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TECHNICAL TEST 1 QUESTIONS.ANSWERS.docx

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Department
Business
Course
BU481
Professor
Tabatha Dominguez
Semester
Fall

Description
1. Define and describe the balance scorecard tool and elements. How does the concept of leading and lagging indicators apply to this tool and its relevance to strategy management analysis? - Meant to forecast how a company will perform in future - Customer Perspective: customer satisfaction, customer retention, and market share in target segments - Financial Perspective: operating income, return on capital employed, and economic value added - Learning and Growth Perspective: employee satisfaction, employee retention, skill sets - Business Process Perspective: cost, throughput, quality. These are for business processes such as procurement, production and order fulfillment - Learning and growth lead to better business processes, which lead to increased value to customer, which leads to improved financial performance - Scorecard includes objectives, measures, targets and initiatives - Lagging indicators are those statistics or measures that tell you what has happened in the past while leading indicators try to determine what will happen in the future (ex. Number of catalogues issued is a leading indicator of future sales at a store) 2. Discuss and describe in details the measures that make up the two axes of the Performance Matrix. What insights (2) does this tool provide in assessing organizational performance? Describe (2) how the outputs of this tool can influence strategy formulation and implementation. - Organizational health o Enthusiasm, boundaries, problem solving, learning, sustainability - Operating performance o Profit margins, ROE, ROA, Liquidity Ratios, Market share, Sales growth - Where was business 3 years ago, where today, which way is it trending? - Tool allows us to see how the company is trending, where it was in the past and where it is headed - If in Q1; strategy is fine tuning, perhaps taking a farther than usual look into the future; make sure you are not complacent - If in Q2; People enjoy work, but not efficient will be hard to make currently happy employees convert into uncomfortable changes to improve performance - If in Q3; good performance, unhappy employees; often a result of companies downsizing and forcing workers to do more work with less people - If in Q4; bad performance and unhappy employees  must act fast, shortcuts must be taken  drastic changes must be made 3. Describe the four basic functions of a general manager as it applies to STRATEGY and their relationship as depicted in the diagram. Which one is a more useful starting point for an existing firm within the context of Strategic Management analysis and why? - Assessing Performance: most important because if you misconstrue performance than everything the follows will be wrong o Based on Operating Performance (hard measures/quantitative) and Org Health (Soft Measures/qualitative) - Setting Direction: need strong sense of direction (vision, mission, values) - Creating Strategy: must now link company vision to strategy; must translate the vision into the strategy - Implementing Change: making it happen o Assessing Performance Should be first  Ex. McDonald‟s saw its first loss in 2003; it was more focused on opening new stores (McDonald‟s is paid rent from franchise owners as well as royalties) - all profits were coming from this, instead of same-store sales 4. Please define the concept of Value Proposition. Why this concept is considered a key component of strategy? What is the relationship of the value proposition to the other components of business strategy? Please describe those elements. Provide an example of a company discussed in class or the textbook that leveraged its value proposition to create a competitive advantage. - Value Proposition: how does the business intend to attract customers? What benefits constitute its offer or value proposition to the marketplace - Porter suggests low cost and differentiation as two generic strategies for VP - It is a key component of strategy because it is crucial for companies to distinguish themselves from the many competitors in their industry, so they must add some sort of value to their products that are not found elsewhere - Costco offers low unit prices on quantity purchases of food and general merchandise items  price advantage is important to small commercial customers and to households with cash and storage capacity to inventory items. Prices are hard for competitors to match as long as they incur the costs associated with the smaller package and lot sizes that many customers want 5. In applying the diamond-E model to strategic analysis, “the tighter the fit, the better the strategy and the performance.” Inconsistency between the components creates risks. Describe two types of strategic risk and how those risks manifest themselves in the short and long terms. - Environmental Risk – inconsistency between strategy and environment o Short-Term: Errors in reading the environment cause strategic failure  Misread timing, potential, competitive reaction  Ex Canon‟s early, heavy investment in digital photography o Long-Term: Environmental changes make the strategy obsolete  Missing or underestimating environmental change  Ex. Kodak procrastinated for years in changing to digital photography and is now playing catch-up - Capability Risk – inconsistency between firm‟s goals and capabilities o Short-Term: Strategic demands exceed the capacity to execute  Strategies demand too much  Ex. Proctor and Gamble tried to aggressively launch a number of new products and brands; but failed as costs escalated and morale tumbled o Long-Term: Internal capabilities develop inconsistently with strategy  Demands of strategy increase while capabilities of firm stay stagnant/or even erode with complacency  Ex. Jim Kilts was brought in to replace CEO of Gillette as it had been floundering 6. Please define and describe the notion of “Strategic Tension” and what are the implications (2) within the context