Strategic Management Concepts and Cases 15th Edition David Solutions Manual

Full Download: https://alibabadownload.com/product/strategic-management-concepts-and-cases-15th-edition-david-solutions-man

Chapter 1 - Nature of Strategic Management

Overview
Chapter 1 introduces the basic terms in strategic management. This chapter
presents the comprehensive model for strategic planning that appears in each subsequent
chapter and provides a unifying, logical flow for the entire textbook. This chapter
describes the benefits of doing strategic planning, the drawbacks of not doing strategic
planning, and the pitfalls of doing strategic planning incorrectly.

Learning Objectives:
1. Discuss the nature and role of a chief strategy officer (CSO).
2. Describe the strategic-management process.
3. Explain the need for integrating analysis and intuition in strategic management.
4. Define and give examples of key terms in strategic management.
5. Discuss the nature of strategy formulation, implementation, and evaluation activities.
6. Describe the benefits of good strategic management.
7. Discuss the relevance of Sun Tzu’s The Art of War to strategic management.
8. Discuss how a firm may achieve sustained competitive advantage.

Teaching Tips
1. Spend about 40 minutes going over the comprehensive strategic management model in
Figure 1-1, highlighting each component part with examples. This is the best way to
cover the terms introduced in the chapter. Pull up the new and improved author website
for this textbook, because it has great resources for students. The URL is
www.strategyclub.com

2. The Edward Deming quote mentioned in Chapter 1 (In God We Trust, All Others
Bring the Data) is vitally important in this course, because students tend to use vague
terms throughout their case analysis. Vagueness is detrimental to development of any
strategic plan. Therefore, highlight and emphasize the relevance and importance of the
Deming quote and tell students that vagueness is disastrous in this course. Strategies
must be formulated to the extent possible on factual, specific, underlying key internal and
external factors, rather than trying to formulate strategies based on general statements,
opinion, or intuition.

3. Highlight Figure 1-2 on “the benefits of doing strategic planning.” Use that exhibit to
emphasize the many benefits of doing strategic planning, as well as the drawbacks of not
doing strategic planning.
1

Copyright © 2015 Pearson Education, Inc:

This is sample only, Download all chapters at: AlibabaDownload.com

4. Ask students to raise their hand if they played football, basketball, or soccer for the
college/university. Ask several of those athletes to “tell the class how important having a
good game plan is to the success of an athletic team.” Associate their answers to the
importance of a business having a good game plan, i.e., strategic plan.

5. Regarding the “Comparing Business and Military Strategy” section, emphasize to

students that there are countless examples in military history where a superior army was
defeated by a smaller army that had a better strategic plan. The famous general,
Alexander the Great, who never lost a battle, said (paraphrased): “I’d rather face an army
of lions led by a sheep, than an army of sheep led by a lion.” That quote emphasizes the
importance of strategic planning, and having an excellent strategist.

6. All 48 end-of-chapter review questions are excellent to go over in class. Sometimes in

class, the authors will assign every student a question and give the class 10 minutes to
develop answers and then let each student give the class the answer, and then comment
on the answer (answers to all questions are given later in this manual). This is a great
way to promote teacher/student interaction.

7. Ask students to read the PepsiCo Cohesion Case presented after Chapter 1 because a
third of all the end-of-chapter exercises apply chapter concepts to the PepsiCo case – thus
preparing students for developing a case analysis on their assigned company. Divide
students into 3 or 4 person teams within the first two weeks of class and assign to them
one of the 29 cases in the book, and schedule a day for the teams to each give a 20 minute
oral presentation revealing their recommended three-year strategic plan for the firm. The
authors and most professors using this book use this approach.

8. The authors’ favorite exercise at the end of Chapter 1 is 1D titled “Strategic Planning
for My University.” You could spend a whole class day on this exercise alone.
Definitely spend some time on this exercise because associated exercises at the end of
each chapter apply strategy concepts to your college/university. Students are very
knowledgeable about their university and their opinions differ widely as to
strengths/weaknesses and opportunities/threats/strategies. Thus, spending class time
working through this exercise will reveal to students how opinions vary regarding the
importance of various factors/issues; opinions also vary in companies doing strategic
planning. We use this exercise also to facilitate teacher/student interaction as well as
student/student interaction, which is especially beneficial to do early in the semester.

9. It is important to spend some class time also on Exercise 1B that applies the strategic
management process to the PepsiCo Cohesion Case. Make sure students understand the
basic strategic planning process as applied to PepsiCo and revealed in that exercise.
Associated exercises at the end of other chapters utilize the information obtained from
Exercise 1B and collectively help prepare students for performing case analysis on their
assigned company.

Copyright © 2015 Pearson Education, Inc:

10. Read the “Special Note to Students” at the end of this chapter and explain its
importance to students.

11. Skip over to the last three pages in book (before the cases start) and go through that
basic timeline/outline for a strategic management case analysis – so students will know
what is expected of them in terms of preparing their case analysis/project for the course.
Refer back to these three pages often in the course.

12. For the first time ever, the Excel Student Template is available FREE for students at
the new and improved author website at www.strategyclub.com. Your students will find
this template to be immensely helpful in this course. Plus, three example strategic
management case projects provided are there as a guide for students to follow.

Answers to End-of-Chapter Review Questions

1. Strengths and weaknesses should be determined relative to competitors, or by elements

of being, or relative to a firm’s own objectives. Explain.

Answer: This is a true statement. An internal factor, such as ROI of 4%, can be stated much
better as, ROI of 4% vs. Industry Avg. of 14%, or ROI of 4% vs. Company Objective of 2%, or
ROE of 4% vs. negative 4% the prior year. Relative strength/weakness deficiency or
superiority is vital information in formulating strategies, and is much better than a single
number with no comparison over time or to industry average. An example of “elements of
being” would be that Firm A owns 10,000 acres of oil lands.

2. Explain why internal strengths and weaknesses should be stated in divisional terms to
the extent possible.

Answer: Perhaps the biggest strategic decision facing firms is the extent to allocate
monies/resources across divisions/segments, so the underlying information to make those
decisions needs to be stated in divisional terms, to the extent possible. For example, say that
PepsiCo’s Frito Lay division’s ROI rose to 10% from 5% the prior year, rather than saying
PepsiCo Inc.’s ROI is 6%. Factors to be included in formulating strategies should be
actionable, i.e., should be conducive to determining what specific strategies would benefit the
firm given that factor. So, factors stated in divisional terms are excellent.

3. Explain why both internal and external factors should be stated in specific terms, i.e.,
using #’s, %’s, $’s, ratios, and comparisons over time, to the extent possible.

Answer: Business people already know the vague generalities, and desperately need to know
the specifics, in order to decide among many available good alternative strategies. Thus, the
underlying external opportunities/threats must be stated in specific terms so give guidance in
1

Copyright © 2015 Pearson Education, Inc:

formulating and selecting alternative strategies. Thus, avoid saying “Canada’s GDP is
increasing.” Instead, say “Canada’s expected GDP next year is 6% and Mexico’s expected
GDP is 3%.” Words such as increasing, decreasing, growing, and expanding can mean virtually
anything. Avoid vagueness. Vagueness is not helpful in making tough resource allocation
decisions among divisions, regions, product, etc.

4. Compare and contrast the near-end-of-chapter quotes by Alexander the Great and
Bear Bryant regarding the importance of strategic planning in military or athletic
settings. How applicable are those quotes in a business setting? Discuss.

Answer: A famous quote by Alexander the Great was: “Greater is an army of sheep led by a
lion, than an army of lions led be a sheep.” This quote reveals the overwhelming importance of
an excellent strategic plan, and in particular an excellent leader (strategist) for any organization
to succeed. The quote suggests the leader, who devises the game plan, is more important than
the actual manpower. A similar quote by the legendary Alabama football coach Bear Bryant
went something like this: I will defeat the opposing coach’s team with my players, but if given
a week’s notice, I could defeat the opposing coach’s team with his players and he take my
players. This quote reveals Coach Bryant’s confidence in his coaching staff developing a
superior game plan given whatever players are available. In a business setting, the CEO or
owner of the business, as chief strategist, must be better than rival CEOs for his/her firm to do
well.

5. Are “strategic management” and “strategic planning” synonymous terms? Explain.

Answer: The term “strategic management” in this text is used synonymously with the term
“strategic planning.” The latter term is more often used in the business world, whereas the
former is often used in academia. Sometimes the term “strategic management” is used to refer
to strategy formulation, implementation, and evaluation, with “strategic planning” referring
only to strategy formulation.

6. What are the three stages in strategic management? Which stage is more analytical?
Which relies most on empowerment to be successful? Which relies most on statistics?
Justify your answers.

Answer: The three stages of strategic management are: strategy formulation, strategy
implementation, and strategy evaluation. Because it is the decision-making stage of strategic
management, strategy formulation is the most analytical stage. The strategy implementation stage
relies most on empowerment to be successful, and hinges upon managers’ ability to motivate
employees, which is more an art than a science. Strategy evaluation relies the most on statistics, as it
deals with reviewing external and internal factors, measuring performance, and analyzing
variances between expected vs. actual outcomes.

Copyright © 2015 Pearson Education, Inc:

7. Why do many firms move too hastily from vision/mission development to devising
alternative strategies?

Answer: Firms that move too hastily from vision and mission development to devising alternative
strategies are overlooking two important steps in the strategic management process: 1) identify and
evaluate internal strengths/weaknesses and 2) identify and evaluate external opportunities/threats.
Reasons why many firms are negligent in this regard include 1) laziness, 2) lack of time, 3) lack of
knowledge, 4) unwillingness to do research to find specific facts and figures, and 5) unaware that
matching key external with internal factors is a key to strategy formulation.

8. Why are strategic planning retreats often conducted away from the work site? How
often should firms have a retreat, and who should participate in them?

Answer: The rationale for periodically conducting strategic-management meetings away from
the work site is to encourage more creativity and candor from participants. Good
communication and feedback are needed throughout the strategic-management process in order
to 1) formulate effective strategies and 2) achieve understanding and commitment that are vital
to strategy implementation.

9. Distinguish between long-range planning and strategic planning.

Answer: Long-range planning is striving to optimize for tomorrow the trends of today, whereas
strategic planning is striving to exploit and create new and different opportunities for tomorrow.
Strategic planning requires much more work and diligence as indicated by the activities and stages
described in the chapter.

10. Compare a company’s strategic plan with a football team’s game plan.

Answer: A strategic plan is, in essence, a company’s game plan. Just as a football team needs a
good game plan to have a chance for success, a company must have a good strategic plan to compete
successfully. Weaker teams with a better game plan very often defeat stronger teams, and the same
thing happens in the business world.

11. Describe the three activities that comprise strategy evaluation.

Answer: The three fundamental strategy-evaluation activities are (1) review external and internal
factors that are the bases for current strategies, (2) measure performance, and (3) take corrective
actions. The first activity involves determining whether strength/weakness/opportunity/threat facts
and figures have changed, which is actually facilitated by activity two, that involves comparing actual
performance to expected results across regions and products. The third activity can include altering a
firm’s vision/mission/objectives/strategies/policies/procedures/organizational chart, etc.

12. How important do you think “being adept at adapting” is for business firms? Explain.

Answer: Being adept at adapting is vital for survival of business firms (and organisms). The
strategic-management process is based on the belief that an organization’s survival can depend on
1

Copyright © 2015 Pearson Education, Inc:

how well the firm continually monitors internal and external events and trends and makes timely
changes as needed.

13. Compare the opossum and turtle to the woolly mammoth and saber tooth tiger in
terms of being adept at adapting.

Answer: Species that adapt well to their changing environment are, like companies, able to survive,
while those that do not adapt, are more likely to perish and become extinct. The opossum and turtle
have been on earth for millions of years, while the saber tooth tiger and woolly mammoth became
extinct about 11,000 years ago.

14. As cited in the chapter, Edward Deming, a famous businessman, once said, “In God
we trust. All others bring data.” What did Deming mean in terms of developing a
strategic plan?

Answer: The strategic-management process can be described as an objective, logical, systematic

approach for making major business decisions in an organization. The process attempts to organize
qualitative and quantitative information in a way that allows effective decisions to be made under
conditions of uncertainty. Mr. Deming insisted on facts and figures because he knew that vague
generalities were not helpful in choosing among many attractive alternative strategies. Mr. Deming
insisted on seeing #’s, $’s, ratios, and %’s across regions and products in order to best chart a path
forward for any organization.

15. What strategies do you believe can save newspaper companies from extinction?

Answer: Newspaper companies could invest more in Internet technologies, including developing
nice aps for smartphones, and charging for the aps. Also, they could charge for an online
subscription. Perhaps they could shift to a business model of giving away newspapers, while
simultaneously enticing advertisers to advertise more, given the expected increased circulation from
“free at newsstands and nominal fee for delivery.” Free is a good price, if expenses can be exceeded
by advertising revenue. But any strategies pursued should be determined after thorough analysis as
described in this text, rather than haphazardly determined.

16. Distinguish between the concepts of mission and vision.

Answer: Mission statements are “enduring statements of purpose that distinguish one business from
other similar firms.” Visions statements answer the question “What do we want to become?” A
vision statement should be one sentence, whereas a mission statement is several sentences, but less
than 200 words.

Copyright © 2015 Pearson Education, Inc:

17. Your university has fierce competitors. List three external opportunities and three
external threats that face your university.

Answer:
Opportunities – 1) The blackboard collaborate technology for online classes has become easier, more
popular, and less expensive. 2) The USA economy and GDP is growing 6% annually. 3)
Construction costs for building new buildings is declined 14% year-over-year.
Threats – 1) The local tech school has cheaper tuition and easier classes that transfer into our
university. 2) Our rival firms all offer a BBA Degree online. 3) There is an 8% decline in population
in the last few months in our county.

18. List three internal strengths and three internal weaknesses that characterize your
university.

Answer:
Strengths – 1) Our College of Business is AACSB accredited at both the BBA and MBA levels.
2) Our average classroom size is 19 students. 3) Our university has a new Nursing Program and
Building.
Weaknesses – 1) Only 50% of our business faculty hold a PhD in business. 2) Our university lacks
sufficient dorm space for students. 3) Our university lacks sufficient parking for students and faculty.

19. List reasons why objectives are essential for organizational success.

Answer: Objectives are essential for organizational success because they state direction, aid in
evaluation, create synergy, reveal priorities, focus coordination, and provide a basis for effective
planning, organizing, motivating, and controlling activities.

20. List four strategies and a hypothetical example of each.

Answer: Business strategies include geographic expansion, diversification, acquisition, product

development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Student
answers as to examples of each could vary widely.

