Chapter 5 - Strategies in Action Overview Chapter 5 provides basic guidelines for when various strategies have historically been most effective to use. This chapter also describes Porter’s generic strategies, outsourcing, reshoring, first-mover advantages, joint ventures, and partnering in the context of strategic planning. Chapter 5 concludes by describing strategic strategic planning in nonprofit and governmental organizations.
Learning Objectives The Chapter 5 Learning Objectives presented in the textbook are reiterated below: 1. Identify and discuss eight characteristics of objectives and ten benefits of hav ing clear objectives. 2. Define and give an example of eleven types of strategies. 3. Identify and discuss the three types of “Integration Strategies.” 4. Give specific guidelines when market penetration, market development, and product development are especially effective strategies. 5. Explain when diversification is an effective business strategy. 6. List guidelines for when retrenchment, divestiture, and liquidation are especially effective strategies. 7. Identify and discuss Porter’s five generic g eneric strategies. 8. Compare 1) cooperation among competitors, 2) joint venture ve nture and partnering, and 3) merger/acquisition as key means for achieving strategies. 9. Identify and explain the advantages of being a “first mover,” or outsourcing, or reshoring as means for achieving strategies. 10. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.
Teaching Tips 1. Bring up the author website in class and show show the Chapter 5 author video. Also, show the Chapter 5 Scholarly Update and the Chapter 5 News Media Update. Ask students if anyone is having any trouble with any aspect of the textbook, website, or class so far, and respond so that all students can hear answers to any issues on any items. 2. Spend a minute on Table 5-3 that reveals the “Ten Benefits of Having Clear Objectives” because too few people can actually articulate why it is important to have clear objectives. Students should realize, however, that even for for them personally, to have an objective (or goal) to accomplish something just ju st as to obtain a BBA Degree is
motivating. Without a clear objective, there there is much less incentive/motivation to to work hard to achieve the desired outcome. 3. Table 5-4 titled “Alternative Strategies Defined and Exemplified” is the most important page in this chapter and one of the most important pages in this textbook, so spend at least 30 minutes on Table T able 5-4 elaborating on those strategies, and tying in the guidelines (given also in Chapter 5) for when those strategies are good to pursue. Emphasize that no firm can do everything ever ything that will benefit the firm, due to high costs and limited resources, so tough decisions have to be made among many desirable alternative strategies. Also, emphasize that deciding among the strategies presented in Table 5-4 is based on a detailed strategic analysis as outlined throughout the textbook, i.e., is based on a systematic, objective process – even even though broad guidelines are given in Chapter 5 for each strategy. Sometimes strategies can fit into two categories or strategy strategy types in the list, but do not worry about this issue because this is a superior classification of types of strategies, compared for example to Porter’s 3 (or 5) generic strategy classification. 4. General guidelines for when various various strategies have worked well historically are provided for each strategy type. Go over these lists so students will have a good feel for alternative strategies available to firms under various scenarios. 5. Near the end of this chapter, emphasize that all types of organizations can benefit immensely from strategic planning, including colleges, universities, zoos, churches, government agencies, startup businesses, hospitals, etc. – not not just large corporations. Even nonprofit organizations have customers, employees, creditors, budgets, etc. The only difference between profit and nonprofit firms are 1) nonprofits nonp rofits do not pay taxes and 2) nonprofits do not have stock issuances as a source of capital. 6. At the end of Chapter 5, direct direct student attention to the “Implications f or or Students” section, because this is important information as the team prepares an d ultimately delivers their oral case analysis presentation later in the course. 7. Regarding the end-of-chapter review questions, consider assigning them all one day in class giving each student a question or two, and letting them tell the class the th e answer, with you commenting on their answers. Many professors find this to be a fun day in class and it goes pretty quickly. 8. Several of the end-of-chapter Assurance of Learning Exercises make excellent homework or classwork assignments to be completed as an individual or as a group of of students. Several exercises focus on the PepsiCo Cohesion Case, and several focus on your college/university. Many professors select one from each venue.
Answers to End-of-Chapter 5 Review Questions 5-1. According to the Baron and Henry article discussed in Academic Research Capsule 5-2, 5-2, what is “deliberate practice” and why is this important in
strategic management?
Answer: Research reveals that innate talent (special skills) and experience are NOT overriding keys to entrepreneurial success. So, what is the key to success? Baron and Henry provide the answer, reporting that the dominating, overriding factor accounting for the success of most great entrepreneurs is that they possess a high level of “deliberate practice .” Deliberate practice is best described as “an intense focusing on all aspects related a to subject matter or business idea.” Deliberate practice goes well beyond hard work or routine practice, so much so that even the most successful entrepreneurs cannot engage in deliberate practice for more than a few hours each day. Deliberate practice includes examining yourself as a person, your competition, and a wide array of factors related to the entrepreneurial endeavor at hand. Several antecedents of deliberate practice include: strong motivation, self-efficacy, self-discipline, delayed gratification, and self-control. Other factors are determination, strong work ethic, goal-oriented, dedication, time management, and “being on a mission.” Deliberate practice entails working “hard and smart” simultaneously; it is all about developing and utilizing a strategic mental approach to the endeavor at hand – rather than having a special innate talent or gaining twenty years of experience. Mr. Disney, Ford, Dell, Gates, Hershey, and Jobs utilized “deliberate practice” right out of the gate, rather than waiting to obtain innate talent or work experience. 5-2. True or False ? The strength of the dollar has led to American firms outsourcing more and more, rather than reshoring. Explain.
