores in Japan. (Until 1994 small retailers could effectively block the establishment of a large discount store in their region by appealing to the local authorities.) Unlike traditional small retailers, large discount retailers are motivated more by price and profit than by loyalties to an established supplier, and microbreweries, in addition to that of Japan’s bit four. Given the decline in traditional barriers to entry, it seems increasingly likely that Japan’s big four brewers will have to face new competitors, increased competitions, and lower profit margins in the years to come.

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

What non-price competitive moves did the company play to combat the competition? (6 marks) < Answer > 6

7.

What pricing strategy did Toys ‘R’ Us follow wherein it under cut the price of its rivals and made two of its competitors bankrupt? (6 marks) < Answer >

Toys ‘R’ Us, based in Paramus, New Jersey, grew at an astonishing 25 percent annual rate throughout the 1980s and today holds a 20 percent share of the $15 billion retail toy market, which makes it the industry leader. To reach its dominant position, the company used a strategy of market penetration based on developing a nationwide chain of retail outlets and a cost-leadership strategy. To lower costs, Toys ‘R’ Us developed efficient materials management techniques for ordering and distributing toys to its stores. It also provided only a low level of customer service. Together, these moves allowed it to obtain a very low expense to sales ratio of 17 percent. Toys ‘R’ Us then used its low costs to promote a philosophy of everyday low pricing. The company deliberately sets out to undercut the prices of its rivals, and its succeeded. In fact, its two largest competitors in the 1980s, Child World and Lionel, went bankrupt. Pursuing a market-penetration strategy based on low cost thus brought spectacular results for Toys ‘R’ Us. In the 1990s, however, the company’s commanding position is being threatened by a new set of rivals, which are also pursuing market-penetration strategies. Companies such as Wal-Mart, Kmart, and Target Stores are rapidly expanding the number of their stores and trying to beat Toys ‘R’ Us at its own game by selling toys at prices that are often below those of Toys ‘R’ Us. Indeed, Wal-Mart has more than doubled its share of the toy market (to more than 13 percent), and both Kmart’s and Target’s toy sales are rapidly increasing. This new competition is squeezing profits for Toys ‘R’ Us, and the company is turning to non-price competition to attract customers. For example, Toys ‘R’ Us is promoting its wide range of products as a competitive advantage; it carries more than 16,000 items versus 2,000 at a typical discount store. It has also decided to increase the level of customer service by offering customers more personalized attention. By emphasizing quality and customer responsiveness, as well as low price, the company seeks to fend off the new challenge from the discount stores and maintain its growth in the 1990s.

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.

Most of the time, going private involves a direct transaction where the investor group buys out the stock of public stockholders. On some occasions, there is a Leveraged Buy-out (LBO) where third party, or sometimes fourth party, investors are involved. In this context, define LBO, explain the stages of the process of an LBO and criticism of LBO (10 marks) < Answer >

9.

Differentiation cannot be understood by viewing the firm in aggregate but is the outcome of specific activities that a firm performs and how they affect the buyer. Hence, discuss the relation between differentiation and value chain. (10 marks) < Answer > END OF SECTION C END OF QUESTION PAPER

Suggested Answers

Business Policy & Strategy (MB311) : October 2005 7

1.

Answer : (e) Reason : The exist barriers are, Investments in plant and equipment that have no alternative uses and cannot be sold off, emotional attachment to an industry and economic dependence on the industry.

< TOP >

2.

Answer : (e) Reason : In turnkey operations, after completion, the facilities are transferred to the host country.

< TOP >

3.

Answer : (a) Reason : Social environment of an organization constitutes the values, beliefs, attitudes, opinions and lifestyles.

< TOP >

4.

Answer : (c) Reason : Focus assumes that a firm can serve its strategic target market more effectively than its competitors who are serving much bigger market.

< TOP >

5.

Answer : (e) Reason : the basic characteristics which differentiate functional strategies from grand strategies are Time horizon covered, specificity and participation in their development.

< TOP >

6.

Answer : (c) Reason : Policy is a general guide that specifies the broad parameters within which organizational members are expected to operate in pursuit of organizational goals.

< TOP >

7.

Answer : (e) Reason : Refreezing is not part of change process.