21. List six characteristics of annual objectives.

Answer: Like long-term objectives, annual objectives should be measurable, quantitative,

challenging, realistic, consistent, and prioritized.

22. Why are policies especially important in strategy formulation?

Answer: Policies, like annual objectives, are especially important in strategy implementation
because they outline an organization’s expectations of its employees and managers. Policies allow
consistency and coordination within and between organizational departments. Policies can be broad
and include rules, regulations, and procedures.

Copyright © 2015 Pearson Education, Inc:

23. What is a “retreat” and why do firms take the time and spend the money to have
these?

Answer: Retreats are formal meetings conducted semiannually to discuss and update the firm’s
vision/mission, opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and
performance. Retreats are commonly held off-premises to encourage more creativity and candor
from participants. The feeling is that off-premise retreat facilitates communication, shared
understanding, and commitment.

24. Discuss the notion of strategic planning being more formal versus informal in an
organization. On a 1 to 10 scale from formal to informal, what number best represents
your view of the most effective approach? Why?

Answer: Formality refers to the extent that participants, responsibilities, authority, duties, and
approach are specified. Application of the strategic-management process is typically more formal in
larger and well-established organizations. Smaller businesses tend to be less formal. Firms that
compete in complex, rapidly changing environments, such as technology companies, tend to be more
formal in strategic planning. Firms that have many divisions, products, markets, and technologies
also tend to be more formal in applying strategic-management concepts. Greater formality in
applying the strategic-management process is usually positively associated with the cost,
comprehensiveness, accuracy, and success of planning across all types and sizes of organizations.
Informality too often invites guessing, laziness, politics, and emotion, which are generally not good
in strategic planning.

25. List ten guidelines for making the strategic-planning process effective. Arrange your
guidelines in prioritized order of importance in your opinion.

Answer: Table 1-2 presents 17 guidelines for the strategic-planning process to be effective:
1. It should be a people process more than a paper process.
2. It should be a learning process for all managers and employees.
3. It should be words supported by numbers rather than numbers supported by words.
4. It should be simple and non-routine.
5. It should vary assignments, team memberships, meeting formats, and even the planning
calendar.
6. It should challenge the assumptions underlying the current corporate strategy.
7. It should welcome bad news.
8. It should welcome open-mindedness and a spirit of inquiry and learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilted, or orchestrated.
11. It should not be too formal, predictable, or rigid.
12. It should not contain jargon or arcane planning language.
13. It should not be a formal system of control.
14. It should not disregard qualitative information.
15. It should not be controlled by “technicians.”
16. Do not pursue too many strategies at once.
17. Continually strengthen the “good ethics is good business” policy.
1

Copyright © 2015 Pearson Education, Inc:

26. List what you feel are the five most important lessons for business that can be
garnered from The Art of War book.

Answer: Both business and military organizations must adapt to change and constantly improve to
be successful. Table 1-3 provides narrative excerpts from The Art of War, but some of the following
especially apply to business.
o Analyze the enemy’s plans so that you will know his shortcomings as well as his strong
points.
o An army should be likened to water. Just as flowing water avoids the heights and hastens to
the lowlands, so an army should avoid strength and strike weakness.
o Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists
rarely go to battle or to court; they generally achieve their objectives through tactical positioning well
in advance of any confrontation.
o When you do decide to challenge a rival, much calculating, estimating, analyzing, and
positioning bring triumph.
o Skillful leaders do not let a strategy inhibit creative counter-movement.
o When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold
their position and give their rivals the opportunity to surrender or merge.
o Brilliant strategists forge ahead with illusion, obscuring the areas of major confrontation, so
that opponents divide their forces in an attempt to defend many areas.

27. What is the fundamental difference between business strategy and military strategy in
terms of basic assumptions?

Answer: The fundamental difference between military and business strategy is that business strategy
is formulated, implemented, and evaluated with an assumption of competition, whereas military
strategy is based on an assumption of conflict.

28. Explain why the strategic management class is often is called a “capstone course.”

Answer: Strategic management is commonly called a capstone course because students’ major
responsibility in this class is to use all knowledge gained in prior courses to chart the future direction
of different organizations. Students have the opportunity in this course to utilize their marketing,
finance, management, MIS, and accounting knowledge.

29. What aspect of strategy formulation do you think requires the most time? Why?

Answer: Important aspects of strategy formulation include developing a business mission,

performing an external audit, conducting an internal audit, generating alternative strategies, and
choosing among alternative strategies. Performing an external audit generally takes the most time.
For example, identifying competitors’ strengths and weaknesses is an essential aspect of the external
audit. Effective use of the Internet can reduce the time required for performing an external audit.

Copyright © 2015 Pearson Education, Inc:

30. Why is strategy implementation often considered the most difficult stage in the
strategic-management process?

Answer: Strategy implementation is often considered to be the most difficult stage in strategic
management because it requires discipline, sacrifice, commitment, and hard work from all employees
and managers. It is always more difficult to do something than to say you’re going to do it.

31. Why is it so important to integrate intuition and analysis in strategic management?

Answer: No analytical tools can capture all aspects of a given organization’s culture and situation.
Nor can analytical tools assimilate all the subjective information that must be considered in strategic
management, such as personalities, emotions, values, beliefs, customs, and ethical factors. However,
analytical tools are essential to utilize in strategic planning because they have been developed over
many years using actual data, and are effective for assimilating facts and figures. Intuition alone is
insufficient for making good strategic decisions. Based on one’s past experiences, judgment, and
“gut” feelings, intuition is especially under time constraints, and in assigning weights and ratings in
planning matrices. Strategists must integrate intuition and analysis in strategic management, but in
the view of this author, analysis is more important than intuition. Unfortunately, too many firms rely
too heavily on intuition, and some disastrously rely exclusively on intuition.

32. Explain the importance of a vision and mission statement.

Answer: Reaching agreement on a formal vision and mission statement can greatly facilitate the
process of reaching agreement on an organization’s strategies, objectives, and policies.
Organizational success depends on reasonable agreement on key issues, so a clear, jointly developed
and supported, vision and mission statement are essential in strategic management.

33. Discuss relationships among objectives, strategies, and policies.

Answer: Long-term objectives and strategies are products of strategy formulation. Short-term
(annual) objectives and policies are products of strategy implementation. Firms should translate long-
term objectives into annual objectives. Strategies should be supported with clear policies.

34. Why do you think some chief executive officers fail to use a strategic-management
approach to decision making?
Answer: Various reasons listed and described in Chapter 1 include:
Lack of knowledge or experience in strategic planning. Poor reward structures. Firefighting. Waste
of time. Too expensive. Laziness. Content with success. Fear of failure. Overconfidence. Prior
bad experience. Self-interest. Fear of the unknown. Honest difference of opinion. Suspicion.

35. Discuss the importance of feedback in the strategic-management model.

Answer: As indicated in the strategic-management model, feedback is critically important. Changes

can occur at any stage in the process and impact all other strategic-management activities. Feedback
allows these changes to be identified and adjustments to be made. Feedback promotes the creation of
a climate for two-way communication and, thus, allows esprit de corps to be achieved in an
organization.
1

Copyright © 2015 Pearson Education, Inc:

36. How can strategists best ensure that strategies will be effectively implemented?

Answer: Strategists can best assure that strategies formulated will be effectively implemented by
involving as many managers as possible in the strategy formulation process. It is important to
communicate effectively why changes are needed, and how managers and employees will benefit
from the expected results. Good communication yields good understanding yields good
commitment, which is essential for good implementation (See Figure 1-2).

37. Give an example of a recent political development that changed the overall strategy of an
organization.

Answer: Gun control legislation is pending at the federal level and in some state legislatures,
which has led to increased demand for ammunition and various guns. So, companies that make
ammo and guns have increased production in the short-term, but in the long-term, some are
diversifying into related products and services, such as hunting and fishing products.

38. Who are the major competitors of your college or university? What are their strengths
and weaknesses? What are their strategies? How successful are these institutions compared to
your college?

Answer: Answers to this question will vary by institution. But, online courses and online
degrees are becoming commonplace. Two year schools are continually offering 100 and 200
level classes more cheaply and “easier” than four year schools, that are more and more focusing
on graduate schools. Schools are also becoming more student-friendly, modifying curriculum
to be more “practical,” and even offering certifications in some areas.

39. Would strategic-management concepts and techniques benefit foreign businesses as

much as domestic firms? Justify your answer.

Answer: The answer to this question is YES. But, management style and culture varies
considerably across countries as will be elaborated upon in Chapter 11. For example, northern
European countries tend to be more participative in management style, whereas southern
European countries tend to be more autocratic (as does Mexico). Many foreign businesses are
using strategic-management concepts and techniques effectively. This textbook is very widely
used globally, being the best seller in Japan, China, and Mexico.

40. What do you believe are some potential pitfalls or risks in using a strategic-management
approach to decision making?

Answer: Thirteen risks are listed under the “Pitfalls in Strategic Planning” section of Chapter 1.
But, there is a risk of too little top management support for the process. There is a risk of too
little involvement by line managers and employees. There is a risk that top managers will
underestimate the importance of understanding and commitment.

Copyright © 2015 Pearson Education, Inc:

41. In your opinion, what is the single major benefit of using a strategic-management
approach to decision making? Justify your answer.

Answer: The single major benefit is the potential for improved understanding of the business
and industry on the part of all managers and employees. Understanding generally leads to
increased commitment, which, in turn, leads to creativity, innovativeness, and overall
cooperativeness. The process is more important than the plan. Also, the strategic-management
process allows an organization to initiate and influence, rather than just respond and react to its
environment. That is, it allows an organization to be proactive, rather than reactive, in
controlling its own destiny. Strategic-management concepts provide an objective basis for
allocating resources and for reducing internal conflicts that can arise when subjectivity alone is
the basis for major decisions.

42. Compare business strategy and military strategy.

Answer: As discussed in the latter part of this chapter, business and military strategy are similar
in many respects. Many of the ideas utilized in business strategy were first developed as a part
of military strategy. Both military and business organizations have competitors. A fundamental
difference between military and business strategy is that business strategy is formulated,
implemented, and evaluated with the assumption of competition, while military strategy is
based on an assumption of conflict. For example, if your forces of 10,000 men are X, and your
enemy of 10,000 men are Y, with other variables being equal, which of the following strategic
positions would you prefer to launch an attack: A, B, C, or D, and why? In a military sense,
and business sense for companies, life or death could hang in the balance, depending on your
choice among strategies.

A. B. C. D Formatted: French (France)

X X X X X XXXXXX XX Formatted: French (France)

X YYYYYY X YYYYYY YYYYYY YYYYYY XX Formatted: French (France)
X X X X X XX Formatted: French (France)

43. Why is it important for all business majors to study strategic management since most
students will never become a chief executive officer or even a top manager in a large
company?

Answer: Strategic management takes place at multiple levels within an organization. Although
most students may never become the CEO of a corporation, they may become the “branch
manager” or department head or manager. In these roles, they may be asked to participate in
development of a strategic plan. Employees at all levels are frequently asked to contribute to
development of their firm’s strategic plan. Thus, an understanding of the strategic-management
process is important, perhaps for the career development of any business major.

Copyright © 2015 Pearson Education, Inc:

44. Describe the content available on the strategy club website at www.strategyclub.com.

Answer: The strategy club website provides the new, free, excel Student Template designed to
help students generate the matrices required for case analyses. The site also provides several
sample student case presentations and other resources to benefit strategic management students.

45. List four financial and four nonfinancial benefits of a firm engaging in strategic
planning.

Answer: Businesses engaging in strategic planning experience many financial benefits,

including: 1) significant improvement in sales, profitability, and productivity compared to firms
without strategic planning activities, 2) superior long-term financial performance relative to
their industry, 3) seem to make more informed decisions with good anticipation of both short
and long-term consequences, and 4) better prepared for fluctuations in their external and
internal environments. In addition to the financial benefits, firms using strategic planning also
experience nonfinancial benefits that include 1) an enhanced awareness of external threats, 2) an
improved understanding of competitors’ strategies, 3) increased employee productivity, 4)
reduced resistance to change, and 5) a clearer understanding of performance-reward
relationships.

46. Why is it that a firm can sustain a competitive advantage normally for only a limited
period of time?

Answer: A firm can sustain a competitive advantage for only a certain period of time due to
rival firms continually trying to imitate and duplicate strategies, products, and services of the
lead firm, in order to take market share from the leader, and build their own competitive
advantage.

47. Why is it not adequate to simply obtain competitive advantage?

Answer: Rival firms will constantly attempt to undermine firms with competitive advantages
and try to imitate/duplicate those advantages/products/services – and perhaps offer similar
products at much lower prices. Organizations must constantly strive to achieve sustained
competitive advantage by continually evaluating their own strategies/products/services as well
as rival firms efforts to undermine and overcome.

48. How can a firm best achieve sustained competitive advantage?

Answer: Sustained competitive advantage can best be achieved by 1) continually adapting to

changes in external trends and events and internal capabilities, competencies, and resources, and
by 2) effectively formulating, implementing, and evaluating strategies that capitalize upon those
factors.

Copyright © 2015 Pearson Education, Inc:

Answers to the End-of-Chapter Assurance of
Learning Exercises

ASSURANCE OF LEARNING EXERCISE 1A:

COMPARE BUSINESS STRATEGY WITH MILITARY STRATEGY

ANSWER:
All nine of the military maxims listed in this exercise do have direct business applications, as
indicated below. Rankings as to relative importance with rationales will vary by industry and
situation.

1. Objective – Numerous benefits of objectives are given in Chapters 1 & 5;

objectives are vital for business success.
2. Offensive – As revealed in Chapters 5 & 6, being aggressive is appropriate in
many business strategy settings, but not all. Sometimes defensive strategies are
best, such as retrenchment and divestiture.
3. Mass – This is almost always applicable in business setting. Rarely can firms
pursue a little bit of many strategies. In contrast, tough strategic decisions must
generally be made among many alternative strategies that could benefit the firm –
and then commit substantial resources to the chosen direction.
4. Economy of Force – Businesses must cull unprofitable and secondary endeavors,
and focus on profitable, growth segments and areas.
5. Maneuver – Gaining and sustaining competitive advantage is a huge need for
businesses; this can be achieved by knowing the rival firms and continuously
putting those firms at a disadvantage in terms of price and service
6. Unity of Command – Businesses commonly assign a “champion” for new
products, i.e., a lead person. In addition, businesses increasingly delegate
accountability and responsibility to a President of various segments.
7. Security – Businesses continuously gather and analyze competitive information
trying to never let rival firms surprise them with new products/services/strategies.
8. Surprise – Businesses do seek to put rival firms out of business by aggressively
identifying and attacking their weak areas in unsuspecting ways.
9. Simplicity – Businesses realize that good communication leads to excellent
understanding which leads to high commitment and that to achieve these ends,
simplicity rather than complexity is necessary.