Answer: Reshoring is the new term that refers to U.S. companies planning to move some of their manufacturing back to the USA. Many U.S. companies plan to reshore in 2016 – 2017 for the following reasons: a desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property; pressure to increase U.S. jobs. Made in the USA is making a comeback. Wal-Mart, for example, is spending an added $250 billion in the next ten years on USA-made goods. Consequently, numerous Wal-Mart suppliers, such as Element Electronics based in Eden Prairie, Minnesota, are bringing manufacturing and assembly operations back to the USA. Element now assembles flat-screen televisions in Winnsboro, South Carolina. Whirlpool and General Electric have re-shored some of their production operations back to the USA. However, the management consulting firm A.T. Kearney reports that re-shoring has stalled, and that American firms are increasingly producing goods in lower-cost countries. The strength of the dollar also has led American firms to look outside the USA more and more to produce goods. The high value of the dollar makes USA goods more expensive overseas and makes imports to the USA cheaper. 5-3. Give three reasons why so many companies are divesting (spinning off) key segments/divisions of the firm.
Answer: 1) Homogenous parts are generally much more attractive for potential buyers. 2) The split parts are worth more than the total; it is the 1 + 1 = 3 effect. 3) Homogeneous entities are easier to manage 5-4. Are international alliances more effective with competitors or noncompetitors? Why?
Answer: Recent research reveals that small and medium-size firms expanding into other countries should form alliances with non-competitors, rather than with rival firms. Alliances with competitors are more costly, directly and indirectly, and provide redundant knowledge and resources, leading researchers to conclude that small and medium-size firms should strive to form alliances with non-competitors rather than competitors whenever possible. Researchers report that the benefits of allying with competitors are offset by higher monitoring and control costs. Also, competing firms oftentimes share less knowledge than they could or should. Even though small and medium-size firms typically have resource constraints as they expand globally and need alliances to grow, research shows that alliances with non-competitors are positively associated with international performance, whereas alliances with competitors are negatively related. These findings are based on a recent study involving 162 British and U.S. private small and medium-sized businesses. 5-5. Give actual examples of how Amazon is forward integrating and diversifying at the same time.
Answer: Amazon is getting into the business of delivering groceries and other items. At the same time, Amazon is diversifying into a variety of ventures such as developing and flying drones. 5-6. Define and give an example of reshoring. What are three reasons why reshoring is becoming more popular? What are three reasons many companies expect “never” to reshore (as Steve Jobs once told President Obama)?
Answer : Reshoring refers to American companies planning to move some of their manufacturing back to the USA. Many USA companies are reshoring for the following reasons: 1) a desire to get products to market faster and respond rapidly to customer orders; 2) savings from reduced transportation and warehousing; 3) improved quality and protection of intellectual property; pressure to increase USA jobs. Some firms will never reshore because 1) wage rates will always be lower somewhere outside the USA, 2) producing closer to customers means some producing outside the USA; 3) tax rates and import/export restrictions will always be more favorable somewhere outside the USA. 5-7. Define and give a hypothetical example of a secondary buyout .
Answer: Private-equity (PE) firms increasingly are buying companies from other private-equity firms, such as Clayton, Dubilier & Rice recently buying David ’s Bridal from Leonard Green & Partners LP for $1.05 billion. PE to PE acquisitions are called secondary buyouts.
5-8. The number and dollar value of hostile takeovers are on the rise. Give two reasons for this trend.
Answer: 1) PE firms see an improving economy and were on the hunt for businesses they could manage for high returns. 2) Top management of firms like their job so increasingly resist acquisitions, thus spurring hostile takeovers. 3) Firms desire to grow through acquisition to gain economies of scale, so target desired firms going direct to shareholders, avoiding top management. 5-9. What do you believe are the nine most important benefits of outsourcing?
Answer: TABLE 5-8 – Thirteen Potential Benefits of Outsourcing 1. Cost savings: Access lower wages in foreign countries. 2. Focus on core business: Focus resources on developing the core business rather than being distracted by other functions. 3. Cost restructuring: Outsourcing changes the balance of fixed costs to variable costs by moving the firm more to variable costs. Outsourcing also makes variable costs more predictable. 4. Improve quality: Improve quality by contracting out various business functions to specialists. 5. Knowledge: Gain access to intellectual property and wider experience and knowledge. 6. Contract: Gain access to services within a legally binding contract wi th financial penalties and legal redress. This is not the case with services performed internally. 7. Operational expertise: Gain access to operational best practice that would be too difficult or time consuming to develop in-house. 8. Access to talent: Gain access to a larger talent pool and a sustainable source of skills, especially science and engineering. 9. Catalyst for change: Use an outsourcing agreement as a catalyst for major change that cannot be achieved alone. 10. Enhance capacity for innovation: Use external knowledge to supplement limited inhouse capacity for product innovation. 11. Reduce time to market: Accelerate development or production of a product through additional capability brought by the supplier. 12. Risk management: Manage risk by partnering with an outside firm. 13. Tax benefit: Capitalize on tax incentives to locate manufacturing plants to avoid high taxes in various countries. 5-10. Define and give an example of a dividend recapitalization. List some pros and cons of doing this in a business.
Answer: Private-equity firms especially, but other firms also, oftentimes borrow money, at low interest rates (a pro), simply to fund dividend payouts to themselves, a controversial practice
known as dividend recapitalizations. Critics say dividend recapitalization saddles a company with debt (a con), burdening its operations. Other cons are that the firm could obtain a higher ROI utilizing that money to fund growth, the practice reveals the firm does not have sufficient funds to pay desired dividends. Another pro is that it makes shareholders happy. 5-11. How are for-profit firms different from nonprofit firms in terms of business? What are the implications for strategic planning?