< TOP >

8.

Answer : (b) Reason : Firms pursue concentration to grow while remaining relatively simple.

< TOP >

9.

Answer : (d) Reason : The statements, Leadership style also relates to the role of planning and the importance of incremental change in strategic management and in relatively stable environments both entrepreneurial leadership style and conservative leadership style can be appropriate and successful.

< TOP >

10.

Answer : (a) Reason : Strategy formulation refers to the development of long term plans for managing opportunities and threats in the external environment and for utilizing the strengths and overcoming the weaknesses within the organization.

< TOP >

11.

Answer : (a) Reason : Machiavellianism is the term used to describe coercive management tactics and which means the ruthless use of power, particularly coercive power and manipulation to attain personal goals.

< TOP >

12.

Answer : (e) Reason : Zero-Base budget its practitioners to justify every dollar they spend.

< TOP >

13.

Answer : (c) Reason : Poison puts is an anti takeover strategy, in which the target company issues bonds which encourage holders to cash in at a high price.

< TOP >

14.

Answer : (d) Reason : Vision of a company provides managers with unity of direction that transcends individual, parochial and transitory needs.

< TOP >

15.

Answer : (a) Reason : Because of Economies of scale, it is possible to manufacture goods at a lower average cost compared to other manufacturers with lower levels of output.

< TOP >

16.

Answer : (e) Reason : The statements, Many fragmented industries possess low barriers of entry and have commodity products that are very hard to differentiate and low barriers of entry during strong demand and high profits will lead to more new entrants hoping for profitability are

< TOP >

8

true. 17.

Answer : (c) Reason : Adaptive mode of strategic planning is characterized by reactive solutions to existing problems, rather than a proactive search for new opportunities.

< TOP >

18.

Answer : (d) Reason : The essence of formulating a competitive strategy is to make a set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company objective by taking into consideration the environment in which the company operates .(a)(b)(c)and(e) the environment contains competitors, customers, creditors and suppliers.

< TOP >

19.

Answer : (d) Reason : Coalitions such as technology licenses, supply agreements, joint ventures and marketing agreements are formed with a long-term orientation, the coalitions bestow the cost and differentiation advantages of vertical linkages without the firm having to go in for vertical integration and entering into a coalition is a laborious and time consuming process, which might involve many compromises and thus can nullify the advantages expected of the coalition.

< TOP >

20.

Answer : (c) Reason : Matrix structure is not one of the five types of organizational structures identified by Mintzberg.

< TOP >

21.

Answer : (c) Reason : In a Horizontal diversification strategy, a company would be acquiring its competitors in the same industry. Broadening the product profile through such acquisition would reduce the risk, if the new products have a counter cyclical sales pattern compared to an organization's present products.

< TOP >

22.

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.

23.

Answer : (e) Reason : The statements, in this method of analysis, managers divide the activities of their firms into sets of separate activities that ad value, to do so, the activities of the organization have to be identified and examined by managers and managers thus acquire an in depth understanding of their firm’s capabilities, its cost structure and how these create competitive advantage or disadvantage.

24.

Answer : (c) Reason : In entrepreneurial mode, strategies are framed by one powerful individual and focuses solely on the organization’s opportunities.

< TOP >

25.

Answer : (a) Reason : Inert cultures are cautious and conservative.

< TOP >

26.

Answer : (a) Reason : Divestiture is not one of the growth strategies.

< TOP >

27.

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

< TOP >

28.

Answer : (a) Reason : The statement, there is universal success formula for all firms is not true. according to Ansoff, there is not universal success formula for all firms.

< TOP >

29.

< TOP >

Because,

Answer: (b) Reason: Restructuring program involves changes in the relationship between division and function. Banking organization is downsizing the number of employees though VRS to reduce operating cost. (a) Re-engineering is the fundamental rethinking and radical redesign of business process to achieve dramatic improvements in critical, contemporary measures of 9

< TOP >

< TOP >

performance such as cost, quality, service and speed (c) Innovation is a process by which organizations use their skills and resources to create new technologies or products (d) capacity building is the increase in the volume from the existing one. (e) Diversification is a growth strategy that entails effecting growth the development of new areas that are clearly distinct from current business. 30.