Copyright © 2015 Pearson Education, Inc:

ASSURANCE OF LEARNING EXERCISE 1B:
GATHER STRATEGY INFORMATION FOR PEPSICO

ANSWER:
The following are possible external opportunities/threats and internal
strengths/weaknesses taken directly from the PepsiCo Cohesion Case. The instructions
request ten for each category. Make sure students see the difference in internal vs.
external factors. Ask students to note the need to be as specific as possible in stating each
factor. Ask students to keep this information for use in later exercises. Remind students
that:

PAB = PepsiCo Americas Beverage

PAF = PepsiCo Americas Foods
LAF = Latin America Foods
AMEA = Asia, Middle East, & Africa
QFNA = Quaker Foods North America
FLNA = Frito-Lay North America

Strengths:
1. FLNA is the largest salty snack provider in the USA.
2. PepsiCo is excellent in innovating/changing products to match local tastes and
cultures globally.
3. PepsiCo is the largest food and beverage company in Russia, India, and the Middle
East and is number two in Mexico, and is in the top five in Brazil, Turkey, Vietnam, the
Philippines, and Thailand.
4. PepsiCo just replaced Coke as the product sold at all Burger Kings in China.
5. PepsiCo has a large, new R&D facility in Shanghai, China.
6. PepsiCo is cutting 8,700 jobs as part of an aggressive cost-cutting program.
7. PAF’s revenues in 2012 increased to 36.6% from 34.8%.
8. PepsiCo’s revenues from Russia increased 2.36% in 2012.
9. PepsiCo’s Europe operating profits increased 9.9% in 2012.
10. PepsiCo’s European revenues rose 5% in Q1 of 2013.
11. About 17% of PepsiCo’s North American revenue comes from Wal-Mart.
12. PepsiCo and Anheuser-Busch InBev cooperate extensively in marketing.
13. FLNA has 40% of the global salty snack market and 64% of that market in the USA.
14. FLNA generates 40% of PepsiCo’s operating profits.

Weaknesses:
1. For Q1 of 2013, PepsiCo’s earnings fell to $1.08 billion from $1.13 billion a year
earlier
2. PepsiCo’s four business units (PAF, PAB, Europe, and AMEA) does not match its
six reportable segments (PAB, FLNA, QFNA, LAF, Europe, and AMEA).
3. PAB revenues dropped to 32.7% of the company total in 2012 from 33.7%.
4. PepsiCo’s revenues from Mexico dropped 17.29% in 2012.
5. AMEA’s operating profit dropped 15.9% in 2012.
6. PAB operating profit dropped 10.3% in 2012 to $2.937 B.
1

Copyright © 2015 Pearson Education, Inc:

7. QFNA operating profit declined 12.8% in 2012.
8. PepsiCo’s non-carbonated drink volume (Gatorade and Tropicana) dropped by 1% in
Q1 2013, while Coca-Cola’s comparable products rose 6%.
9. PepsiCo’s AMEA region revenue dropped 14% in Q1 of 2013.
10. PAB revenue dropped 0.6% in Q1 of 2103.

Opportunities:
1. Fountain soda accounts for about a quarter of soft drink sales volume in China.
2. Coca-Cola’s sparking beverage volume growth in Q1 of 2013 grew only 2% in Brazil.
3. For Q1 of 2013, Coca-Cola’s revenues dropped 1% in North America, 2% in Europe,
and 4% in Pacific.
4. DPS derives 90% of its revenue from North America; 70% of that total comes from
carbonated drinks.
5. Mondelez’s top management would support a merger with PepsiCo.
6. The energy drinks category of the beverage industry is growing 8% annually.

Threats:
1. Coca-Cola is changing all its plastic bottles to its green PlantBottle by 2020.
2. Kellogg just acquired P&G’s Pringles business.
3. PepsiCo lags Coca-Cola in revenue per employee, return on investment, and long-term
debt.
4. Coca-Cola generates 70% of its revenue and 80% of its operating profit from outside the
USA.
5. The carbonated beverage consumption growth rate is about zero in North America and
developed markets.
6. Coca-Cola is investing over $4 billion in China between 2012 and 2015.
7. Coca-Cola revenues in Q1 of 2013 grew 8% in both India and Russia, and 18% in
Thailand.
8. Coca-Cola’s sparking beverage volume growth in Q1 of 2013 grew 15% in Russia, 30%
in India, 38% in Thailand, and 6% in China.
9. DPS has started to distribute its products in Australia, China, Japan, South Korea, and
Malaysia.
10. DPS holds the #1 position in the flavored non-cola market in the USA with a market share
of 40%.
11. Mondelez has the leading market share in salty snacks outside the USA in every country.
12. Monster Beverage posted 35% growth in Q4 of 2012 in energy drinks and sells its
products in 90 countries.
13. Per capita soda consumption of the USA has been declining for years, and is now 44
gallons per person, down from 54 gallons in 1998. The percentage consumption is dropping
1% annually in the USA.
14. USA and many other consumers globally are becoming much more health conscious –
shunning sugary, carbonated drinks. The volume of packaged food is declining while the
volume of fresh food in increasing.
15. Coca-Cola has reduced the size of its cans from 8.0 ounces to 7.5 ounces to bring the
calorie count below 100.

Copyright © 2015 Pearson Education, Inc:

ASSURANCE OF LEARNING EXERCISE 1C:
UPDATE THE PEPSICO COHESION CASE

ANSWER:
PepsiCo is continually in the news and posts company news releases at their website
www.pepsico.com. Simply click on the News & Press Releases icon and read all the up-
to-date news about PepsiCo. Or simply go to a site such as www.finance.yahoo.com and
enter PepsiCo’s stock symbol (PEP) and then click on Headlines. Select several articles
and prepare your executive summary based on that information.

ASSURANCE OF LEARNING EXERCISE 1D:

STRATEGIC PLANNING FOR YOUR UNIVERSITY

ANSWER:
Ask students to keep results of this exercise because, at the end of each chapter, at least one
exercise applies chapter material to your university. Make sure students see the difference
in internal vs. external factors. Ask students to note the need to be as specific as possible
in stating each factor. While answers to this exercise will vary for each institution, a sample
is provided below.

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

Copyright © 2015 Pearson Education, Inc:

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 graduate 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

ASSURANCE OF LEARNING EXERCISE 1E:

STRATEGIC PLANNING AT A LOCAL COMPANY

ANSWER: Answers will vary for each student. The following questions could be used to
guide the class discussion.

 How many of the organizations used formal as opposed to informal planning? How
did this vary by size and type of firm?
 How many of the firms had a written vision and/or mission statement? How did this
vary by size and type of firm?
 Did the people interviewed recognize the benefits of strategic planning? How did they
inform the organizations’ employees of the strategic plans and the benefits of strategic
planning?
 What would the students recommend in terms of changes to the strategic planning
process used by the businesses they evaluated?

Copyright © 2015 Pearson Education, Inc:

ASSURANCE OF LEARNING EXERCISE 1F:
GETTING FAMILIAR WITH THE STRATEGY CLUB ONLINE

ANSWER:
For the first time ever, the popular Excel Student Template is provided free to all students
who use this textbook. Just go to the www.strategyclub.com website. Widely used for
more than a decade by both students and businesses, and improved dramatically just for
this edition, the Excel Student Template enables students to more easily apply strategic
management concepts while engaging in assurance of learning exercises or case analysis.
Using the Template, students can devote more time to applying strategy concepts and less
time to the mechanics of formatting strategy matrices, tables, and PowerPoints.

ASSURANCE OF LEARNING EXERCISE 1G:

GETTING FAMILIAR WITH MYLAB

ANSWER:
For the first time ever with any strategic management text, a Case MyLab ancillary enables
professors to systematically utilize cases to monitor student learning of stragegic
management concepts. The authors have identified 29 key strategic management concepts,
and written the 15th ed. cases in a manner to exemplify those concepts. All 29 cases now
include coverage of most strategy concepts, but the Concepts by Cases matrix given earlier
in this manual reveals which cases are designed for monitoring student learning of various
strategy concepts. The before-class MyLab testing feature includes 25 multiple choice
questions for each case –10 Basic questions that test if the student simply read the case
before class and 15 Applied questions that test the student’s ability to apply various
strategic management concepts. In addition, there are 2 Discussion questions per case.
This testing feature enables professors to determine, before class if desired, whether
students 1) read the case and 2) are able to apply strategy concepts to resolve issues in the
case. Example MyLab case questions for the Applied questions are something like
this: What two components recommended for inclusion in a mission statement are missing
in the Nikon statement? Example Basic Questions would be like: In what country is
L’Oreal headquartered? The Case MyLab product helps assure that the cases apply the
concepts, but in addition the ancillary simplifies grading for professors and helps achieve
AACSB's key assurance of learning objectives – even in purely or partly online class
settings.

Copyright © 2015 Pearson Education, Inc:

 Domino’s Pizza, Inc. – 2013
Forest R. David

A. Case Abstract
Domino’s Pizza, Inc. is the second largest pizza chain in the world with operations in over 70 nations
and over 10,200 stores as of March 2013. Domino’s trails only Yum Brand’s Pizza Hut in store
numbers and global presence. Domino’s specializes in takeout and delivery of pizza and more recently
chicken wings and sub sandwiches, but so far does not offer a dine in experience for customers.
Lacking seating inside greatly reduces margins and startup costs for franchisees and allows products to
be sold cheaper to more price-conscious buyers. Domino’s operates under three business segments: 1)
Domestic Stores, 2) Domestic Supply Chain, and 3) International. The Domestic Supply Chain
produces and/or supplies over 99 percent of all franchisee stores and accounts for over half of
company- wide revenue. Founded in 1960, Domino’s is headquartered in Ann Arbor, Michigan.

B. Vision Statement (taken from stated mission)

To be the best pizza delivery company in the world.

C. Mission Statement (proposed)

At Domino’s, we are committed to providing our customers (1) around the world (3) an affordable,
consistently high quality pizza, subs and chicken wings (2), with timely delivery each and every time
they order (5,6,7). Our new PULSE computerized system (4) allows orders to be more streamline and
accurate. The system also allows for nutritional labels to be printed and provides accurate driving
directions for delivery drivers. With our new apps for mobile phones, and website platform, customers
can ensure a quick and easy ordering process. We believe good ethics is good business, and strive to
sponsor programs within the communities we serve (8). We hire only dedicated employees and
selectively screen and train all potential franchisees (9).

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
D. External Audit
Opportunities

1. Domino’s is only serving approximately 50 percent of the international market they could possibly
be serving.
2. There is a steadily growing international appetite for American fast food, and an improving global
economy. Markets such as China, Russia, India, and Brazil are still relatively untapped.
3. Many customers are looking for healthier fast food options.
4. College campuses and shopping malls are often frequented by young people.
5. Over 16 percent of residents of the USA identify themselves as Hispanic.
6. Many customers in today’s climate are willing to tolerate a degree of inconvenience if they can get
a better deal.
7. Small margins in the restaurant business are the reason why so many mom-and-pops fail.
8. The current landscape in the Quick Service Restaurant (QSR) business is a bimodal population
distribution with a large population of bargain-minded customers seeking deals on cheap fast food
options, and another population of more affluent consumers targeting middle-to-higher end
restaurants.
9. Domestic stores voted to increase their advertising revenue contribution to 5.5 percent in 2011.

Threats

1. Governments potentially forcing all restaurants to label all nutrition information on the menu at
the point of sale.
2. Trademark and patent protection laws are not as sophisticated in developing countries.
3. YUM Brands (parent company of Pizza Hut) revenues are over 60 percent greater than Domino’s.
4. Little Caesars was listed as the fastest growing pizza chain in 2010, with revenues up 13.6 percent
over 2009, followed by Pizza Hut’s 8 percent increase and Domino’s 7.2 percent increase.
5. Many restaurants such as Wendy’s, Subway, and even Pizza Hut offer customers low calorie
options on the menu.
6. Currently, there are over 925,000 fast food service locations in the USA or one for about every
330 people.
7. Barriers to entry are relatively low for the restaurant industry, but rivalry (competitiveness) among
firms is exceptionally high.
8. In the QSR industry, the bargaining power of consumers is quite powerful, availability of
restaurant options in most places are abundant, and consequently there is intense price
competitiveness among rival firms.
9. Wild fluctuations in commodity prices, especially prices in dairy products since they cannot be
locked in for long periods of time, are particularly problematic for the industry.
10. Labor is the second greatest expense in the fast food industry.
Competitive Profile Matrix

Domino's Pizza Hut Papa John's

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.08 2 0.16 3 0.24 4 0.32
Global Presence 0.10 3 0.30 4 0.40 1 0.10
Healthy Food Options 0.05 2 0.10 3 0.15 1 0.05
Store Locations 0.09 3 0.27 4 0.36 2 0.18
Brand Awareness 0.07 3 0.21 4 0.28 2 0.14
Dining Area 0.04 2 0.08 4 0.16 1 0.04
Financial Profit 0.12 2 0.24 4 0.48 1 0.12
Customer Loyalty 0.08 1 0.08 2 0.16 3 0.24
Market Share 0.10 3 0.30 4 0.40 1 0.10
Product Quality 0.07 2 0.14 4 0.28 3 0.21
Stockholders' Equity 0.12 1 0.12 4 0.48 2 0.24
Price Competitiveness 0.08 4 0.32 2 0.16 3 0.24
Totals 1.00 2.32 3.55 1.98

Domino’s score of 2.32 reveals a below average company with respect to Pizza Hut and Papa John’s.
Over $1.5 billion in long term debt severely impacts Domino’s stockholders’ equity and financial
profit.