Answer: Nonprofit organizations are nearly identical to for-profit companies except for two major differences: 1) nonprofits do not pay taxes and 2) nonprofits do not have shareholders to provide capital. In virtually all other ways, nonprofits are just like for-profits. Nonprofit organizations embrace strategic planning just as much as for-profit firms, and perhaps even more, since equity capital is not an alternative source of financing. 5-12. If the CEO if a beverage company such as Dr Pepper/Snapple asked you whether backward or forward integration would be better for the firm, how would you respond?
Answer: Backward integration would include gaining control of or acquiring bottlers or even glass makers. This would be more effective for beverage firms than forward integration, which would include acquiring supermarkets and fast-food outlets. It simply is not feasible for there to be distributors (stores) that sell just Dr Pepper/Snapple products. That would be ineffective for sure. 5-13. In order of importance, list six “characteristics of objectives.”
Answer: Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent across departments. 5-14. In order of importance, list six “benefits of objectives.”
Answer: Benefits of objectives include the following: 1) Provide direction by revealing expectations. 2) Allow synergy. 3) Aid in evaluation by serving as standards. 4) Establish priorities. 5) Reduce uncertainty. 6) Minimize conflicts. 7) Stimulate exertion. 8) Aid in allocation of resources. 9) Aid in design of jobs. 10) Provide basis for consistent decision making. Responses as to the ranking of these benefits will vary among students. 5-15. Called de-integration, there appears to be a growing trend for firms to become less forward integrated. Discuss why.
Answer: De-integration makes sense in industries that have global distributors. Companies today shop around, play one distributor against another, and go with the best deal. Global competition is also spurring firms to reduce their number of suppliers and to demand higher levels of service and quality from those they keep. 5-16. Called de-integration, there appears to be a growing trend for firms to become less backward integrated. Discuss why.
Answer: De-integration makes sense in industries that have global sources of supply. Companies today shop around, play one seller against another, and go with the best deal. Global competition is also spurring firms to reduce their number of distributors and to demand higher levels of service and quality from those they keep. American firms are now following the lead of Japanese firms, which have far fewer suppliers and distributors, and closer, long-term relationships with those few. 5-17. What conditions, externally and internally, would be desired/necessary for a firm to diversify?
Answer: First and foremost, diversification makes sense only to the extent the strategy adds more to shareholder value than what shareholders could accomplish acting individually. Diversification is, however, an attractive strategy when a firm is competing in an unattractive industry. Internally, a firm needs to be well managed and strong financially to consider diversifying. 5-18. There is a growing trend of increased collaboration among competitors. List the benefits and drawbacks of this practice.
Strategies that stress cooperation among competitors are being used more. For collaboration between competitors to succeed, both firms must contribute something distinctive, such as technology, distribution, basic research, or manufacturing capa city. Sharing such resources is a benefit. But a drawback is that unintended transfer of important skills or technology may occur at organizational levels below where the deal was signed. Information not covered in a formal agreement often gets traded in the dayto-day interactions and dealings of engineers, marketers, and product developers. Firms often give away too much information to rival firms when operating under cooperative agreements! Tighter formal agreements are needed. 5-19. List four major benefits of forming a joint venture to achieve desired objectives.
Answer: Joint ventures and cooperative arrangements are being used increasingly because they allow companies to improve communications and networking, to globalize operations, and to minimize risk. Joint ventures are often used to pursue an opportunity that is too complex, uneconomical, or risky for a single firm to pursue alone. Joint ventures are also used when an industry requires a broader range of competencies and know-how than any one firm can marshal. 5-20. List six major benefits of acquiring another firm to achieve desired objectives.
Answer: Benefits of acquiring another firm to achieve desired objectives include: 1) To provide improved capacity utilization. 2) To make better use of the existing sales force. 3) To reduce managerial staff. 4) To gain economies of scale. 5) To smooth out seasonal trends in sales. 6) To gain access to new suppliers, distributors, customers, products, and creditors. 7) To gain new technology. 8) To reduce tax obligations. 5-21. List five reasons why many mergers or acquisitions historically have failed.
Answer: Reasons that many mergers and acquisitions fail include: 1) Integration difficulties.
2) Inadequate evaluation of target. 3) Large or extraordinary debt. 4) Inability to achieve synergy. 5) Too much diversification. 6) Managers overly focused on acquisitions. 7) Too large an acquisition. 8) Difficult to integrate different organizational cultures. 8) Reduced employee morale due to layoffs and relocations. 5-22. Can you think of any reasons why not-for-profit firms would benefit less from doing strategic planning than for-profit companies?
Answer: NO. Even competition can be as intense or more intense in the nonprofit area, such as between universities and between churches. All nonprofits have income statements, balance sheets, customers, competitors, etc., just like for-profit firms. 5-23. Discuss how important it is for a college football or basketball team to have a good game plan for the big rival game this coming weekend. How much time and effort do you feel the coaching staff puts into developing that game plan? Why is such time and effort essential?
Answer: Football (and other) coaches spend perhaps 100 hours watching film of prior games in order to put together an effective game plan. Planning for a big game is much like strategic management for a small firm – it takes time and effort. As parity among teams (and firms) becomes closer, most often the better game plan is victorious. The same is true in business. Head coaches (and CEOs) are often paid large salaries partly because of their skill as a strategist. 5-24. How does strategy formulation differ for a small versus large organization? How does it differ for a for-profit versus a nonprofit organization?