of strategic management analysis? Provide an example discussed in class or the textbook where a firm experienced strategic tension. - Strategic tension suggests that there is no perfect strategic choice and firms will always experience some stretch or tension o Strategic analysis triangle shows that firms must manage the tension between what they need to do given the competitive environment, what they can do given their organization, resources and capabilities, and what they want to do given management preferences - Want: Management Preferences (Individual) - Can: Resource Capabilities and Organization (Firm) o What they can do considering their organization, resources and capabilities - Need: Given competitive Environment (Industry) - A firm may satisfy key stakeholder interests at the expense of not delivering exactly what the market needs, as found in many entrepreneurial firms who are guided by what an entrepreneur wants to do 7. Please explain the relationship between trade-offs and strategy. Please define and describe three trade-offs between the “differentiation” and “cost leadership” generic strategies. - Strategy is the process or plan which a company o Strategy consists of  Goals (what a company wants to achieve),  Product market focus (what are the products/services the company wants to sell and in what markets),  Value Proposition (how the business will attract customers), and  Core activities (what the primary value adding activities the business intends to perform and how it will perform it) - Trade-offs are the sacrifices that firms must make in order to pursue a certain strategy - Trade-offs between differentiation and cost leadership o Cost leadership appeals to price sensitive consumers; while differentiation appeals to high-quality or value seeking customers o Differentiation seeks to serve customers with products that are vastly different/superior to competitors, while cost leadership seeks to provide the same products as competitors at a lower price o Goals of Cost leadership are often to sell in more volume whereas differentiation has high enough margins that it does not o The experience one often receives with the differentiation strategy is sacrificed with cost leadership 8. Define and describe core activities. Why core activities are considered a key component of business strategy? Which tool(s) can be used to help identify the core activities? Provide an example discussed in class or the textbook of a company and its core activities. - Core Activities: Activities which are critical to the effective operation of the business - As illustrated in the definition, core activities are considered a key to component of business strategy because they are required to be done extremely well otherwise the firm will not excel in its industry – it will have no competitive advantage - Firms can decide on what they want their core activities to be; in order to o Ex. In pursuing vertical integration, you will have to decide on what basic building blocks in the industry value chain you intend to perform and those you will access through a market o Your core activities would be best described in terms of the building blocks that represent fundamental aspects of the industry such as raw material supply, manufacturing, distribution, etc. - Kmart: Kmart decided to outsource transportation activities as well as its information technology, in order to focus on merchandising (ITS CORE ACTIVITY)  Wal-Mart was investing heavily in distribution and information technology at the same time, which allowed it to lower costs. Kmart was unable to match Wal-Mart‟s costs partly because it did not have control over some of the fundamental cost elements of the business. Kmart soon became bankrupt because having a core activity of Merchandising was not enough to offset the cost differences 9. Please define and describe the “focus” generic strategic strategy. Please define and describe three internal attributes / elements required by a firm to support this generic strategy. - Focus: producing a product/service which focuses on the need of a particular buyer group, segment or product line or geographic market o Built around serving a particular target market VERY well – either more effectively (differentiation) or efficiently (cost leadership) o Defensible from competition because the firm is achieving low cost or differentiation in its narrow market segment - Required Attributes: o Strong Marketing abilities: must be able to describe product‟s differences from the market o Creative flair: must be a product which appeals to customers o Strong cooperation from channels: this is key in order to minimize costs 10. Please define and describe the “differentiation” generic strategic strategy. Please define and describe three internal attributes / elements required by a firm to support this generic strategy. - Differentiation: product/service that is perceived industry wide as being different o Firm differentiates product/service along same dimensions that are valued by customers o Creates brand loyalty in customers which is hard to break by competitors; also makes customers less price sensitive o Makes significant entry barriers for new competitors to enter market - Required Attributes: o Strong marketing abilities: must be able to tell public your product is superior o Creative flair: must provide something that the public is interested in, which is different from current competitors o Reputation for quality or technology leadership: must be trusted by consumers as a company which provides high quality, high value products 11. Please define and describe the “cost leadership” generic strategic strategy. Please define and describe three internal attributes / elements required by a firm to support this generic strategy. - Cost Leadership: requires aggressive construction of efficient-scale facilities, pursuit of cost reduction from experience, tight cost and overhead control as well as avoidance of marginal customer accounts o Yields above average return; defence against rivalry from competitors as it can earn returns after competitors have competed away profits