EFE Matrix

Opportunities Weight Rating Weighted Score

1. Domino’s senior management estimates the company is only
serving approximately 50 percent of the international market they 0.10 4 0.40
could possibly be serving.
2. There also is a steadily growing international appetite for
American fast food, and an improving global economy. Markets
0.08 3 0.24
such as China, Russia, India, and Brazil are still relatively
untapped.
3. Many customers are looking for healthier fast food options. 0.08 1 0.08
4. College campuses, shopping malls, and other high traffic areas
0.06 3 0.18
are more commonly frequented by young people.
5. According to the US Census in 2010, over 16 percent of
0.02 1 0.02
residents of the USA identify themselves as Hispanic.
6. While an inconvenience over delivery, many customers in
today’s climate are willing to tolerate a degree of inconvenience 0.03 3 0.09
that they historically were not if they can get a better deal.
7. The small margins in the restaurant business are the reason why
0.02 3 0.06
so many mom-and-pops fail.
8. The current landscape in the Quick Service Restaurant (QSR)
business is a bimodal population distribution with a large
population of bargain-minded customers seeking deals on 0.05 4 0.20
cheaper end fast food options, and another population of more
affluent consumers targeting middle to higher end restaurants.
9. Starting in 2009, domestic stores voted to increase their
advertising revenue contribution rate to 5 percent and 0.06 4 0.24
eventually to 5.5 percent in 2011.
 Threats Weight Rating Weighted Score
1. Governments potentially forcing all restaurants to label all
0.03 2 0.06
nutrition information on the menu at the point of sale.
2. Trademark and patent protection laws are not as sophisticated in
0.02 2 0.04
developing countries.
3. YUM Brands (parent company of Pizza Hut) revenues are over
0.10 3 0.30
60 percent greater than Domino’s.
4. Little Caesars was listed as the fastest growing pizza chain in
2010, with revenues up 13.6 percent over 2009, followed by Pizza 0.08 3 0.24
Hut’s 8 percent increase and Domino’s 7.2 percent increase.
5. Many restaurants such as Wendy’s, Subway, and even Pizza
0.06 1 0.06
Hut offer customers low calorie options on the menu.
6. Currently, there are over 925,000 fast food service locations in
0.03 2 0.06
the USA or one for about every 330 people.
7. Barriers to entry are relatively low for the restaurant industry,
0.03 3 0.09
but rivalry (competitiveness) among firms is exceptionally high.
8. In the QSR industry, the bargaining power of consumers is quite
powerful, availability of restaurant options in most places are
0.05 3 0.15
abundant, and consequently there is intense price
competitiveness among rival firms.
9. Wild fluctuations in commodity prices, especially prices in dairy
products since they cannot be locked in for long periods of time, 0.06 2 0.12
are particularly problematic for the industry.
10. Labor, is the second greatest expense in the fast food industry. 0.04 3 0.12
TOTALS 1.00 2.75

Domino’s received an above average EFE score of 2.75 which can be attributed largely to the excellent
job Domino’s has done with international expansion. Domino’s still lags competitors by not offering a
healthy line of menu items.

E. Internal Audit
Strengths

1. Domino’s reached $1 billion in USA online sales in 2012 from its website, IPhone and Android apps
alone, accounting for over 60% of all sales.
2. Domino’s operates stores in 70 different nations.
3. International stores grew 30% from 2009 to 2012 to total 4,835 at year end 2012.
4. Backward integrated supply chain provides over 99% of supplies for franchisee stores.
5. Domino’s enjoys large economies of scale and great brand recognition.
6. Domino’s is exclusively a delivery/take out business, reducing overhead by not offering dine in space.
7. PULSE touch screen ordering system allows for increased order accuracy and provides driving
directions to drivers.
8. Domino’s Pizza markets their pizzas as having gluten-free crust.
9. Domino’s recently introduced new Artisan pizzas, and new recipes (higher quality products) for their
crust, sauce and cheeses.
Weaknesses

1. While many fast food restaurants have added healthy options, Domino’s offers little with respect to
healthy food options such as salads or fruit.
2. Domino’s does not produce a sustainability report or have a sustainability statement on their website.
3. Domino’s reported over $1.3 billion in negative stockholders’ equity at yearend 2012.
4. Domino’s is a relatively large company to operate under a functional type structure.
5. One large slice of hand- tossed, pepperoni pizza contains 300 calories and 12 grams of fat, and there
are 8 slices in a pizza.
6. No dine in option.
7. Domino’s suffered a quality image before the launch of the new Artisan pizzas, and there is some
belief there remains a residual quality problem.

Financial Ratio Analysis

Profit Margin Percent Domino’s Industry S&P 500

Gross Margin 29.87 31.98 37.55
Pre-Tax Margin 10.79 17.46 16.89
Net Profit Margin 6.7 11.88 12.42

Liquidity Ratios
Debt/Equity Ratio NA 0.7 0.97
Current Ratio 1.3 0.7 1.2
Quick Ratio 1.2 0.6 0.8

Profitability Ratios
Return On Equity NA 36.7 20.88
Return On Assets 23.4 13.4 7.7
Return On Capital 42.2 16.3 10.2

Efficiency Ratios
Income/Employee 11,239 16,959 129,395
Revenue/Employee 167,844 138,523 1.05 Mil
Receivable Turnover 18.5 49.3 14.2
Inventory Turnover 38.1 93 13.5
Asset Turnover 3.5 1.1 0.8

Domino’s is a healthy company based on most of the financial ratios. However, $1.5 billion in long-term
debt weighs heavily.

Net Worth Analysis (in millions)

Domino's Company Worth Analysis

Stockholders' Equity -$1,336
Net Income x 5 $560
(Share Price/EPS) x Net Income $3,237
Number of Shares Outstanding x Share Price $3,124
Method Average $1,396
 Papa John's Company Worth Analysis

Stockholders' Equity $182

Net Income x 5 $308
(Share Price/EPS) x Net Income $1,504
Number of Shares Outstanding x Share Price $1,418
Method Average $853

Methods 3 and 4 are likely the best representation of company worth. Like Domino’s, Papa John’s is also
heavily leveraged with long term debt.

IFE Matrix

Strengths Weight Rating Weighted Score

1. Domino’s reached $1 billion in USA online sales in 2012 from its
website, IPhone and Android apps alone. Accounting for over 0.11 4 0.44
60 percent of all sales.
2. Domino's operates stores, in 70 different nations. 0.09 4 0.36
3. International stores grew 43 percent from 2008 to March 2013 to
0.08 4 0.32
total 5,327.
4. Backward integrated supply chain provides over 99 percent of
0.09 4 0.36
supplies for franchisee stores.
5. Domino’s enjoys large economies of scale and great brand
0.07 4 0.28
recognition.
6. Domino’s is exclusively a delivery/take out business, reducing
0.04 4 0.16
overhead by not offering dine in space.
7. PULSE touch screen ordering system allows for increased order
0.04 4 0.16
accuracy and provides driving directions to drivers.
8. Domino’s Pizza markets their pizzas as having gluten free crust. 0.02 3 0.06
9. Domino’s recently introduced new Artisan pizzas, and new
recipes (higher quality products) for their crust, sauce and 0.05 4 0.20
cheeses.
 Weaknesses Weight Rating Weighted Score
1. While many fast food restaurants have added healthy options,
Domino’s offers little in respect to healthy food options such as 0.06 1 0.06
salads or fruit.
2. Domino’s does not produce a sustainability report or have a
0.02 1 0.02
sustainability statement on their website.
3. Domino’s reported over $1.3 billion in negative stockholders’
0.15 1 0.15
equity at year end 2012.
4. Domino’s is a relatively large company to operate under a
0.05 2 0.10
functional type structure.
5. One large slice of hand tossed pepperoni pizza contains 300
0.03 1 0.03
calories and 12 grams of fat, and there are 8 slices in a pizza.
6. No dine in option. 0.02 1 0.02
7. Domino’s suffered a quality image before the launch of the new
Artisan pizzas and there is some belief there remains a residual 0.08 2 0.16
quality problem.
TOTALS 1.00 2.88

With a score of 2.88, Domino’s is doing an above average job based on internal factors. One area of improvement
would be to develop a healthy line of menu items.

F. SWOT
SO Strategies
1. Add 500 new stores over the next 3 years in China, India, and Brazil (S2, S3, O1, O2).
2. Add 500 new stores over the next 3 years in traditional European and Middle Eastern Markets (S2, S3,
O1).
3. Increase advertising expenses from $40M to match Pizza Hut’s $75M over the next 3 years to market
the new Artisan pizzas and other new products (S9, O9).
4. Offer 15 percent off all takeout orders (S5, S6, O6, O8).

WO Strategies
1. Create and market a new Artisan salad (W1, W5, O3).
2. Add 500 new stores over the next 3 years in traditional European and Middle Eastern Markets (W3,
O1).
3. Open 10 restaurants with a dining area as a pilot study near college campuses (W6, O4).
4. Restructure by division to further capitalize on any differences in consumption preferences in
international markets (W4, O1, O2).

ST Strategies
1. Hire a market research firm to determine the value in offering discounts or other marketing strategies
to combat against new competitors in select markets (S1, S5, T3, T4, T5, T6, T7, T8).
2. Market to consumers more readily the healthier aspects of Domino’s pizza’s (S8, T1).

WT Strategies
1. Create and market a new Artisan salad and pizza with lower-fat cheese (W1, W5, T1, T5).
2. Offer complimentary pizza at events around the world as a means of introducing customers to the new
Artisan pizza recipe (W7, T3, T4, T5).
G. SPACE Matrix
FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2 X = 0.2
Y = -2.6
-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
Stockholders' Equity 1 Rate of Inflation -4
Debt/Equity 4 Healthy Minded Public -7
Current Ratio 5 Rising Food Prices -5
Cash 3 Competitive Pressure -7
Net Income 2 Barriers to Entry into Market -5
Financial Position (FP) Average 3.0 Stability Position (SP) Average -5.6

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -2 Growth Potential 6
Product Quality -4 Financial Stability 3
Customer Loyalty -5 Ease of Entry into Market 2
Technological know-how (PLUSE System) -2 Ease of Obtaining Commodity Contracts 2
Control over Suppliers and Distributors -3 Profit Potential 4
Competitive Position (CP) Average -3.2 Industry Position (IP) Average 3.4

Domino’s lands in the Competitive Quadrant based mostly on 1) $1.5 billion in long term debt, 2) intense
competition within the fast food industry and 3) Offering products that are generally not a healthy food
choice. Domino’s should consider adding a line of salads to their menu to help move up the Y-Axis on the
Space Matrix.
H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

Domino’s is clearly experiencing rapid growth, especially internationally; however, their competitive position is
unclear lying somewhere between Quadrant I and II. While the company has many more locations and a much
better international presence than Papa John’s, Pizza Inn, and Little Caesars, the overriding debt problem is a
concern. Yum Brand’s Pizza Hut still remains supreme among pizza chains. Paying off debt would be a viable
strategy for Domino’s management.
I. The Internal-External (IE) Matrix
The Total IFE Weighted Scores
Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High 3

3.0 IV V VI
2

The
EFE
Total Medium Domino's
Weighted
Scores

2.0 VII VIII IX

Low

1.0

Business Segment Revenue Revenue Revenue

2013 2012 2011
(1) Domestic Company Owned Stores $324 $336 $345
(2) Domestic Franchise 195 187 173
(3) Domestic Supply Chain 942 928 876
(4) International 218 201 176
TOTAL $1,679 $1,652 $1,571

Domino’s Domestic Supply Chain segment is the true gem of all the segments. Backward integrated and
serving 99% of domestic franchisees with their products is a recipe for an enduring revenue stream. While
company owned stores have more revenue than either domestic or international franchises, much of
Domino’s long term debt problem is associated with these stores. Finding franchisees to place into these
stores would be a viable strategy for Domino’s.
J. QSPM

Develop a
Continue
Line of
Robust
Healthy
International
Menu
Expansion
Options
Opportunities Weight AS TAS AS TAS
1. Domino’s reached $1 billion in USA online sales in 2012 from its
website, IPhone and Android apps alone. Accounting for over 0.10 4 0.40 1 0.10
60 percent of all sales.
2. Domino's operates stores, in 70 different nations. 0.08 4 0.32 2 0.16
3. International stores grew 43 percent from 2008 to March 2013 to
0.08 1 0.08 4 0.32
total 5,327.
4. Backward integrated supply chain provides over 99 percent of
0.06 0 0.00 0 0.00
supplies for franchisee stores.
5. Domino’s enjoys large economies of scale and great brand
0.02 0 0.00 0 0.00
recognition.
6. Domino’s is exclusively a delivery/take out business, reducing
0.03 0 0.00 0 0.00
overhead by not offering dine in space.
7. PULSE touch screen ordering system allows for increased order
0.02 0 0.00 0 0.00
accuracy and provides driving directions to drivers.
8. Domino’s Pizza markets their pizzas as having gluten free crust. 0.05 0 0.00 0 0.00
9. Domino’s recently introduced new Artisan pizzas, and new
recipes (higher quality products) for their crust, sauce and 0.06 0 0.00 0 0.00
cheeses.
 Threats Weight AS TAS AS TAS
1. Governments potentially forcing all restaurants to label all
0.03 1 0.03 4 0.12
nutrition information on the menu at the point of sale.
2. Trademark and patent protection laws are not as sophisticated in
0.02 0 0.00 0 0.00
developing countries.
3. YUM Brands (parent company of Pizza Hut) revenues are over
0.10 3 0.30 2 0.20
60 percent greater than Domino’s.
4. Little Caesars was listed as the fastest growing pizza chain in
2010, with revenues up 13.6 percent over 2009, followed by Pizza 0.08 4 0.32 3 0.24
Hut’s 8 percent increase and Domino’s 7.2 percent increase.
5. Many restaurants such as Wendy’s, Subway, and even Pizza
0.06 1 0.06 4 0.24
Hut offer customers low calorie options on the menu.
6. Currently, there are over 925,000 fast food service locations in
0.03 3 0.09 1 0.03
the USA or one for about every 330 people.
7. Barriers to entry are relatively low for the restaurant industry,
0.03 1 0.03 2 0.06
but rivalry (competitiveness) among firms is exceptionally high.
8. In the QSR industry, the bargaining power of consumers is quite
powerful, availability of restaurant options in most places are
0.05 0 0.00 0 0.00
abundant, and consequently there is intense price
competitiveness among rival firms.
9. Wild fluctuations in commodity prices, especially prices in dairy
products since they cannot be locked in for long periods of time, 0.06 0 0.00 0 0.00
are particularly problematic for the industry.
10. Labor, is the second greatest expense in the fast food industry. 0.04 0 0.00 0 0.00

Develop a
Continue
Line of
Robust
Healthy
International
Menu
Expansion
Options
Strengths Weight AS TAS AS TAS
1. Domino’s reached $1 billion in USA online sales in 2012 from its
website, IPhone and Android apps alone. Accounting for over 0.11 0 0.00 0 0.00
60 percent of all sales.
2. Domino's operates stores, in 70 different nations. 0.09 4 0.36 1 0.09
3. International stores grew 43 percent from 2008 to March 2013 to
0.08 4 0.32 1 0.08
total 5,327.
4. Backward integrated supply chain provides over 99 percent of
0.09 0 0.00 0 0.00
supplies for franchisee stores.
5. Domino’s enjoys large economies of scale and great brand
0.07 2 0.14 3 0.21
recognition.
6. Domino’s is exclusively a delivery/take out business, reducing
0.04 0 0.00 0 0.00
overhead by not offering dine in space.
7. PULSE touch screen ordering system allows for increased order
0.04 0 0.00 0 0.00
accuracy and provides driving directions to drivers.
8. Domino’s Pizza markets their pizzas as having gluten free crust. 0.02 1 0.02 4 0.08
9. Domino’s recently introduced new Artisan pizzas, and new
recipes (higher quality products) for their crust, sauce and 0.05 1 0.05 2 0.10
cheeses.
 Weaknesses Weight AS TAS AS TAS
1. While many fast food restaurants have added healthy options,
Domino’s offers little in respect to healthy food options such as 0.06 1 0.06 4 0.24
salads or fruit.
2. Domino’s does not produce a sustainability report or have a
0.02 0 0.00 0 0.00
sustainability statement on their website.
3. Domino’s reported over $1.3 billion in negative stockholders’
0.15 4 0.60 3 0.45
equity at year end 2012.
4. Domino’s is a relatively large company to operate under a
0.05 0 0.00 0 0.00
functional type structure.
5. One large slice of hand tossed pepperoni pizza contains 300
0.03 1 0.03 4 0.12
calories and 12 grams of fat, and there are 8 slices in a pizza.
6. No dine in option. 0.02 0 0.00 0 0.00
7. Domino’s suffered a quality image before the launch of the new
Artisan pizzas and there is some belief there remains a residual 0.08 0 0.00 0 0.00
quality problem.
TOTALS 3.21 2.84

K. Recommendations
1. Increase advertising expenses by $35M over the next 3 years to market the new Artisan pizzas and
other new products.
2. Establish new franchisees for 1000 new stores over the next 3 years; (200 in Russia, 200 in India, 200
in China, and 400 in Europe/Middle East) for a cost of $100M. (many of these connections are already
established).
3. Hire a market research firm to assess the feasibility of adding new healthy options to the menu for a
cost of $5 million.