Answer: Strategy formulation is conceptually the same for both small and large organizations. However, for large firms, there are more variables to include in both the external and internal audits. The process is usually more formal in a large firm. 5-25. Give hypothetical examples of market penetration, market development, and product development.
Answer: Market penetration means selling more products to existing markets by advertising more or adding sales reps, such as PepsiCo’s strategy in Russia. Market development means selling an existing product to a new market. YUM! Brands is opening 500 new stores in China. Product development means developing and selling a new product to an existing market. An example of this is Google’s new Chrome OS operating system, which is expected to overtake Microsoft Windows by 2015. 5-26. Give hypothetical examples of forward integration, backward integration, and horizontal integration.
Answer: Forward integration means purchasing or developing a distributor for a product. For instance, Microsoft is opening its own retail stores. Backward integration means owning a supply source for production. For example, Apple is working to produce its own internally developed chips
for its iPhone and iPod Touch devices. Horizontal integration means acquiring like operations. For instance, a hospital group may purchase another hospital. 5-27. Give hypothetical examples of related and unrelated diversification.
Answer: Related diversification, also called concentric diversification, means adding new, but related products. When Under Armour began selling running shoes for the first time, this represented related diversification. Unrelated, or horizontal, diversification means adding new, unrelated products for customers. For instance, Qualcomm Inc. recently diversified beyond cell phones into desktop hardware. 5-28. Give hypothetical examples of joint venture, retrenchment, divestiture, and liquidation.
Answer: A joint venture is a partnership between two companies. As part of a joint venture, Nokia and Facebook are partnering to embed parts of the social network into some Nokia games. Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales. Recently, J.C. Penney has launched a massive retrenchment strategy in efforts to save the company. Divestiture is selling a division or part of a company. PepsiCo is considering divesting its Snacks division. Liquidation is selling all of a company’s assets. Goody’s Family clothing liquidated all of its 282 stores, resulting in the loss of jobs for all 10,000 of its employees. 5-29. Are hostile takeovers unethical? Why or why not?
Answer: It can best be argued that hostile takeovers are ethical. Shareholders and customers of the company often benefit from the new management team that perhaps does a better job at strategic planning. Most employees and managers benefit, too, but some employees and top managers usually lose their jobs when the takeover is consummated. From this angle, some students may argue that hostile takeovers are unethical – but it is better to save 75% of the jobs by letting go of 25% if that is needed, rather than losing all 100%. 5-30. What are the major advantages and disadvantages of diversification?
Answer: Several disadvantages of diversification are (1) it is risky, (2) it is costly, (3) it requires excellent management skills, and (4) it requires an elaborate control system. Some advantages of diversification are (1) it allows a firm to spread risks and resources in more than one area, (2) it allows a firm to pursue special opportunities in diverse areas, and (3) it allows a firm to balance counter-seasonal sales yearly. 5-31. What are the major advantages and disadvantages of an integrative strategy?
Answer: An advantage of an integrative-type strategy is that it allows a firm to offer products and services at lower prices. Another advantage is that the firm can cater to its customers better than a third party distributor. A disadvantage of integrative-type strategies is that firms can be trapped if their basic industry falters. Another disadvantage is that firms forgo the expertise of other firms in being suppliers and/or distributors for the industry.
5-32. How does strategic management differ in profit and nonprofit organizations?
Answer: The strategic-management process is conceptually the same for both profit and nonprofit organizations, and just as important for each entity. However, compared to profit firms, nonprofit organizations often function in a monopolistic environment, produce a product or service that offers little or no performance measurability, and may be totally dependent on outside sources of financing. Thus, the types of variables examined will differ some between profit and nonprofit organizations – but this difference is minor among hundreds of similarities. 5-33. Why is it not advisable to pursue too many strategies at once?
Answer: Organizational resources are spread too thin when more than a few strategies are pursued at the same time. All organizations have limited resources. No organization can pursue all the strategies that may benefit the firm. Similarly, no individual can take on an unlimited amount of debt to obtain goods and services. No more than a few strategies can be financed, marketed, and managed effectively at the same time. In addition to being cost prohibitive, pursuing too many strategies at once makes it difficult for firms to project consistency/thoroughness/dedication to customers. 5-34. Compare and contrast financial objectives with strategic objectives. Which type is more important in your opinion? Why?
Answer: Financial objectives are those associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, and improved cash flow. Strategic objectives include examples like achieving a larger market share, quicker on-time delivery than rivals, and lower cost than rivals. Both types of objectives are important, but financial objectives must sometimes be sacrificed for the long-term benefit of strategic objectives. 5-35. How do the levels of strategy differ in a large firm versus a small firm?
Answer: In large firms, the persons primarily responsible for having effective strategies at the various levels include the CEO at the corporate level, the president or executive vice president at the divisional level, the respective CFO, CIO, HRM, CMO, at the functional level and the plant manager and regional sales manager at the operational level. In small firms, the persons primarily responsible for having effective strategies at the various levels include the business owner or president at the company level and then the same range of persons at the lower two levels as with a large firm. 5-36. List 11 types of strategies. Give a hypothetical example of each strategy listed.
Answer: Forward integration: Widgets, Inc. opens retail stores to sell its widgets. Backward integration: Widgets, Inc. purchases a steel mill to control its supply of steel at a reasonable price. Horizontal integration: Widgets, Inc. purchases We R Widgets, a competing widget manufacturer.