Answer : (e) Reason : Grand strategies focus on Concentration, market development, product development and turnarounds.

10

< TOP >

Section B : Problems Caselet 1 1.

Mattel had lost a big opportunity by losing out on the innovation. Mattel had too much of confidence on its established brand and its brand extension strategy. This is not to mistake the strategy of Mattel. Mattel was right to focus on established and enduring brands, which it had developed with lot of dollar pumping. But by emphasizing the established brand over innovation, it lost the new block buster and opportunity to cash the changing consumer’s choices and tastes. Mattel has lost the opportunity of earning revenues in video games business as it’s carry foray into video games was devoid of creativity and lacked the innovation. < TOP >

2.

Mattel was successful with its brand extension strategy to a large extent. Brand has successfully increased the sale revenue in just 7 years by adopting the brand extension strategy. The Mattel brand’s were highly successful and this helped Mattel gain more revenues through brand extension.

3.

Mattel was one of the larger established and branded toy makers in the world. The toy industry was facing lack of creativity and innovation and Mattel was not in a position to take risk by banking on new innovative and creative toys. May be this is the reason, for Mattel to bank on its extended branded toys over innovation.

< TOP >

< TOP >

Caselet 2 4.

The Japanese entire beer industries is totally under the control of four players only. The four beer companies spend heavily on advertising and promotions. The resulting product differentiation and promotions. The resulting product differentiation and brand identification have certainly become the barriers for the new entrant to operate. Again, brewers in Japan must have a license from the ministry of Finance (MOF) and it issues the license to any brewer produce more than 2 millions litres annually. The close ties between distributors and manufacturers is also a big barrier for the new entrant. Because of the above reasons, it was very difficult for the new entrants.

5.

The owners of the restaurants are very loyal to the big brewers and reluctant to take on competing brand that might alienate their main suppliers. Because of this, the restaurants want to sell those brand only for which they are main distributors. This leads to the non-existence of ideal market conditions. Sometimes, the owners might not plance their competitive brand and so the situation forces the customers brand and so the situation forces the customers to use the brand available in the particular restaurant. So, the customer’s choice is not being made available. If this condition continues, it is likely to create a problem that the distributor’s choice becomes more important rather than customer’s choice.

< TOP >

< TOP >

Caselet 3 6.

The following were the non-price competitive moves made by the company. Promotion of wide range: Toys ‘R’ strength lay in the wide range of products which its competitors lacked. Therefore promoting this as a ‘differentiating’ factor to gain competitive advantage. Improve customers’ service: the customers service played significant importance for a retail store, in order to improve its competitive position, it tried to increase the level of customers service. Low price, high quality: It sought to make products which were priced low but were high in quality. < TOP >

7

Toys ‘R’ have followed the ‘put-out’ pricing strategy. This is a strategy where a firm/company prices its product’s very competitively so as to eliminate its weaker competitors. < TOP >

Section C: Applied Theory 8.

Stages in an LBO There are four distinct but related stages of in the process of an LBO: •

Arrangement of finance

•

Taking the company private

•

Restructuring

•

Reverse LBO 11

Arrangement of finance Raising the finance and establishing the incentive system for the management is the first step in any LBO operation. Normally 10 percent of the financing is undertaken by the LBO specialist, while the rest of the financing comes from merchant bankers, venture capitalists and commercial banks. Other forms of financing include borrowing from banks against the company’s assets, or borrowing through private placement or public offering of junk bonds which give very high yields but also carry greater risk. Taking the company private The shares of the target company are purchased by the buy-out specialist, who takes the company private. The buyout specialist may also purchase all the assets through the asset purchasing option. Restructuring The new management tries to enhance the profits and cash flow by cutting down on operating costs, or changing the marketing strategy, etc. The new management may adopt any of the following policies: • • • •

Consolidating and reorganizing the existing production facilities. Changing the product mix, which includes changing the quality of the product and policies relating to customer service and pricing. Reducing excess employment. Phasing out employees and reducing research and development costs, and costs involved in purchasing new plants and equipment, as long as there is need to redeem the acquired debts.

•

Getting better terms from suppliers.

•

Selling off parts of the corporation or disposing off inventory to reduce debts.