Total Amount of Funds Needed = $140M

L. EPS/EBIT Analysis (in millions expect for EPS and Share Price)
Amount Needed: $140
Stock Price: $55
Shares Outstanding: 57
Interest Rate: 5%
Tax Rate: 37%

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT $240 $280 $340 $240 $280 $340
Interest 0 0 0 7 7 7
EBT 240 280 340 233 273 333
Taxes 89 104 126 86 101 123
EAT 151 176 214 147 172 210
# Shares 59 59 59 57 57 57
EPS 2.56 2.98 3.62 2.58 3.02 3.68
 20 Percent Stock 80 Percent Stock
Recession Normal Boom Recession Normal Boom
EBIT $240 $280 $340 $240 $280 $340
Interest 6 6 6 1 1 1
EBT 234 274 334 239 279 339
Taxes 87 102 124 88 103 125
EAT 148 173 211 150 176 213
# Shares 57 57 57 59 59 59
EPS 2.57 3.01 3.67 2.56 2.99 3.63

The EPS/EBIT chart reveals debt financing as the most attractive alternative for all economic conditions.
However, it is unclear if Domino’s could acquire debt capital at 5%, given the firm’s current $1.5 billion of
long- term debt on the 2013 balance sheet. With the high stock price, and all recommendations (in this
note) suggest having franchisees provide the capital for new stores, acquiring $140 million through equity
would only increase total shares outstanding from 57 million to 59 million, so dilution of ownership is not a
concern.

L. Epilogue

As of first quarter March 2013, Domino’s continues to carry $1.5 billion in long-term debt on the balance
sheet resulting in over $1.3 billion in negative stockholders’ equity. Despite the continued troubles with
debt, one interesting strategic change is as of March 2013. Domino’s has changed their principle strategy
of delivery speed to taking extra time to produce a top-quality pizza. Down are the advertisements of
yester year, promising free pizzas if not at your door in 30 minutes and in is a nation-wide marketing
campaign claiming Domino’s pizzas are made fresh from never frozen dough, and it just takes a bit longer
to make a better pizza. This campaign comes on the heels of Domino’s starting their Artisan Pizzas and
new recipes just a few years earlier. The new buzz word/slogan for Domino’s newest marketing campaign
is simply “try our Handmade Pan Pizza.”

In addition to the new Handmade Pan Pizza, Domino’s is rolling out a new $5.99 value menu that offers
Penne Pastas, Stuffed Cheesy Breads, 8-piece chicken varieties, and Oven Baked Sandwiches. All of these
products are in addition to the $5.99 medium two topping pizza pick-up special Domino’s has offered in
recent years. With the new products (and change in pizza recipe), Domino’s is claiming through
advertisements that 80 percent of their menu items are new since 2008.
Chapter 1: Domino’s Pizza

10 Basic Questions

1: A

2: C

3 C
4: B

5: A

6: D

7: C

8: B

9: C

10: C

15 Applied Questions

Porters Five Forces Model

1: D

2: B

3: A

4: B

5: D

Organizational Structure

1: A

2: C

3: D

4: D

5: A

Strategy Types
Strategic Management Concepts and Cases 15th Edition David Solutions Manual
Full Download: https://alibabadownload.com/product/strategic-management-concepts-and-cases-15th-edition-david-solutions-man

1: D

2: D

3: D

4: A

5: D

This is sample only, Download all chapters at: AlibabaDownload.com

2-8. What are some different names for “mission statement,” and where will you likely find a firm’s
mission statement?Answer: A mission statement is sometimes called a creed statement, a statement of
purpose, a statement of philosophy, a statement of beliefs, a statement of business principles, or a
statement“defining our business.” A good place to look for a company’s mission statement is on the
firm’s website or its annual report, but many organizations also have the statement engraved
andpublicly visible at its stores or facilities.

2-9. If your company does not have a vision or mission statement, describe a good process for
developing these documents. Answer: Select several articles and/or websites about these statements
and ask all managers to read these as background information. Then, managers should prepare a vision
or mission statement for the organization. A facilitator or committee should then merge these
statements into a single document and distribute the draft statements to all managers. A request for
modifications, additions, and deletions is needed next, along with a meeting to revise the document.

2-10. Explain how developing a mission statement can help resolve divergent views amongmanagers in
a firm.Answer: The question “What is our business?” can create controversy. Raising the question often
reveals different opinions/views/beliefs among strategists in the organization. Individuals who have
worked together for a long time may realize that they are in fundamental disagreement. Negotiation,
compromise, and eventual agreement on important issues is needed

2-11. Drucker says that the most important time to seriously reexamine the firm’s

vision/mission is when the firm is very successful. What is this?

Answer: The most important time to ask seriously “What do we want to become?” and “What

is our business?” is when a company has been successful. Success obsoletes the very behavior

that achieved it, and creates new realities and different problems. A very successful firm is the

target of rival firms who try to imitate, duplicate, reverse engineer their products, and take

market share from the leading firms.

2-12. Explain why a mission statement should not include monetary amounts, numbers,

percentages, ratios, goals, or objectives.

Answer: A mission statement is broad in scope for three reasons. First, it allows for the

generation and consideration of a range of feasible alternative objectives and strategies without

unduly stifling management creativity. Excess specificity would limit the potential of creative

growth for the organization. Second, a mission statement needs to be broad to reconcile

differences among, and appeal to, an organization’s diverse stakeholders. Thus, a mission

statement should be reconciliatory. Third, it is simply premature in the mission statement to

reveal goals and objectives, which should be determined after the internal and external

assessment, as illustrated in the comprehensive strategic planning model.

2-13. Discuss the meaning of the following statement: “Good mission statements identify

the utility of a firm’s products to its customers.”

Answer: A good mission statement reflects the anticipations of customers. Organizations should

identify customers’ needs and then provide a product or service to fulfill those needs. For

example, AT&T’s mission statement focuses on communication rather than on telephones;

Exxon-Mobil’s mission statement focuses on energy rather than on oil or gas; Union Pacific’s

mission statement focuses on transportation rather than on railroads; and Universal Studio’s

mission statement focuses on entertainment rather than on movies.

2-14. Distinguish between the “self-concept” and the “philosophy” components in a

mission statement. Give an example of each for your university.

Answer: The self-concept component of a mission statement describes a firm’s distinctive

competence or major competitive advantage. The philosophy component of a mission statement

refers to the basic beliefs, values, aspirations, and ethical priorities of the firm.

Self-Concept: Overlooking the Atlantic Ocean, our college is AACSB accredited at both the

BBA and MBA levels.

Philosophy: We treat all students with respect and admiration.

2-15. When someone or some company is “on a mission” to achieve something, many

times they cannot be stopped. List three things in prioritized order that you are “on a

mission” to achieve in life.

Answer: 1) To daily eat healthy. 2) To daily be a good steward of the natural environment.

3) To daily build up rather than break down people.

2-16. Compare and contrast vision statements with mission statements in terms of

composition and importance.

Answer: Many organizations develop both a mission statement and a vision statement. Whereas

the mission statement answers the question, “What is our business?” the vision statement

answers the question, “What do we want to become?” Both statements are essential for firm

success. The vision is one sentence, whereas the mission is several sentences, and includes nine

components.

2-17. Do local service stations need to have written vision and mission statements? Why
or why not?

Answer: Less formality and detail characterize strategic management in small businesses such

as a local service station. However, local service stations are not immune to competitive

pressures, changes in technology, changes in demographic factors, and resistance to change.

Therefore, it is recommended that even the smallest organization develop written vision and

mission statements to enhance efforts to secure bank financing and to develop good supplier,

customer, and employee relationships.

2-18. Why do you think organizations that have a comprehensive mission statement tend

to be high performers? Does having a comprehensive mission cause high performance?

Answer: Having a comprehensive mission statement does not guarantee or cause high

performance. However, a comprehensive mission statement can contribute significantly to high

performance, because ideally it conveys the intent and aspirations of all employees and

managers who by working together achieve synergy. Having an excellent mission statement

also provides a firm foundation for effective strategic planning, rather than ad hoc guessing

about what actions would be best to take in the future.

2-19. What is your college or university’s self-concept? How would you state that in a

mission statement?

Answer: Ranked #1 nationally in International Business, the Darla Moore College of Business

at the University of South Carolina trains students to be knowledgeable, comfortable, and

effective in business across varied country settings.

2-20. Explain the principal value of a vision and mission statement.

Answer: Whereas the mission statement answers the question, “What is our business?” the

vision statement answers the question, “What do we want to become?” Both the vision

statement and the mission statement ensure unanimity of purpose within the organization and

make important statements about “who the firm is” and “what it wants to become” to outside

stakeholders. The two statements provide a firm foundation for effective strategic planning

The statements provide direction and help motivate employees/managers. Table 2-2 lists ten

benefits of having a clear mission statement: 1) achieve clarity of purpose among all managers

and employees; 2) provide a basis for all other strategic planning activities; 3) provide direction;
4) provide a focal point for all stakeholders of the firm; 5) resolve divergent views among

managers; 6) promote a sense of shared expectations among all managers and employees; 7)

project a sense of worth and intent to all stakeholders; 8) project an organized, motivated

organization worthy of support; 9) achieve higher organizational performance; and 10) achieve

synergy among all managers and employees.

2-21. Why is it important for a mission statement to be reconciliatory?

Answer: A mission statement needs to be reconciliatory because the claims of a firm's various

stakeholders often conflict. For example, employees desire high wages yet customers desire low

prices. An effective mission statement reconciles (reduces/mitigates) major differences among key

stakeholders.

2-22. In your opinion, what are the three most important components that should be

included when writing a mission statement? Why?

Answer: All nine components described in Chapter 2 are important, but three are particularly

important: 1) self concept (reveals the firm’s distinctive competence or competitive advantage),

2) philosophy (reveals that the firm is ethical in all aspects), and 3) technology (reveals that the

firm is up-to-date technologically rather than being out-of-date).

2-23. How would the mission statements of a for-profit and a nonprofit organization

differ?

Answer: The mission statements of profit versus nonprofit organizations would not differ in the

characteristics or the components specified for inclusion in effective statements.

2-24. Write a vision and mission statement for an organization of your choice.

Answer: This is a worthwhile class exercise. Ask students to do this individually, and then

exchange papers for grading. Have grading done based on inclusion of 9 components and 8

characteristics.

2-25. Who are the major stakeholders of the bank that you do business with locally?

What are the major claims of those stakeholders?

Answer: The major stakeholders of a bank include commercial customers, consumer

customers, shareholders, communities, managers, and employees. Each stakeholder group

relies upon the organization. Customers expect the bank to perform in a manner that protects
them financially. Shareholders expect the firm to be profitable. Local communities rely upon

the bank to provide jobs, credit, and to pay taxes. Employees rely upon the bank for wages and

salaries.

2-26. List eight benefits of having a clear mission statement

Answer: Table 2-2 lists ten benefits that may be included in students’ lists: 1) achieve clarity of

purpose among all managers and employees; 2) provide a basis for all other strategic planning

activities; 3) provide direction; 4) provide a focal point for all stakeholders of the firm; 5)

resolve divergent views among managers; 6) promote a sense of shared expectations among all

managers and employees; 7) project a sense of worth and intent to all stakeholders; 8) project an

organized, motivated organization worthy of support; 9) achieve higher organizational

performance; and 10) achieve synergy among all managers and employees.

2-27. How often do you feel a firm’s vision and mission statement should be changed?

Answer: Vision and mission statements should be evaluated on a regular basis, at least

annually, to determine if they are still appropriate. Firms may wish to change the statements

both in times of crisis and in times of success. The vision and mission should be modified as

needed to “stay in tune” with the company and its environment. Well-written statements

oftentimes are not changed for 3 to 5 years, or longer.

2-28. Explain why a mission statement should not include strategies and objectives.

Answer: A mission statement should not include strategies and objectives because the statement

needs to be broad in scope to effectively provide a basis for performing an external and internal

audit and for generating and selecting among alternative strategies. Including specific strategies

and objectives in a mission statement could reduce the level of innovative and creative thinking

in an organization and jeopardize the potential for the statement to be widely accepted by all

managers and employees. Acceptance of a clear mission is a prerequisite for gaining acceptance

for strategies and objectives to pursue. In addition, it is simply premature in the mission to

include strategies and objectives where they are determined after the mission is decided upon.
2-29. List seven characteristics of a mission statement.