through rivalry o Relies on economy of scale and/or experience curve as entry barrier o Strategy particularly dependent on pre-emption - Required Attributes: o Low-cost distribution system: do not want distribution channel members adding on lots of costs o Process engineering skills: need to produce efficiently to ensure low price o Products designed for ease of manufacture: easily manufactured items means economy of scale is easier to obtain 12. Define and describe four models / frameworks/ tools that may be used in environmental analysis and note their major strategic purpose? - Porter‟s Five Forces o Potential Entrants, Suppliers, Substitutes, Buyers, rivalry among existing firms o Who has the power and how attractive is the industry? - PEST o Political, Economic, Social, Technology  Supply, competition demand o More macro than Porter‟s: Early warning signs of changes in industry o Can provide long lead time in their evolution or development, although the final outcome or impact of the force may be less than precise o Ex. Demographics can be used to assess demand many years in advance – for schools for ex. - Game Theory o It is illegal for companies to tacitly collude with competitors; therefore they must read and understand the signals sent by one another to determine motivation and intent to cooperate or compete o 8 industry attributes that facilitate the development and maintenance of tacit collusion 1. Small number of firms enables monitoring 2. Product homogeneity focuses attention on price (easily monitored) 3. Cost homogeneity enables common price structure and level of output 4. Price leaders to provide order and discipline to the market 5. Industry social structure or recipe that defines the standards of operating in the industry 6. High order frequency adn small order size minimize the cost of losing an order and incentive to compete 7. Entry barriers as noted by Porter in his Five Forces Model o Zero-Sum games = one player‟s gain is exactly equal to the other player‟s loss o Non-zero-sum games = allows cooperation and competition o Purpose is to see that it is possible to have mutual gain in industries, there are often non-zero-sum games - Stakeholder Analysis o Method which identifies all stakeholders of a business, values their importance to the business and adopts a strategy in order to align it with the stakeholders‟ interests. o Stakeholders can have Power, legitimacy, or urgency, or a combination of any/all of the three 13. Define and describe the "Economic Deterrence / Expected Retaliation" concept within the context of the 5 forces model and how this concept can impact the industry profitability. Please provide an example in your textbook, articles or discussed in class that relates to the concept. - Economic Deterrence: companies pre-empt competitors by investing heavily in an asset; competitor can buy the same asset but will not because of limited market potential o Ex. Float-glass plants require a huge investment, and most markets can only support one facility; because this investment cannot be transferred the first mover always ensures sole ownership of the market - Would fall under rivalry among existing firms 14. Define and describe the PEST analysis tool. Please describe how this tool should be used in the context of strategy assessment and formulation. - PEST (Politics, Economics, Social, Technological) [macro forces] o Supply, Competition, Demand (micro forces) - More macro than porter‟s five forces, and act as the early warning signals about changes in the industry - Can provide long lead time in their evolution or development, although the final outcome or impact of the force may be less than precise o Ex. Demographics can be used to assess demand many years in advance – for schools for ex. o Ex. Exchange rates, interest rates, and unemployment rates will all affect supply, demand and competition within an industry  this can be successfully predicted using the Economic section of PEST 15. Define and describe the concepts forward integration and backward integration. How and why are each one of these two concepts relevant to strategy? - Forward Integration: A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products. o Controls distribution centers and retailers where its products are sold. - Backward Integration: A form of vertical integration that involves the purchase of suppliers in order to reduce dependency. o controls subsidiaries that produce some of the inputs used in the production of its products.  For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. - These two concepts are relevant to strategy because implementing them are a legitimate way that companies control the value chain and can therefore dictate the final cost that the consumers are going to pay. This is a great way for cost leadership firms to limit costs and know exactly what their product will sell for in the store 16. Define, describe and contrast the value system and the value chain? What insight can the value system provide? What insights does the value chain provide? ( Note: Value system is sometimes referred to Industry value chain), - Value Chain: primary activities selected from the industry‟s value chain that have been integrated into the structure of an organization - Industry Value Chain: includes all activities from raw materials to sale to the final consumer and disposal o Ex. Automobile manufacturer (Value Chain) makes parts, assembles cars, and then market and distributes them  While the whole (industry) value chain would include mining the iron ore, manufacturing paint, producing radial tires, and disposing of old vehicles o Value Chain illustrates how any product/service could be described in terms of a set of primary activities and a set of supporting activities  Primary activities include: inbound logistics, operations, outbound logistics, marketing and sales and after-sale service  Support activities include firm infrastructure, human resource management, technology development and procurement  Primary and support activities contribute to both a firm‟s costs as well as the ability for a firm to deliver value to