Market Penetration: Widgets, Inc. launches a widget loyalty program to reward heavy buyers of widgets. Market Development: Widgets, Inc. begins to offer widgets in India, a new geographic market area for the company. Product Development: Widgets, Inc. develops a special widgets drill. Related Diversification: Widgets, Inc. will now manufacture and sell fasteners. Unrelated Diversification: Widgets, Inc. will offer a credit card for its customers. Retrenchment: Widgets, Inc. is cutting jobs in 20 markets in the Southwest. Divestiture: Widgets, Inc. is selling off its plastics division. Liquidation: Widgets, Inc. is selling off the equipment previously used in its now defunct plastics division.
5-37. Define and explain “first mover advantages.”
Answer: First mover advantages are the benefits a firm may achieve by entering a new market or developing a new product before any other firms. Examples of first mover advantages include securing access to rare resources, gaining new knowledge of key factors and issues, and carving out market share. 5-38. Define and explain “outsourcing.”
Answer: Outsourcing occurs when third-party companies take over functional operations such as human resources, information systems, payroll, accounting, customer service, and marketing of other firms. 5-39. Give some advantages and disadvantages of cooperative versus competitive strategies.
Answer: Cooperative strategies are generally less costly than competitive strategies. For example, firms can cooperate on development of new technologies or even new products. Cooperative between domestic and foreign companies is widely utilized to facilitate entry into world markets. However, gaining and sustaining competitive advantage is an underlying philosophy of business, so identifying competitors’ strengths and weaknesses is a vital part of the external audit. 5-40. What are the two major differences between for-profit and not-for-profit organizations?
Answer: The two major differences between for-profit and not-for-profit organizations are 1) nonprofit firms generally pay no taxes and 2) nonprofits generally do not have stock (equity) as a source of capital. 5-41. If a company has $1 million to spend on a new strategy and is considering market development versus product development, what determining factors would be most important to consider?
Answer: Market development is introducing present products or services into new geographic areas. Product development is seeking increased sales by improving present
products or services or developing new ones. The following six guidelines indicate when market development may be an especially effective strategy: 1. New channels of distribution are available that are reliable, inexpensive, and of good quality. 2. An organization is successful at what it does. 3. New untapped or unsaturated markets exist. 4. An organization has the needed capital and human resources to manage expanded operations. 5. An organization has excess production capacity. 6. An organization’s basic industry is rapidly becoming global in scope. In contrast, the following five guidelines indicate when product development may be an especially effective strategy to pursue: 1. An organization has successful products that are in the maturity stage of the product life cycle; the idea here is to attract satisfied customers to try new (improved) products as a result of their positive exper ience with the organization’s present products or services. 2. An organization competes in an industry that is characterized by rapid technological developments. 3. Major competitors offer better-quality products at comparable prices. 4. An organization competes in a high-growth industry. 5. An organization has especially strong research and development capabilities. 5-42. Discuss five reasons why many mergers or acquisitions historically have failed.
Answer: Nine reasons why many mergers and acquisitions fail are as follows: 1. Integration difficulties 2. Inadequate evaluation of target 3. Large or extraordinary debt 4. Inability to achieve synergy 5. Too much diversification 6. Managers overly focused on acquisitions 7. Too large an acquisition 8. Difficult to integrate different organizational cultures 9. Reduced employee morale due to layoffs and relocations
OPTIONAL QUESTIONS NOT IN THE BOOK 5-43. What are the pros and cons of a firm merging with a rival firm?
Answer: The following are some pros and cons of merging. Pros: * To provide improved capacity utilization. To make better use of an existing sales force. To reduce managerial staff.
To gain economies of scale. To smooth out seasonal trends in sales. To gain access to new suppliers, distributors, customers, products, and creditors. To gain new technology. To reduce tax obligations.
Cons:
The acquiring company may overpay for the acquired company. Merging firms must reconcile different cultures and organizational routines. Merging firms must decide who will remain as top executives, even as CEO.
5-44. Discuss the nature as well as the pros and cons of a “friendly merger” versus “hostile takeover” in acquiring another firm. Give an example of each.
Answer: A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases a smaller firm or vice versa. When both parties desire a merger or acquisition, it is a friendly merger. However, if it is not desired by one party, it is a hostile takeover. Wells Fargo acquired Wachovia in a friendly merger. Comcast made an unwanted bid for Walt Disney. Had the bid been successful, it would have represented a hostile takeover. 5-45. If a company has $1 million to spend on a new strategy and is considering market development versus product development, what determining factors would be most important to consider?
Answer: A market development strategy involves introducing present products or services into new geographic areas, whereas a product development strategy seeks increased sales by improving or modifying present products or services. Determining factors for market development include the following: When new channels of distribution are available that are reliable, inexpensive, and of good quality. When an organization is very successful at what it does. When new untapped or unsaturated markets exist. When an organization has the needed capital and human resources to manage expanded operations. When an organization has excess production capacity. When an organization’s basic industry is rapidly becoming global in scope. Determining factors for product development include: When an organization has successful products that are in the maturity stage. When an organization competes in an industry that is characterized by rapid technological developments. When major competitors offer better-quality products at comparable prices. When an organization competes in a high-growth industry.
When an organization has especially strong research and development capabilities.
5-46. Could a firm simultaneously pursue focus, differentiation, and cost leadership? Should firms do that? Discuss.