Answer: Table 2-3 lists eight characteristics that may be included in students’ lists: 1) it is

broad in scope and does not include monetary amounts, numbers, percentages, ratios, or

objectives; 2) it is less than 250 words; 3) it is inspiring; 4) it identifies the utility of a firm’s

products; 5) it reveals whether the firm is socially responsible; 6) it reveals whether the firm is

environmentally responsible; 7) it includes nine components (customers, products and services,

markets, technology, concern for survival/growth/profits, philosophy, self-concept, concern for

public image, concern for employees); and 8) it is enduring and can reconcile differences among

and appeal to an organization’s diverse stakeholders

ISSUES FOR REVIEW AND DISCUSSION
1.Explain how to conduct an external strategic-management audit.
Answer: An effective approach for conducting an external strategic-management audit
consists of four basic steps: (1) select key variables, (2) select key sources of information, (3)
use forecasting tools and techniques, and (4) construct an EFE Matrix.
2.Identify a recent economic, social, political, or technological trend that significantly affects
financial institutions.
Answer:
Economic²Interest rates remain low.
Social²Many states are passing no smoking ordinances.
Political²Eastern European countries are experiencing political instability.
Technological²Use of the Internet is doubling every 100 days.
3.Discuss the following statement: Major opportunities and threats usually result from
aninteraction among key environmental trends rather than from a single external event orfactor.
Answer: This statement is accurate. It reveals how complex the external audit part of strategy
formulation can be. There are an infinite number of interactions among key external factors.
4.Identify two industries experiencing rapid technological changes and three industries thatare
experiencing little technological change. How does the need for technological forecastingdiffer in these
industries?Why?
Answer: The computer industry, communications industry, and aerospace industry are
experiencing rapid technological change. Three industries that are experiencing little technological
change are the forest products industry, the shipping industry, and the dairy industry.
5.Use Porters five-forces model to evaluate competitiveness within the U.S. banking industry.
Answer: Porter identifies five competitive forces that determine the intensity of competition in an
industry and the total value of profits created in a particular industry. The five forces are 1) newentrants, 2)
substitute products or services, 3) bargaining power of suppliers, 4) bargaining powerof buyers, and 5) rivalry
among existing firms.A key to selecting appropriate generic strategies isto analyze these competitive forces in
terms of trends, opportunities, and threats facing the firm.
Ask your students to apply an analysis of these forces to the banking industry
6.What major forecasting techniques would you use to identify (1) economic opportunitiesand threats and
(2) demographic opportunities and threats?Why are these techniques mostappropriate?
Answer: With the advent of sophisticated computers, simultaneous systems of regression
equations have become the most widely used approach for forecasting economic variables.Scenario
development is the most popular of all techniques for social and demographicforecasting, although surveys and
market research are also widely used.
7.How does the external audit affect other components of the strategic-management process?
Answer: In countless ways, external audit results can and often do affect all other components of
the strategic-management model.
8.As the owner of a small business, explain how you would organize a strategic-information
scanning system. How would you organize such a system in a large organization?
Answer: In both small and large organizations, strategists could assign specific publications to
particular individuals who could then monitor their assigned source and regularly report strategicinformation to a
coordinator.Also, both small businesspeople and chief executive officers of largebusinesses could effectively
use on-line databases.
9.Construct an EFE Matrix for an organization of your choice.
Answer: An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive
information.
There are five steps in developing an EFE Matrix as illustrated in Table 3-9.
List key external factors as identified in the external-audit process. Include a total of 10-20 factors
from both the opportunities and threats.
Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights
show the relative importance. The total of all the weights should equal 1.0.
Assign a 1-4 rating to each factor to indicate how effectively the firm¶s current response strategy:
1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the
response is superior.
Multiply each factor¶s weight by its rating to get a weighted score.
Sum the weighted scores for each variable to determine the total weighted score for the
organization.
While each answer will vary for this question, students should follow these guidelines.
10. Make an appointment with a librarian at your university to learn how to use on-line
databases.Report your findings in class.
Answer: This is an interesting and beneficial library exercise. Many libraries have a business
liaison who will come to your class to illustrate the use of these databases.
11. Give some advantages and disadvantages of cooperative versus competitive strategies.
Answer: Cooperative strategies are generally less costly than competitive strategies. Cooperative
strategies between domestic and foreign companies can facilitate entry into world markets.However,
competitive strategies recognize that survival of the fittest is an underlying philosophyof business not only in the
United States, but also in most of the world. Identifying competitors¶strengths and weaknesses is, thus, an
integral and vital part of the external audit.
12. As strategist for a local bank, explain when you would use qualitative versus quantitative
forecasts.
Answer: Qualitative forecasts are most appropriate when historical data are not available and
when relationships among key variables are expected to vary greatly in the future.In addition,when conditions
are exploratory in nature, qualitative data can be very useful. Quantitativeforecasts require access to
quantitative data.
13. What is your forecast for interest rates and the stock market in the next several months?Asthe
stock market moves up, do interest rates always move down?Why? What are thestrategic implications
of these trends?
Answer: As the stock market goes up, interest rates usually go down. An underlying reason for
this trend is that investors find stocks more attractive than certificates of deposit as investmentopportunities
when stock prices rise. The primary strategic implications of these trends concernthe relative attractiveness of
stock versus debt as a source of capital to finance strategyimplementation.As stock prices move up and interest
rates move down, debt becomes moreattractive as a source of capital.
14. Explain how information technology affects strategies of the organization where you have
worked most recently.
Answer: Answers will vary for each student. If asking this question as a class exercise, encourage
students to think about how information technology might have represented a strength orweakness for that
organization. In addition, mention that rapidly changing information technologycan represent a threat or
opportunity for a firm.
15. Let¶s say your boss develops an EFE Matrix that includes 62 factors.How would you
suggest reducing the number of factors to20?
Answer: Let a group of knowledgeable individuals in the organization evaluate the relative
importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = veryimportant. Then
add the ratings each factor receives. The 20 factors with the highest sum scoreshould be included in the EFE
Matrix.
16.Discuss the ethics of gathering competitive intelligence.
Answer: Gathering competitive intelligence information is not corporate espionage because all the
information needed is available by ethical means, mostly accessible through the Internet. Firmsowe it to all their
stakeholders to gather competitive intelligence and to perform this activitysystematically and ethically.
17.Discuss the ethics of cooperating with rival firms.
Answer: The norms of personal ethics serve as a foundation for business ethics and provide a
basis for cooperating with rival firms. Engaging in unethical practices, even with rival firms, will
jeopardize a firm¶s credibility and respect in the industry.
18. Visit the SEC website at www.sec.gov and discuss the benefits of using information provided
here.
Answer: This is a good Internet exercise for students.The SEC website contains a plethora of
information including SEC forms and filings, information for investors, accountants, mutual fundmanagers, etc.
While the information can be useful for conducting company business andplanning, it is also a good source of
environmental information particularly related to regulationsand the financial environment.
19. What are the major differences between U.S. and multinational operations that affect
strategic management?
Answer: The external environment is much broader for a firm that conducts multinational
operations than for a firm that only sells domestically.As a result, a firm that conductsmultinational operations
must consider a broader range of information in its external analysis,which may affect how its strategies are
structured and implemented.
20. Why is globalization of industries a common factor today?
Answer: The following are trends that are contributing to the globalization of industries around the
world:
y Corporations in every corner of the globe are taking advantage of the opportunity to share in
the benefits of worldwide economic development.
y Markets are shifting rapidly and in many cases are converging in terms of tastes, trends, and
prices.
y Innovative transport systems are accelerating the transfer of technology, and shifts in the
nature and location of production systems are reducing the response time to changing market
conditions.
y More and more countries around the world are welcoming foreign investment and capital.
y E-commerce and the instant transmission of money and information across continents.
21. Do you agree with I/O theorists that external factors are more important than internal
factors in a firm achieving competitive advantage? Explain both your and their position.
Answer:While I/O theorists claim that industry factors are more important than internal factors,
research findings suggest that only 20%of a firm¶s profitability can be explained by industryfactors and 36%
explained by internal factors. Regardless, it is not a question of whether externalor internal factors are more
important. Rather, effective integration and understanding of bothexternal and internal factors is the key to
securing and keeping a competitive advantage.
22. Define, compare, and contrast the Weights vs Ratings in an EFEM vs IFEM.
Answer: The weight in an EFE Matrix indicates the relative importance of that factor to being
successful in the firm¶s industry. The rating indicates how effectively the firm¶s current strategiesrespond to each
key external factor. Thus, the weight allows more important factors to receivemore consideration while the rating
evaluates how well the firm handles each factor. Weights areindustry-based but ratings are company-based.
The weight in an IFE also indicates the relative importance of the factor to the firm¶ssuccessfulness in the industry.
However, in the IFE the factors under consideration are internalfactors rather than external factors. Ratings in the
IFE indicate whether the factor is a major orminor weakness or strength. Like in the EFE, weights industry-based
while ratings are company-based. The IFE is presented in Chapter 4.

23. List the 10 external areas that give rise to opportunities and threats.
Answer: The ten external areas are economic, social, cultural, demographic, environmental,
political, government, legal, and technological.
Chapter 4 - The Internal Assessment
Overview
Chapter 4 explains how to conduct an internal strategic management audit to
provide an excellent foundation for formulating strategies. Key aspects of the basic
business functions (management, marketing, finance, production/operations, R&D, and
MIS) are reviewed along with value chain analysis, benchmarking, breakeven analysis,
and cost/benefit analysis. This chapter reveals how to identify and prioritize internal
strengths and weaknesses that provide a basis for strategies formulated. Chapter 4
explains how to develop an Internal Factor Evaluation (IFE) Matrix, an important
strategic planning tool.
It is vital for companies and organizations to identify and prioritize the relative
importance of key internal strengths and weaknesses that characterize the firm, so the
firm can deploy assets/resources to capitalize on the strengths and improve upon the
threats. Survival of the firm can hinge on this part of strategic planning being done well,
so Chapter 4 is very important. This part of strategic planning requires that an
engineering hunt for the facts be conducted, to avoid a strategic plan being based on
vague generalities, which is detrimental both to companies and students performing case
analysis.

Learning Objectives
The Chapter 4 Learning Objectives presented in the textbook are reiterated below:

1. Describe the nature and role of an internal assessment in formulating strategies.

2. Discuss why organizational culture is so important in formulating strategies.
3. Identify the basic functions (activities) that make up management and their relevance
in formulating strategies.
4. Identify the basic functions of marketing and their relevance in formulating strategies.
5. Discuss the nature and role of finance and accounting in formulating strategies.
6. Discuss the nature and role of production/operations in formulating strategies.
7. Discuss the nature and role of research and development (R&D) in formulating
strategies.
8. Discuss the nature and role of management information systems (MIS) in formulating
strategies.
9. Explain value chain analysis and its relevance in formulating strategies.
10. Develop and use an Internal Factor Evaluation (IFE) Matrix.

Teaching Tips
1. Ask by show of hands (although you have the information recorded on a class roster
sheet), who in the class is a Management major, and then ask the same for each BBA
major. Why? Because this chapter offers a quick synopsis of key material in those
majors. Ask students to capitalize on their area of expertise in performing their strategic
management case analysis. Emphasize to students that strategies are based on a
prioritized list of strengths and weaknesses in the functional areas of business. No firm
can do everything beneficial, so prioritization is a key in strategic planning.

2. Show the author videos about Chapter 4 at the www.strategyclub.com website. Also
at that website, show the IFEM portion of the Excel student template. Also, show a
sample case presentation at that website, with special emphasis on the Internal
Assessment part.

3. Regarding the financial ratios presented, show students where they can retrieve those
ratios on the Internet, i.e., at the websites presented in the chapter, especially the sources
given in Table 4-10. Note: Table 4-10 is brand new to this textbook and is worthy of
spending some time on because the underlying numbers of key internal and external
factors come from sources such as those given, plus students need to get familiar with
what their college library does and does not offer in terms of business online databases.

4. Breakeven analysis has become an increasingly important strategic planning concept,

especially for thousands of start-up businesses and entrepreneurs. Therefore, definitely
go through the end-of-chapter review questions and exercises that deal with breakeven.
This edition gives a formula and example problems that can be utilized in class to apply
breakeven.

5. The IFE Matrix in Table 4-8 for a retail computer store will serve as a running
example in other chapters to come, so definitely go over that example. Point out the use
of $’s, #’s, %’s in the factor list, as well as the Ratings, which (remind students) are 4 or
3 for strengths and 2 or 1 for weaknesses (in contrast to the Ratings in an EFEM).

6. At the end of Chapter 4, direct student attention to the “Implications for Students”
because this is important information as the team prepares and 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 answer,
with you commenting on their answers. I have found 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
students. Several exercises focus on the Hershey Company Cohesion Case, and several
focus on your college/university. I usually select one from each venue.
Answers to End-of-Chapter 4 Review Questions
4-1. The primary means for gaining and sustaining competitive advantages for most
companies are shifting downstream. Explain and discuss this statement.

Answer: The primary means for gaining and sustaining competitive advantages for most
companies are shifting downstream. Recent research by Dawar reveals that in most
industries today, upstream activities such as supply chain management, production, and
logistics, are being commoditized or outsourced by firms, while downstream activities
related to consumer behavior are becoming the primary means for gaining and sustaining
competitive advantage. Dawar reports that the sources of competitive advantage are
shifting away from production processes inside the firm, to customers and markets
outside the firm. Businesses are increasingly gaining competitive advantage by
proactively shaping customers’ point of purchase behavior, rather than firms using focus
groups, surveys, and social media to determine what customers want.

4-2. In analyzing big data, there is a shift from focusing largely on aggregates or
averages to focusing, in addition, on outliers, because outliers oftentimes reveal
(predict) critical innovations, trends, disruptions, and revolutions on the horizon.
Explain and discuss this statement.

Answer: In analyzing big data, there is a shift from focusing largely on aggregates or
averages to focusing, in addition, on outliers, because outliers oftentimes reveal (predict)
critical innovations, trends, disruptions, and revolutions on the horizon. In essence,
knowing more about “who is not your customer and why” may be as (or more) important
than knowing about your customer. Perceptual mapping and multidimensional scaling
are being more widely used to explore outlier patterns. Also, the typical statistical
approach of relying on p values to establish the significance of a finding is becoming less
trusted, since with extremely high sample sizes “almost everything” becomes significant.
In contrast, the focus of analysis is shifting more to the size and variance explained, i.e.,
examining for example R-squared. Stepwise regression and cluster analysis are
becoming more widely used to supplement traditional p-value analyses.

4-3. What are some limitations of financial ratio analysis?