its customers  Value is created, less the costs, dictates the margin (or lack thereof) derived by each activity along the value chain 17. Define and describe the concept of strategic myopia and the implications within the context of strategy assessment and formulation. Define and describes two approaches that can reduce the strategic myopia impact. - Strategic Myopia: focus on environmental analysis is too specific, you miss the emergence of a new market opportunity, or the arrival of unconventional competition o Also; if you concentrate overly on a particular time horizon you may get blindsided by events that lie just beyond that limit - You can reduce the risks of focus by ensuring that your analysis is accompanied by continuous macro-environmental scanning, and that the analysis is recycled as it proceeds, to incorporate the redefinition as necessary, of both the relevant environment and questions being addressed o Macroeconomic Scanning – maintaining a concurrent awareness of the events and institutions surrounding the relevant business environment (use PEST)  PEST is good b/c it identifies broad forces and basic changes in the total environment of a business (most useful when uncertainty is very high)  Essentially an issue-seeking process; ongoing search for basic developments that may offer a firm brand new opportunities or present unconventional threats to its continuing performance o Identifying Market Intrusions – keep your eyes open for newcomers into your industry  Trucks and aircraft have taken business that historically belonged to the railroads  Low fare airlines are challenging the traditional hub and spoke network airplanes  Plastics have replaced wood, paper and metals in numerous applications  The development of new technology is often at the edge that allows outsiders to break into an industry and successfully penetrate its markets  Simply watch patent registrations, technical reports, and products or processes already in use in other industries that may be applicable in your own situation  There should be enough time to respond, as long as a clear and imaginative view is taken of the potential of the innovation and the intentions of its sponsors (given time lags associated with truly novel commercial development and market diffusion) o Recycling Analysis – ensure that the analytic process stays open (that you are prepared to incorporate new information and to double back or recycle your work as the need arises)  Recycling breaks the momentum of a proposal and may require substantial additional analysis; you may be reluctant (especially in ambiguous situations) to go back a step, perhaps to the beginning and redefine and reassess the situation  Fight this tendency or you will lose the important benefits of learning about new possibilities as the work develops 18. One model that can be used to assess the strategy-environment linkage is the Business Environment Analysis Model. (BEAM) Define and describe the four components of the model, how and when it should be used. How does it compare to the Porter 5 forces model? - Demand: Customer needs and performance, market growth, buyer bargaining power o does it anticipate opportunities and create advantages in the way that it addresses customer requirements and trends in the market? Is the strategy aimed at growing market segments? Does the strategy tap into new customer needs? In this process it is particularly important for you to gauge the degree to which a strategic proposal incorporates (1) the needs and preferences of current and potential customers; (2) the scale and timing of market development; and (3) the bargaining power of customers - Competition: aggregate competitive conditions, individual competitor strategies - Supply: advances in product, process technology; supplier competence and bargaining power; competition for raw materials and people - Government: industry support programs; economic and trade policy; regulation of structure and conduct - Similar to Porter‟s 5; understanding supply, demand and competition is crucial o Add government to the list since in many economies the regulatory environment has a direct impact on the industry. Simply examining the political factors that affect the industry, as in the PEST model, does not adequately capture the micro- processes of industry analysis 19. Please define and describe three (3) insight / conclusions that a GM seeks to acquire when he/she analyze the industry structure in which his/ her firm is competing within. How should the GM best apply this knowledge while reviewing the current strategy or formulating a new one? Vague so I‟ll assume you‟re looking for Porter‟s five forces - Potential Entrants o Threat of new entrants - Supplier o Bargaining power of supplier - Industry Competitors o Rivalry among existing firms - These three factors are of great importance to General Managers when they are contemplating their own firm‟s strategy. They must be aware of what is happening within the industry. With respect to potential entrants, the GM must attempt to build entry barriers through relationships with suppliers/distributors, or investing in assets. The firm must understand how much power their supplier has; in which case the firm can think about backwards integration, or spreading out its orders to multiple suppliers. Lastly the firm can use Game Theory to see what is happening within the industry to discover how to best react to competitor actions 20. Please define and describe the "switching costs" concept. How does this concept, when applied, impacts profitability (2). Please provide an example in your textbook, articles or discussed in class that relates to the concept. - Switching costs o If your product is tied to a certain system or supplier; you need them, you cannot switch suppliers because they won‟t fit that system o This will affect profitability because supplier will have significant power over the buyer as they will be forced to purchase from that specific supplier because they are integrated so closely  Ex. CANNOT FIND ONE (p 62 in “Buyers” section is where switching costs are)  Ex from Suppliers. In 