Answer: Yes, it is possible, especially for a multi-divisional firm where various divisions have different strategies. Differentiation and focus strategies are likely to drive up costs, so although it may be possible to combine these two strategies, adding cost leadership would be difficult. Another reason not to mix the three generic strategies within a given division/segment is that firms strive to build appeal/awareness/consistency among a customer base for particular brands. For example, Dollar General goes for cost leadership. Could you imagine that firm also going for focus? 5-47. Define and give a hypothetical example of a “white knight” in the fast-food industry.
Answer: White knight is a term that refers to a firm that agrees to acquire a firm that is facing a hostile takeover by some company. Perhaps Best Buy would buy Radio Shack at a time when Radio Shack is to be bought by Shanghai Limited Express. 5-48. Consumers can purchase tennis shoes, food, cars, boats, and insurance on the Internet. Are there any products today that cannot be purchased online? What is the implication for traditional retailers?
Answer: There are very few, if any, products that cannot be purchased online. Perhaps some services such as haircuts would be an example. Some experts point to the efficiencies associated with online selling and believe that an increasing portion of the goods and services purchased each year will be done online. Other experts disagree and believe that online selling will not threaten traditional retailers in a substantive manner. Most brick-and-mortar retailers now also sell the products online. A contentious related issue is not charging sales tax online.
Answers to the End-of-Chapter 5 Assurance of Learning Exercises ASSURANCE OF LEARNING EXERCISE 5A: DEVELOP HYPOTHETICAL HERSHEY COMPANY STRATEGIES
ANSWER: The following is a hypothetical list of Hershey Company strategies. a. Build a manufacturing plant in Germany or Belgium because northern Europeans love chocolate and Hershey has too little presence there, and because shipping chocolate is pretty expensive. b. Purchase a cocoa farm in South America because cocoa suppliers from Africa are unreliable given political, economic, and governmental and terror problems.
c. Develop new dark chocolate products because dark chocolate is healthy and the world is becoming more interested in healthy eating. d. Add a woman and a minority as soon as possible to the top management team. e. Resign the organizational structure to be divisional-by-continent in order to have a “champion” person heading the company’s global expansion. f. Look to acquire European, Asian, South American, and Asian small confectionary companies, in order to facilitate global expansion. g. Avoid further acquisitions away from confectionery, chocolate, and candy – such as the beef stick company Hershey recently acquired. Do not diversify into snack foods.
ASSURANCE OF LEARNING EXERCISE 5B: HORIZONTAL INTEGRATION IN PRACTICE
ANSWER: A specialty retail jeweler by sales in the US, Canada and UK, Signet Jewelers is focused exclusively on retailing of jewelry, watches, and providing associated services. The company is managed as two geographical operation divisions: the U.S. division and the UK division. The U.S. division stores trade nationally in malls and off-mall locations as Kay Jewelers and Zales and other brand names. The UK division’s stores operate as H. Samuel, Ernest Jones and Leslie Davis and are situated in major shopping malls. Headquartered in Hamilton, Bermuda that has zero corporate taxes, Signet is doing great. A possible rival firm to acquire would be Blue Nile, Inc. (Nile) that has a market capitalization of about $375 million and annual revenues of about $500 million. Headquartered in Seattle, Washington, Blue Nile is the largest online retailer of diamonds and fine jewelry worldwide.
ASSURANCE OF LEARNING EXERCISE 5C: WHAT STRATEGIES SHOULD HERSHEY PURSUE IN 2017?
ANSWER: a. Build a manufacturing plant in Germany or Belgium because northern Europeans love chocolate and Hershey has too little presence there, and because shipping chocolate is pretty expensive. b. Purchase a cocoa farm in South America because cocoa suppliers from Africa are unreliable given political, economic, and governmental and terror problems. c. Develop new dark chocolate products because dark chocolate is healthy and the world is becoming more interested in healthy eating. d. Add a woman and a minority as soon as possible to the top management team. e. Resign the organizational structure to be divisional-by-continent in order to have a “champion” person heading the company’s global expansion. f. Look to acquire European, Asian, South American, and Asian small confectionary companies, in order to facilitate global expansion.
g. Avoid further acquisitions away from confectionery, chocolate, and candy – such as the beef stick company Hershey recently acquired. Do not diversify into snack foods.
ASSURANCE OF LEARNING EXERCISE 5D: EXAMINE STRATEGY ARTICLES
ANSWER: This is an excellent activity that introduces students to a cademic journals and asks students to actually read and comment on a journal article on a strategic-management topic. This may be the only occasion in a student’s undergraduate education that he or she is asked to comment on an academic journal article (like those found in Harvard Business Review, Business Horizons, or the Strategic Management Journal ).
ASSURANCE OF LEARNING EXERCISE 5E: CLASSIFY SOME RECENT STRATEGIES
ANSWER: 1. Unrelated diversification 2. Forward integration 3. Retrenchment 4. Product development 5. Divestiture 6. Retrenchment 7. Retrenchment 8. Product development 9. Product development 10. Unrelated diversification 11. Related diversification 12. Horizontal diversification 13. Market development 14. Related diversification 15. Related diversification 16. Product development 17. Horizontal integration 18. Related diversification 19. Unrelated diversification 20. Related diversification 21. Related diversification 22. Retrenchment 23. Retrenchment 24. Divestiture 25. Divestiture
ASSURANCE OF LEARNING EXERCISE 5F: HOW RISKY ARE VARIOUS ALTERNATIVE STRATEGIES?