However, even while implementing restructuring activities, approval should continue to be given to genuine requirements of capital. A firm has to incur expenses on R&D and on new plants and equipment at some point; therefore any restructuring activity should also look after long term objectives. Reverse LBO In reverse LBO, the investor group may take the company public again if the goals see by the LBO groups have already been achieved. The purpose of this exercise is to create liquidity for the existing shareholders. Criticisms of LBO Despite the success of LBOs as a strategy to safeguard firms from hostile takeovers, it is criticized on many grounds: •

A major chunk of the funds available in the market are borrowed for financial restructuring of the firm, resulting in an increase in the cost of debt.

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An LBO makes it more costly and difficult for other firms to borrow funds from the market.

• After the LBO, as firms streamline their operations, many employees lose their jobs. Since the new management in the post-buyout scenario concentrates on short-term goals such as reduction of debtburden, long term investments on research and development, new plant and equipment are not made, hampering the growth of the firm in the long run. < TOP >

9.

Differentiation and Value Chain Differentiation cannot be understood by viewing the firm in aggregate but is the outcome of specific activities that a firm performs and how they affect the buyer. Differentiation grows out of a firm’s value chain. The end product gets affected based on the procurement of raw material and other inputs and hence affecting differentiation. For example, Heineken pays particular attention to quality and purity of the ingredients by using a constant strain of yeast for its beer. Steinway differentiates itself by using skilled technicians to choose the finest materials for its pianos and Michelin is very attentive than its competitors in selecting the grades of rubber it uses in its tires. Similarly, the uniqueness is created by other successful differentiators through other primary and support activities. Technology development activities of a firm can lead to product designs that possess superior and unique performance over its competitors, as it has been done by Cray Research in super computers. In operations activities, the uniqueness can be found in product appearance, conformance to specifications and reliability. For 12

example, Perdue for its fresh chicken has bolstered its differentiation by controlling growing conditions carefully and by feeding chickens marigolds to improve their color. The speed and the consistence of deliveries can be shaped by the outbound logistical system. For example, an integrated logistical system has been established by the Federal Express using its Memphis Hub that yields a level of delivery reliability unheard of prior to its entry into the small-parcel delivery business. Marketing and sales activities also frequently have an impact on differentiation. For example, Timken’s sales force assists its buyers to use roller bearings more effectively in their manufacturing processes. Even if the physical product is a commodity, other activities can often lead to substantial differentiation. Similarly, maintenance or scheduling which is considered to be an indirect activity can contribute to differentiation just as do direct activities such as assembly or order processing. For example, dust and fume free building can dramatically improve defect rates in semiconductor manufacturing. Value activities which represent small amount of total cost can nevertheless have a major impact on differentiation. For example, only one percent of total cost may be represented by inspection, but in shipping even one defective package of drugs to a buyer can create a major problem for a pharmaceutical firm’s perceived differentiation. Value chains developed for the purpose of strategic cost analysis may not separate all activities that are important for differentiation. A finer division of some value activities is required for differential analysis, while others may be combined as a whole if they have little differentiation impact. A firm may also be differentiated based on the breadth of its activities. Or its competitive scope. Crown Cork and seal offers bottle caps and filling machinery plus cans. A full line of packaging services to its buyers is offered by crown cork and seal and its expertise in packaging machinery gives it more credibility and access in selling cans. Citicorp’s breadth of activities in financial services increases its fame as well as allowing its sales channels to provide a broader product range. A number of other differentiating factors can result from broad competitive scope. •

Ability to serve buyer needs anywhere.

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Simplified maintenance for the buyer if spare parts and design philosophies are common for a wide line.

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Single point at which the buyer can purchase.

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Single point for customer service.

• Superior compatibility among products. Proper consistency and co-ordination among the activities is needed by most of these benefits if a firm is to achieve them. Differentiation can also have its source from downstream. A firm’s channels play a vital role in enhancing the reputation of firm, service and customer training and many other factors. For example, independent bottlers in soft drinks are crucial to differentiation. Coke and Pepsi improve their effectiveness by spending huge amount of money in attempting to upgrade bottlers. For example, Coke has been arranging the sale of less effective bottlers to new, more capable owners. < TOP > < TOP OF THE DOCUMENT >

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