2007 the price of hops drastically increased; which in turn hurt the beer industry greatly due to its dependence on hops as it is the main ingredient of beer. 21. Please define and describe three (3) options a General Manager should seriously consider when the industry he/she is competing in is experiencing high power of buyers and high threat of entry? Please provide an example in your textbook, articles or discussed in class that relates to one of more of these options. - Suppliers can build strategies to link their customers into their unique capabilities o This will lower the strength of buyers as it forces them to work exclusively with your company, as you offer a unique product that - Spread the risk of individual projects by maintaining a broad portfolio of contracts and customers o This is self explanatory; if one particular buyer accounts for a large percentage of your sales, that buyer will have significant influence on price negotiations. Therefore, whenever possible companies should try to refrain from „putting all its eggs in one basket‟  Ex. When inexpensive music became widely available via the internet, the music industry took a big hit - Use a focus strategy (either differentiation or cost leadership) o A great way to negate buyer power is to offer something that they need that is not offered by competitors; this will in effect also lower the threat of entry as you will gain brand loyal customers while creating barriers to entry for new firms to enter the market  Wal-Mart is an example of this. Wal-Mart uses cost leadership to appeal to consumers (it can be argued that all consumers have considerable buying power; as there is an unlimited number of options available to them for purchasing choices) by offering the lowest prices available, and at the same time the company sets barriers to entry as new competitors will be unable to offer similar prices while still turning a profit 22. Please define and describe three (3) options a General Manager should seriously consider when the industry he/she is competing in is experiencing high rivalry and high power from substitutes? Please provide an example in your textbook, articles or discussed in class that relates to one of more of these options. - Using generic focus strategies such as differentiation or cost leadership - Seek to lower costs through forward or backward integration - Invest in Research and Development or other core activities so you can better serve your current customers - Ex build a bear offers something that its customers do not; an experience along with the actual product it sells 23. Crossan Fry and Killing suggest using the firm’s profit model as a tool for focusing strategy-environment analysis. Define and describe the following profit models and their implications for strategic RISK analysis: · High variable cost structures · Inflexible Investment structures - High Variable Cost Structures: ensure you take care to assess the accuracy of the assumptions about the significant input costs. o Consider the problems that a large agrochemicals company has with one of its ammonia plants. The plant has a high variable cost structure and a large part of these costs are for the natural gas used in the conversion process. So much so in fact that the profitability of the plant hinges directly on access to natural gas at prices that are competitive with other regional producers. Some miscalculations at the time of proposing the plant about continuing political support for advantageous gas supply, however, have left this company with a major investment that simply cannot make money - Inflexible Investment Structures: sometimes you will find that the nature of the investment required by a strategic proposal is such that there will be little salvage value if things do not work out. The impact of such investments on the availability and cost of capital needs to be carefully considered o A small winery that intended to age all of its products for example, had to revise its proposal bc its bankers were not prepared to finance the inventory o A group with a uniquely designed restaurant had difficulty raising money from lenders who were concerned about the fact that the building had no alternative uses if the restaurant failed o In circumstances such as these you should carefully explore the probabilities of external forces that would lead to such worst case scenarios 24. Crossan Fry and Killing suggest using the firm’s profit model as a tool for focusing strategy-environment analysis. Define and describe the following profit models and their implications for strategic RISK analysis: · High fixed cost structures · High Break Even - High Fixed Cost Structures - if high fixed costs; special care should be given to assessing the prospects for price stability in the market o Airline industry: once airline has set schedule for season; costs are fixed  battle is to maximize total contribution. Since Variable cost are quite low in airline industry there is a strong temptation in this structure to cut price to capture additional volume; unfortunately this structure leads to fierce price wars and serious profitability problems for the industry as a whole - High Break Even – if Break even is high compared to target market; you need to make a careful assessment of your ability to achieve the required share position. You should also weigh the possibility that if you do achieve the high share position you may have established a significant barrier to new competition 25. From the article “Strategy and the Internet”, define and describe the concepts of cannibalization and channel conflict as they relate to the Internet in business. Porter discusses a number of shortcomings of the Internet. Define and describe two shortcomings of the Internet and how traditional business models can strategically overcome them. - “Cannibalization” o Point of view that the internet will replace all conventional methods of doing business and overturn all traditional advantages o Companies were afraid of being replaced of business; had to get over that fear and find
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