ANSWER: The following strategies are listed in terms of riskiness, where the first is the most risky and the tenth is the least risky. There are many variations of each of these strategies, so the sequential ordering is only suggestive; it does not always hold true. MOST RISKY 1. Unrelated diversification – getting into a totally new business is exceptionally risky 2. Related diversification – getting into a partially new business is very risky too 3. Liquidation – Selling everything for its tangible worth usually results in shareholders failing to garner the fair market value of the firm’s assets 4. Forward integration – the business of selling is much different than the business of making 5. Backward integration – the business of farming or growing is much different than the business of producing or selling 6. Market development – new countries bring huge differences in many variables 7. Product development – most firms have to continually develop new products but being a first mover can be expensive 8. Horizontal integration – buying a rival firm can create controversy on what facilities to close or integrate and what persons to get rid of 9. Retrenchment – this strategy makes firms more efficient which is oftentimes needed 10. Market penetration – spending more on advertising or adding sales reps comes with low relative risk LEAST RISKY
ASSURANCE OF LEARNING EXERCISE 5G: DEVELOP ALTERNATIVE STRATEGIES FOR YOUR UNIVERSITY
ANSWER: Strategies are listed below the key internal and external factors that would enable our university to capitalize on its strengths, improve upon its weaknesses, take advantage of opportunities, and mitigate the impact of key threats. Strengths: 1. Location in a state capital with several Fortune 500 companies nearby 2. $200 million technology donation has resulted in high-tech facilities 3. Diverse (28%) student body and faculty, up from 21% three years prior 4. Visionary presidential leadership 5. Nationally-ranked programs in nursing and business 6. Athletic teams performing excellent, raising college visibility 7. Tuition 15% lower than peer institutions 8. Our engineering and life sciences buildings are new and modern 9. We operate at full capacity in our dorms
Weaknesses: 1. Urban campus with limited space for expanding campus 2. Police arrests on campus rising 5% annually 3. Gyms and athletic facilities 30 years old 4. Food service complaints up 11% vs. prior year 5. 30% of faculty are near retirement age and drawing high salaries 6. Student activity surveys indicate 14% decline in satisfaction 7. Alumni giving declining 10% annually 8. 30% of classes taught by adjunct faculty 9. Student/faculty ratio of 51 to 1 is higher than peer institutions Opportunities: 1. 14% increase in percentage of minority students enrolling in college vs. prior year 2. Need for adult education programs in the area growing 15% annually 3. Demand for international and online programs growing 20% annually 4. Large local firms seek new certification programs from the institution 5. Demand for nursing graduates growing 12% annually 6. The USA GDP is rising 1% annually 7. Social media use is growing 6% annually in North and South America 8. Demand for engineers is growing 5% annually in the USA Threats: 1. Pressure from state to admit marginal students in order to provide increased access for underserved minority students 2. Local two-year institutions offer courses 20% cheaper and less rigorous 3. 15% decline in international student applications 4. 12% annual decline in state funding levels 5. Major rival peer institutions offer and heavily market online degrees in our area 6. State population declining 4% annually 7. Unemployment rate stable at 9.0% causing many would-be students to have to work 8. The number of high school graduates is dropping 3% annually 9. The number of two-year tech school students is growing 8% annually 10. Demand for liberal arts degree students is declining 6% annually Strategies 1. Hire 3 more full-time campus policemen since campus crime is a problem 2. Remodel our student union since our student satisfaction rates are low 3. Build new dorms since we operate at full capacity 4. Hire 18 new faculty across campus since our student/faculty ratio is too high and also we rely too heavily on adjunct faculty 5. Add 15 new online courses across campus since demand is up 20% 6. Double fundraising activities since alumni giving has declined yet our athletic teams are performing great; the 12% annual decline in state funding levels also mandates this need 7. Double our nursing physical facilities since demand growing 12% annually 8. Raise tuition 5% given the decreased state funding
9. Mandate that curriculum be more experiential-skill based to offset growing tech school threat 10. Develop a satellite campus outside the USA to better meet international student needs
Answers to End-of-Chapter 5 Mini-Case Questions 1. Examine Facebook’s new professional features and access that company’s potential to hurt LinkedIn’s business.
Answer: LinkedIn Corporation’s stock symbol is LNKD and Facebook’s symbol is FB. Go to www.finance.yahoo.com and read recent news releases from these two rival firms. Both firms are financially doing great. Facebook does not seem interested so far in acquiring or even emulating LinkedIn, which is good for LinkedIn. The authors believe FB should try to acquire LNKD. 2. Rival firms are increasingly forming partnerships and cooperative agreements. Perhaps LinkedIn and Facebook should cooperate. Identify and describe three ways the two rival firms could perhaps cooperate in mutually beneficial ways.
Answer: The two companies could jointly develop new apps, or jointly sell consumer behavior information to marketers, or jointly offer customers special incentive to join both networks. LinkedIn Corporation’s stock symbol is LNKD and Facebook’s symbol is FB. Go to www.finance.yahoo.com and read recent news releases from these two rival firms. Both firms are financially doing great. Facebook does not seem interested so far in acquiring or even emulating LinkedIn, which is good for LinkedIn. The authors believe FB should try to acquire LNKD. 3. Other than product development, identify and describe four other strategies that LinkedIn should/could pursue, from the most attractive (#1) to the least attractive (#4).
Answer: LinkedIn could 1) begin selling consumer behavior information to marketers (similar to what Facebook is doing), or 2) could acquire other social media companies (such as Twitter), or 3) could begin marketing and solicitation operations in Asia and Australia, or 4) could develop a personal product (similar to Facebook) to accompany their professional product.