Answer: 1) Financial ratios are based on accounting data, and firms differ in their
treatment of such items as depreciation, inventory valuation, R&D expenditures, pension
plan costs, mergers, and taxes. 2) Seasonal factors can influence comparative ratios. 3)
Conformity to industry composite ratios does not establish with certainty that a firm is
performing normally or that it is well managed; likewise, departures from industry
averages do not always indicate that a firm is doing especially well or badly. For
example, a high inventory turnover ratio could indicate efficient inventory management
and a strong working capital position, but it also could indicate a serious inventory
shortage and a weak working capital position. 4) Financial ratios are not very
“actionable” in terms of revealing potential strategies needed, i.e., since they generally
are based on performance of the overall firm; selecting “actionable” key factors, both
externally and internally, upon which to formulate strategies is important. 5) All ratios
are not significant for all industries and companies. For example, accounts receivable
turnover and average collection period are not meaningful to a company that takes only
cash receipts.

4-4. Does RBV theory determine diversification targets? Explain and discuss this
statement.

Answer: Recent research by Neffke and Henning basically says the answer is YES.
Their empirical evidence reveals that it is the nature of a firm’s human capital more than
any other variable in the firm’s value chain that impacts that firm’s choice of
diversification targets. Specifically, firms select acquisition targets that offer
opportunities to leverage existing human resources. Neffke and Henning report that
firms are far more likely to diversify into industries that have ties to the firms’ core RBV
activities in terms of their existing workforce, rather than into industries without such
ties. In fact, Neffke and Henning report that “firms are over 100 times more likely to
diversify into industries to which the firms’ internal human assets are strongly
complementary, rather than into industries for which such skill-relatedness linkages are
weak.” (Source: Based on: Neffke, Frank and Martin Henning (2013), “Skill
Relatedness and Firm Diversification,” Strategic Management Journal, 34, 297-316).

4-5. True or False: Recent research reveals that the most effective marketing
methods for firms with fewer than 500 employees is the company website (50%).
Explain.

Answer: TRUE. There has been a dramatic shift away from advertising on television,
newspaper, radio, and magazine to advertising on social media, especially through the
company’s website.

4-6. What are “collaborative machines?”

Answer: Increasingly in production settings, a new breed of robots, called “collaborative

machines,” are working alongside people. The robots, priced as low as $20,000 and
becoming widely used even in small businesses, do not take lunch breaks or sick days or
require health insurance, and they can work nonstop all night tirelessly if needed. Unlike
larger robots that cost much more, collaborative machines are more flexible, oftentimes
doing one task one day and a different task the next day. At Panek Precision Inc., a
Northbrook, Illinois-based machine shop, Mr. Panek says: “Having robots has allowed
us to move our existing workers into more useful tasks, such as monitoring more-
advanced machines that require human tending.” Workers are generally quite receptive
to collaborative machines, even giving them names, such as “Fred” at Stuller Inc., a
jewelry factory in Lafayette, Louisiana, and “Baxter” at K’NEX Brands, a toy maker in
Hatfield, Pennsylvania.

4-7. Identify some excellent online resources for finding financial ratio information.
Answer: See Table 4-10. The author’s favorite, however, is www.finance.yahoo.com. It is free and
immensely informative with financial comparative metrics for any publicly-held firm.

4-8. Marketing is becoming much more technical as are the duties and responsibilities of
chief marketing officers (CMOs). Give four examples of increasing technical aspects of
marketing.

Answer: a) Managing the firm’s website. b) Performing data mining (business analytics) to
facilitate decision making. c) Developing, administering, and analyzing surveys to assess
customer tendencies and desires. d) Adjusting prices across countries in conjunction with
changes in the value of the dollar.

4-9. Is a capacity utilization rate of 50 percent good? Why?

Answer: A rate of 50% would be terrible because that would indicate that the production
machinery in a manufacturing plant would be running/operating only 50% of the time. This
would be like an airplane staying grounded 50% of the time = not good for business.

4-10. If Netflix increases its advertising expenses by 30 percent while keeping its price and
variable costs the same, does that mean the company’s breakeven point will increase 30
percent? Show this calculation for a hypothetical firm.

Answer: YES, on rare occasions. NO, unless the only fixed cost is advertising, which is rarely
the case, so the answer is almost always NO.
Before: After:
BE = TFC/ (P – VC) BE = TFC/ (P – VC)
BE = 100/ (10 – 5) BE = 130 / (10 – 5)
BE = 20 BE = 26
Conclusion: 26 – 20 = 6 6/20 = 30%

4-11. What are the limitations of breakeven analysis?

Answer: Wikipedia gives a good answer, as follows:

• BE is only a supply side (i.e., costs only) analysis, as it tells you nothing about
what sales are actually likely to be for the product at various prices.
• BE assumes that fixed costs (FC) are constant. Although this is true in the short
run, an increase in the scale of production is likely to cause fixed costs to rise.
• BE assumes average variable costs are constant per unit of output, at least in the
range of likely quantities of sales (i.e., linearity).
• BE assumes that the quantity of goods produced is equal to the quantity of goods
sold (i.e., there is no change in the quantity of goods held in inventory at the
beginning of the period and the quantity of goods held in inventory at the end of
the period).
• In multi-product companies, BE assumes that the relative proportions of each
product sold and produced are constant (i.e., the sales mix is constant).
4-12. In the Joy’s Daycare BE example in the chapter, how would a $1,000 annual
advertising expenditure impact the business break-even point?

Answer: It would raise the BE point from 8 children to 20 children.

BE = 1,600/4 = 400 units (children in June). Since there are 20 days in June, Joy must watch 400/20
= 20 children every day to break even, up from 8 children. See Table 4-7 in the chapter.

Table 4-5 – Applying Breakeven Analysis for Joy’s Day Care

Seeing a need for childcare in her town, Joy is considering opening her own daycare
service. Joy’s Day Care needs to be affordable, so Joy would like to care for each child
for $12 a day. But Joy also wants to make money. Joy needs to know how many
children she will have to watch per day to make money. Joy gathered the following
information about potential new business.

a. The month of June has 20 workdays, Monday through Friday for four weeks.
b. Insurance and rent on her business will be $200 and $400, respectively, per month.
c. Expenses per student per day will be snacks (2 @ $1.00) + meals (2 @ $3.00).

Joy’s Analysis
Breakeven = Operating Expenses ÷ ($12.00 - $8.00)
Break-even = $600 ÷ $4.00 Break-even = 150 units (children) in June.
Since there are 20 days in June, Joy must watch 150 ÷ 20 = 7.5 kids, or 8 children every
day to make a profit.

4-13. Explain Cost/Benefit analysis.

Answer: Cost/benefit analysis involves assessing the costs, benefits, and risks associated with
marketing decisions. The three steps required to perform a cost/benefit analysis are: (1) compute
the total costs associated with a decision, (2) estimate the total benefits from the decision, and
(3) compare the total costs with the total benefits. An opportunity becomes more attractive to
the extent that expected benefits exceed total costs.

4-14. Explain why “communication” may be the most important word in Management.
What do you think is the most important word in Marketing? In Finance? In Accounting?

Answer: The process of performing an internal audit provides significant opportunity for
participants to understand how their jobs, departments, and divisions fit into the whole
organization. Performing an internal audit thus is an excellent vehicle or forum for improving
the process of communication in the organization. Excellent communication leads to excellent
understanding of what the firm is doing and why, and what is in it for employees and managers.
This leads to excellent commitment, a vital ingredient for strategy implementation. Student
answers will vary on the most important words for Marketing, Finance, and Accounting.
Examples may include “pricing” for Marketing, “financing” for Finance, and “ethics” for
Accounting.
4-15. Discuss how the nature of advertisements have changed in the last few years.

Answer: Growth of traditional advertising outlets such as newspapers, magazines, television,

and radio have slowed dramatically, and there has been significant growth in Internet
advertising. Advertising on social media sites such as Facebook, Twitter, YouTube, and
LinkedIn has become important for many companies. Companies are even beginning to
advertise to readers of e-books. Ads in general are also shorter in length, and targeted more
effectively to customers. Companies increasingly are utilizing business analytics (data mining)
to link the price being charged for ads to tangible, measurable results in sales.

4-16. Explain why it is best not to have more than 30 percent of the factors in an IFE
Matrix be financial ratios.

Answer: In developing an IFE Matrix, it is important to not have more than 30 percent of the
key factors be financial ratios, because financial ratios are the result of many factors, so it is
difficult to know what particular strategies should be considered based on a financial ratio. For
example, a firm would have no insight on whether to sell in India or China to take advantage of
a high ROI ratio. A much better factor is that the firm’s sales in India increased 14% vs. 4% in
China.

4-17. List three firms you are familiar with and give a distinctive competence for each firm.

Answer: Answers will vary for each student. Examples of firms with distinctive competencies
include Maytag, which is known for excellent product quality; Procter & Gamble, known for
superb marketing; and 3M, known for innovative research & development.

4-18. Give some key reasons why prioritizing strengths and weaknesses is essential.

Answer: Prioritization is key throughout the strategic planning process, because no firm has
sufficient resources to do everything that can benefit the firm. Key internal factors must be
prioritized so that the firm’s most important strengths and weaknesses can be determined
collectively as needed to decide among numerous beneficial strategies. Performing an internal
audit provides great opportunity for participants to understand how their jobs, departments, and
divisions fit into the whole organization.

4-19. Why may it be easier in performing an internal assessment to develop a list of 80

strengths/weaknesses than to decide on the top 20 to use in formulating strategies.

Answer: Developing a list of 20 strengths and weaknesses can be difficult when it involves
managers representing various organizational interests and points of view. The judgments
required to compile such a list will impact strategy formulation, implementation, and
evaluation. Simply put, some departments and divisions/segments will receive greater
resources than others based on the factors selected, and more specifically the prioritization of
factors. Eighty random factors would be easy to develop since managers from all areas would
have their interests covered. It is essential to include managers from all areas of the business in
the prioritization of internal factors since formulation of selection of strategies will be based on
the most important factors.

4-20. Think of an organization you are very familiar with. List three resources of that entity
that are empirical indicators.

Answer: Empirical indicators are resources that are rare, hard to imitate, and not easily
substitutable. Student examples should encompass at least one of these three characteristics
when identifying resources that enable a firm to implement strategies that lead to a sustainable
competitive advantage. For example for ExxonMobil Corp., ownership of oil wells, ownership
of drilling rights, and contractual agreements with various distributors could all be empirical
indicator resources.

4-21. Think of an organization you are very familiar with. Rate that entity’s organizational
culture on the 15 example dimensions listed in Table 4-2.

Answer: Organizations selected will vary by student. Some example cultural products listed in
Table 4-2 include: strong work ethic, high ethical beliefs, formal/informal dress, socializing
outside of work, and being health-conscious or having a wellness program. These and other
cultural aspects can be rated on a 1-5 scale, where 1 is a weak component of the firm’s culture
and 5 is a strong component of the firm’s culture.

4-22. If you and a partner were going to visit a foreign country where you have never been
before, how much planning would you do ahead of time? What benefit would you expect that
planning to provide?

Answer: I would do extensive planning, so that we could use our time wisely in the country,
seeing and doing all that we could while there. Potential benefits from planning for the trip may
include anticipating and preparing for potential issues related to weather and travel, establishing
objectives on what to do and see, devising strategies to make the trip cost effective, developing
policies and guidelines on behavior and activities, and setting goals (priorities) that are
important to the student. Some students may indicate that extensive planning is not necessary
and may curb spontaneity.

4-23. Even though planning is considered the foundation of management, why do you think it
is commonly the task that managers neglect most?

Answer: Various reasons listed and described back in Chapter 1 include:

Lack of knowledge or experience in planning. Poor reward structures. Firefighting. Considered to be
a waste of time. Too expensive. Laziness. Content with success. Fear of failure. Overconfidence.
Prior bad experience. Self-interest. Fear of the unknown. Honest difference of opinion. Suspicion.

4-24. Are you more organized than the person sitting beside you in class? If not, what
problems could that present in terms of your performance and rank in the class? How
analogous is this situation to rival companies?
Answer: Being well-organized means that you utilize time efficiently and effectively, rather
than wasting time. Being well organized in class thus usually translates into excellent
performance in the course. When rival firms are in close proximity to each other, as your fellow
students are in the class, being well organized becomes even more important. Regarding
teamwork in class or in a business, the purpose of organizing is to achieve coordinated effort by
defining task and authority relationships. The three activities within the organizing function can
be applied to business as well as the classroom: 1) work specialization, 2) combining jobs to
form departments, and 3) delegating authority.

4-25. List the three ways that financial ratios should be compared/utilized. Which of the three
comparisons do you feel is most important? Why?

Answer: Three questions that should be raised when conducting a financial ratio analysis are:
(1) How has each ratio changed over time? (2) How does each ratio compare to industry
norms? (3) How does each ratio compare with key competitors? Financial ratio analysis should
be conducted on three separate fronts to get the full picture, so no one area is more important
than the others.

4-26. Illustrate how value chain activities can become core competencies and eventually
distinctive competencies. Give an example for an organization you are familiar with.

Answer: Identify where low-cost advantages or disadvantages exist anywhere along the value
chain from raw material to customer service activities. Identify your firm’s own strengths and
weaknesses as compared to competitors’ value chain analyses. Take action to strengthen
competitive advantages turning them into distinctive competencies, and improve competitive
disadvantages in an effort to turn them into core competencies. An example of this is Wal-Mart,
which has built powerful value advantages by focusing on exceptionally tight inventory control,
volume purchasing, and low pricing.

4-27. In an IFEM, would it be advantageous to list your strengths, and then your weaknesses,
in order of increasing “weight”? Why?

Answer: Yes. Arranging factors according to importance would help the firm organize,
evaluate and utilize internal factors in the strategic planning process. It is not essential that the
IFEM be structured in this manner, but it definitely would be helpful for an analyst.

4-28. In an IFEM, a critic may say there is no significant difference between a “weight” of 0.08
and 0.06. How would you respond?

Answer: On the surface, the weight of an IFEM factor may appear to be insignificant.
However, a factor’s weight can become significant when it is combined with a rating and
converted into a weighted score. For example, the 0.08 factor may receive a rating of 4 (major
strength), whereas the 0.06 factor may receive a rating of 1 (major weakness). The weighted
score of the 0.08 factor will be 0.32, whereas the weighted score of the 0.06 factor will be a
much lower 0.06. In addition, it is important to note that 0.08 is 33% higher (more important)
than 0.06.
4-29. Why are so many firms raising their dividend payout amounts?