NOTE – THE FOLLOWING IS AN EXCELLENT, FUN, NOT-IN-THE-BOOK, ADDITIONAL ASSURANCE OF LEARNING EXERCISE FOR CHAPTER 5 EXERCISE TITLE: Strategic Planning For Hershey Company Purpose
Strategic-management classes are usually composed of teams of students who perform case analysis. The purpose of this exercise is to examine whether individual decision making is better than group decision making. Academic research suggests that groups make better decisions than individuals about eighty percent of the time. No company has sufficient resources to implement all strategies that would benefit the firm. Thus, tough choices have to be made. Ranking strategies as to their relative attractiveness (1 = most attractive, 2 = next most attractive, etc.) is a commonly used procedure to help determine which actions to actually fund. Oftentimes, a group of managers will jointly rank strategies and compare their ranking to other groups. This ranking process may be used to determine the relative attractiveness of feasible alternative strategies. The purpose of this exercise is to examine how well students understand the advantages and disadvantages of a firm pursuing the strategic options described in Chapter 5. In addition, the purpose of this exercise is to examine whether individual decision making is better than group decision making. Academic research suggests that groups make better decisions than individuals about eighty percent of the time. This is a fun exercise that also gives you experience selecting among feasible alternative strategies for a company. The Situation
Hershey is doing really well, but wants to do better. Hershey is trying to decide what strategies would be best for the company going forward. Seven strategies discussed in Chapter 5 are being seriously considered, as listed below. The Strategies
1. Backward integration – Purchase a 10,000-acre cocoa farm to gain better control over supplies needed for production operations. 2. Forward integration – Build 100 more Hershey retail stores globally. 3. Horizontal integration – Acquire Tootsie Roll Industries (stock symbol = TR) 4. Market development – Build a manufacturing plant in Africa to begin servicing that continent. 5. Market penetration – Launch an advertising, promotion, and publicity campaign globally to make Hershey a household name globally. 6. Product development – Develop, produce, and launch a full line of organic candy products. 7. Unrelated diversification – Acquire a construction company to handle building new stores and manufacturing plants globally. The Task
Your task is to rank the seven strategies listed above in terms of their relative attractiveness for Hershey, where 1 = the most attractive strategy to pursue, 2 = the next most attractive strategy, etc. to 7 = the least attractive strategy to pursue. Rank the strategies first as an individual, and then as part of a group. Then, listen to the EXPERT ranking and rationale. In this manner, this exercise enables you to determine what individual(s) and what group(s) in class make the best strategic decisions, i .e., that come closest to the expert ranking. The Steps
1. Fill in Column 1 in Table 1 to reveal your individual ranking of the relative attractiveness of the proposed strategies. For example, if you feel backward integration is the 7th best option, then in Table 1 enter a 7 in Column 1 beside Backward Integration. 2. Fill in Column 2 in Table 1 to reveal your group’s ranking of the relative attractiveness of the proposed strategies. For example, if your group feels backward integration is the 3rd best option, then enter 3 into Column 2 beside backward integration. 3. Fill in Column 3 in Table 1 to reveal the expert’s ranking of the relative attractiveness of the proposed strategies. 4. Fill in Column 4 in Table 1 to reveal the absolute difference between Column 1 and Column 3 to reveal how well you performed as an individual in this exercise. (Note: For absolute difference, disregard negative numbers.) 5. Fill in Column 5 in Table 1 to reveal the absolute difference between Column 2 and Column 3 to reveal how well your group performed in this exercise. 6. Sum Column 4. Sum Column 5. 7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your Column 5 sum, then you performed better as an individual than as a group. If you did better than your group, you did excellent. 8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER. 9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER. Table 1 – Strategic Planning for Hershey: Individual vs. Group Decision Making Column Number
The Strategies
1. Backward integration Purchase cocoa farm
(1) My Rank
(2) Group Rank
(3) EXPERT Rank
(4) Absolute Value 1-3
(5) Absolute Value 2-3
2. Forward integration Build 100 stores 3. Horizontal integration Acquire Tootsie Roll 4. Market development Build mfg. plant in Africa 5. Market penetration Launch marketing campaign 6. Product development Launch a full line of organic candy products. 7. Unrelated diversification Acquire a construction company THE ANSWER The Strategies
The Expert Rank
1. Backward integration Purchase cocoa farm
6
2. Forward integration Build 100 stores
4
3. Horizontal integration Acquire Tootsie Roll
1
4. Market development Build mfg. plant in Africa
3
5. Market penetration Launch marketing campaign
5
6. Product development Launch organic candy products
2
7. Unrelated diversification Acquire a construction firm
7
THE RATIONALE
Based on the guidelines given in Chapter 5, the authors believe the most attractive strategy is horizontal integration (acquire Tootsie Roll) since Hershey could gain economies of scale and expand globally more effectively using the rival firm’s facilities, coupled with Hershey knowing the business. The second most attractive strategy is to develop and launch a line of organic candy products, because consumers everywhere are increasingly paying more and expecting organic food products from manufacturers such as Hershey. The third best strategy is to build a manufacturing plant in Africa because this is where a majority of cocoa plants grow and Africa is booming in business. The fourth best strategy is to build 100 new Hershey stores to complement existing Hershey stores. The fifth best is to launch the marketing campaign, a relatively low rank because of costs vs. benefit concerns. The sixth best is to purchase a cocoa farm, a low rank because Hershey has no expertise in farming, and because Hershey is doing so well manufacturing and selling candy, especially chocolate products. The least attractive strategy is to acquire a construction firm because Hershey has no expertise in construction and no reason to diversify.