Answer: Companies are making money and stock prices are high, so the thought is to reward
their shareholders by raising the dividend. Firms in 2012 especially raised dividends since the
federal government anticipated increasing taxes on dividends in 2013.

4-30. When someone says dividends paid are double taxed, what are they referring to?

Answer: Dividends are subject to corporate taxation followed by private income taxation. The
company first pays corporate tax on its revenue, before the dividend is paid out to the
shareholder. Once the shareholder receives the dividend, he/she pays taxes on that dollar
amount. So in essence that dollar amount was taxed at the corporate level and the individual
level.

4-31. Draw a breakeven chart to illustrate a drop in labor costs.

Answer: A drop in labor costs constitutes a decrease in variable costs, which would result in a
decrease in a firm’s breakeven point. See the diagram below for an illustration:
TR TR

TC
Before After

VC
TC

$
VC
$

FC FC

Q Q

4-32. Draw a breakeven chart to illustrate an increase in advertising expenses.

Answer: An increase in advertising expenses constitutes an increase in fixed costs, which would
result in an increase in a firm’s breakeven point. See the diagram below for an illustration:
 TR TR

TC
Before TC After

VC $
VC
$

FC
FC

Q Q

4-33. Draw a breakeven chart to illustrate closing stores.

Answer: Closing stores constitutes a decrease in fixed costs, which would result in a decrease in
a firm’s breakeven point. See the diagram below for an illustration:

TR TR

TC
Before TC After

VC
VC
$

FC
FC

Q Q

4-34. Draw a breakeven chart to illustrate lowering price.

Answer: Lowering price constitutes a decrease in total revenue, which would result in an
increase in a firm’s breakeven point. See the diagram below for an illustration:
 TR
TR
Before TC After
TC

VC VC
$
$

FC F
C

Q Q

4-35. Explain why prioritizing the relative importance of strengths and weaknesses to include
in an IFE Matrix is an important strategic-management activity.

Answer: No firm has sufficient resources to do everything that can benefit the firm, so
prioritization is vital at all stages of strategic management. No more than 20 factors should be
included in an IFE Matrix because too many strategies cannot be effectively pursued
simultaneously. Including more than 20 factors dilutes the importance of the most significant
factors.

4-36. How can delegation of authority contribute to effective strategic management?

Answer: Delegation of authority is an effective way to involve lower-level and middle-level

managers in the strategy-formulation process. Delegation can also be important in strategy
implementation to help motivate managers, because those persons being delegated to may actually be
closer to customers/suppliers/distributors and thus can make more effective decisions.

4-37. Which of the three basic functions of finance/accounting do you feel is most important in
a small electronics manufacturing concern? Justify your position.

Answer: According to James Van Horne, the three basic functions of finance are the investment
decision, the financing decision, and the dividend decision. In a small electronics manufacturing
concern, the investment decision would be most important, because the firm probably does not pay
dividends, and likely does not have common stock, but does have to allocate available resources
among projects/regions.

4-38. Explain how you would motivate managers and employees to implement a major new
strategy.

Answer: There is a need to demonstrate clearly how the new strategy will benefit managers and
employees of the organization. Articulate effectively why the new strategy is needed, given
competitors’ strategies, products, and services. Involve employees and managers in formulating
strategies to the extent possible. Involve as many managers as possible in discussions about how to
effectively implement the strategy. The process is more important than the plan.

4-39. Why do you think production/operations managers are often not directly involved in
strategy-formulation activities? Why can this be a major organizational weakness?

Answer: There is an unfortunate stigma in many organizations that production/operations

managers do not need to be involved in strategy-formulation decisions; they only implement
strategies. This attitude can represent a major weakness in any organization, because more than
80 percent of company assets are generally tied up in production/operations facilities, materials,
plants, equipment, inventory, and machines. Production managers’ input into strategy-
formulation activities can help assure that cost-effective strategies are selected for
implementation.

4-40. Give two examples of staffing strengths and weaknesses of an organization with which
you are familiar.

Answer: Staffing activities include hiring, training, testing, wage and salary administration,
employee benefits, union/management relations, and employee development. The Brown
Company has high employee morale and an excellent ESOP plan, but the firm also has too few
women in upper management and too few minorities as well.

4-41. Would you always pay out dividends if your firm’s annual net profit increases
ten percent or more? Why or why not? What effect could this have on a firm’s
strategies?

Answer: The answer is NO. You may pay out dividends, but you certainly would not
always pay out the dividends. Reason is that there are pros and cons of reinvesting
earnings, as opposed to paying dividends, as follows:

Pros of reinvesting earnings:

1. Can spur growth of the company
2. Can enable the firm to acquire other firms
3. Can enable the firm to fund multiple strategies
Pros of paying out dividends:
1. Can keep shareholders happy
2. Can attract more shareholders
3. Can raise a firm’s stock price

4-42. If a firm has zero debt in its capital structure, is that always an organizational strength?
Why or why not?

Answer: Whenever an organization’s return on investment or profit margin exceeds the cost of debt,
it may be advisable to use debt to finance growth and expansion. Thus, it is not always an
organizational strength to have zero debt in a firm’s capital structure. As an individual, if you were
sure you could make 15 percent on monies invested, then you would probably obtain a substantial
amount of debt at 4 percent to invest at that higher level.

4-43. After conducting an internal audit, a firm discovers a total of 100 strengths and 100
weaknesses. What procedures could be then used to determine the most important of these?
Why is it important to reduce the total number of key factors?

Answer: Let a group of knowledgeable individuals in the organization evaluate the relative
importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very
important. Then add the ratings each factor receives. The 20 factors with the highest sum score
should be included in the IFE Matrix. Another way is to ask those individuals to simply put a check
mark by their top 20 factors; then take up the responses and add the check marks to determine the
prioritization.

4-44. Why do you believe cultural products affect all the functions of business?

Answer: Cultural products permeate every activity in an organization. People become attached
to cultural products and often resist changes in rites, rituals, values, beliefs, and norms.
Whether people work in marketing, manufacturing, personnel, or finance/accounting, they
likely feel strongly about a firm’s culture.

4-45. Do you think cultural products affect strategy formulation, implementation, or

evaluation the most? Why?

Answer: Cultural products likely affect strategy implementation most, but, too often,
consideration of cultural products is limited in formulation and evaluation activities.

4-46. Explain the difference between data and information in terms of each being useful to
strategists.

Answer: Data becomes information when it is assimilated and used by individuals for some purpose.

4-47. What are the most important characteristics of an effective management information
system (MIS)?

Answer: An MIS utilizes hardware, software, models for analysis, and one or more databases. The
system must be economical, widely understood, practical, and updated regularly.

4-48. Do you agree or disagree with RBV theorists that internal resources are more important
than external factors for a firm in achieving and sustaining competitive advantage? Explain
your and their position.

Answer: While internal factors are certainly important, one cannot say with any degree of certainty
that either internal or external factors will always or even consistently be more important than the
other in seeking competitive advantage. Strategists must understand that both internal and external
factors, and the relationships between them, are important. The RBV suggests that the mix, type,
amount, and nature of a firm’s internal resources should be considered first and foremost in devising
strategies that lead to sustainable competitive advantage. The RBV recognizes that a firm should
identify and exploit its unique resources and capabilities. While this is certainly true, external factors
will also play a key role in a firm’s success. Firms should utilize internal strengths to take advantage
of external opportunities.

4-49. Define and discuss “empirical indicators.”

Answer: Empirical indicators refer to the characteristics of resources that enable a firm to implement
strategies that improve its efficiency and effectiveness and ultimately lead to a sustainable
competitive advantage. The three empirical indicators for a resource to be valuable are that the
resource should be 1) rare, 2) hard to imitate, and 3) not easily substitutable.

4-50. Define and explain value chain analysis (VCA).

Answer: Value chain analysis refers to the process whereby a firm determines the costs associated
with organizational activities from purchasing raw materials to manufacturing products to marketing
those products. The analysis seeks to identify where advantages and disadvantages exist along the
value chain from raw material to customer service as compared to rival firms. VCA can enable a
firm to gain and sustain competitive advantages.

4-51. List five financial ratios that may be used by your university to monitor operations.

Answer: Different type organizations have unique ratios that they monitor in addition to
traditional ratios. For example, universities may monitor #faculty/#students, $tuition
revenues/#students, and #online courses/total # courses. Universities can also monitor current
ratio, quick ratio, debt-to-total assets ratio, accounts receivable turnover, average collection
period, and operating profit margin.

4-52. Explain benchmarking.

Answer: Benchmarking is an analytical tool used to determine whether a firm’s value-chain

activities are competitive compared to rivals. It entails measuring costs of value chain activities
across an industry to determine “best practices” among competing firms for the purpose of
duplicating or improving upon those best practices.

4-53. Define, compare, and contrast weights vs. ratings in an EFE Matrix vs. an IFE
Matrix.

Answer: Weights in both matrices reveal the relative importance of the factors to being successful in
the industry and must sum to 1.0. Ratings in both matrices reveal how well the company is
performing on the given factor and range from 1 to 4. However, in an EFEM the ratings can be 1, 2,
3, or 4 anywhere on the column, whereas in an IFEM the ratings must be 4 or 3 for the strengths and
1 or 2 for the weaknesses.
4-54. Would you ever pay out dividends when your firm’s annual net profit is negative? Why?
What effect could this have on a firm’s strategies?

Answer: YES. It may be a one-year accounting anomaly that caused the negative profit rather
than a projected trend of poor performance. For the following reasons, dividends are sometimes
paid even when a firm’s annual net profit is negative:

 Paying cash dividends is customary. Failure to do so could trigger a huge stock price drop.
 Dividends represent a sales point for investment bankers. Some institutions can only buy
dividend-paying stocks.
 Shareholders often demand dividends, even in companies with great opportunities for
reinvesting all available funds.

Answers to the End-of-Chapter 4 Assurance of

Learning Exercises
ASSURANCE OF LEARNING EXERCISE 4A:
APPLY BREAKEVEN ANALYSIS

ANSWER:
Breakeven Quantity = Total Fixed Costs (TFC) / Price per unit (P) - Variable Costs per unit
(VC)

Total Fixed Costs (TFC): $100 million

Price per unit (P): $3 million
Variable costs per unit (VC): $2 million

1. Breakeven Quantity = $100 million / ($3 million - $2 million) = 100 planes

2. Since the company makes $1 million on each plane (P – VC), after the FC are covered at
100 planes, then the company needs to produce 99 more planes to make a $99 million profit,
so the answer is 199 planes.
3. Since the company makes $1 million on each plane (P – VC), after the FC are covered at
100 planes, then if the company produces 200 planes, it will make a profit of $100 million.

Note: This problem assumes that capacity utilization is sufficiently low for the additional
planes to be produced with no corresponding increase in fixed costs. Obviously at some point
of producing additional airplanes, fixed costs must be increased.

ASSURANCE OF LEARNING EXERCISE 4B:

COMPARE NETFLIX WITH REDBOX

ANSWER: Which of the two companies’ websites reveal most effectively “the best
movies” for the week? What are the best movies being rented this week?
www.netflix.com versus www.redbox.com. The Netflix website is best but only after
you pay the $7.99 per month fee or sign up for the free first month. The Redbox site is
non-subscription (free) and reveals instantly the best movies, etc.

ASSURANCE OF LEARNING EXERCISE 4C:

PERFORM A FINANCIAL RATIO ANALYSIS FOR HERSHEY

ANSWER:

Financial Ratios for Hershey Company (2014)

Liquidity Ratios:
Current ratio: Current assets/Current liabilities = 2,247 / 1,935 = 1.16

Quick ratio: Current assets minus inventory/Current liabilities = (2,247 - 801) / 1,935 = 0.747

Leverage Ratios:
Debt-to-total-assets ratio: Total debt/Total assets = 1,548 / 5,629 = 0.275

Debt-to-equity ratio: Total debt/Total stockholders’ equity = 1,548 / 1,455 = 1.06

Long-term debt-to-equity ratio: (Total liabilities – Total current liabilities)/Total Equity =

(4,109 – 1,935) / 1,519 = 1.43

Times-earned-interest ratio: Profits before interest and taxes/Total interest charges =

1,389 / 83.5 = 16.63

Activity Ratios:

Inventory turnover: Sales/Inventory of finished goods = 7,421 / 801 = 9.26

Fixed assets turnover: Sales/Fixed assets = (let Fixed Assets = PP&E) = 7,421 / 2,151 = 3.45

Total assets turnover: Sales/Total assets = 7,421 / 5,629 = 1.32

Accounts receivable turnover: Annual credit sales/Accounts receivable = 7,421 / 596 = 12.45

Average collection period: Accounts receivable/(Total credit sales / 365 days) =

596 / (7,421 / 365) = 29.32 days

Profitability Ratios:

Gross profit margin: (Sales minus costs of goods sold)/Sales = (7,421 – 4,085) / 7,421 = 0.45

Operating profit margin: Earnings before interest & taxes (EBIT)/Sales = 1,389 / 7,421 = 0.19
 Net profit margin: Net income/Sales = 846 / 7,421 = 0.114

Return on total assets (ROA): Net income/Total assets = 846 / 5,629 = 0.15

Return on SEquity (ROE): Net Income/Total stockholder’s equity = 846 / 1,519 = 0.557

Earnings per share (EPS): Net Income/ # of shares of common stock outstanding =
846,912 / 299,281 = 2.82

Price-earnings ratio: Stock Price/EPS = 90 / 2.82 = 31.91

Growth Ratios:
Sales Annual % growth in total sales
2014 revenue – 2013 revenue = 7,421 – 7,146 = 0.038
2013 revenue 7,146

Net income Annual % growth in profits

2014 net income – 2013 net income = 846 – 820 = 0.0317
2013 net income 820

Earnings per share Annual % growth in EPS

2014 EPS – 2013 EPS = 846 - 820 divided by 820 =
2013 EPS (299 + 60) (299 + 60) (299 + 60)

(2.35 – 2.28) / 2.28 = 0.031

2014 RE – 2013 RE = xxxx invested into company vs. NI of xxxx, so $ div paid =
5,860 – 5,454 = 406 vs. 846 earned, so $ 440 dividends paid

2014 dividends per share = $ 440 / (299 + 60) = 440/359 =$ 1.22

ASSURANCE OF LEARNING EXERCISE 4D:

CONSTRUCTING AN IFE MATRIX FOR HERSHEY COMPANY

ANSWER:

Key Internal Factors Weight Rating WScore

Strengths

1. Hershey sells products in 70 countries under more than 80 brands. 0.07 4 0.28
2. Hershey has an exemplary philanthropic & sustainability record. 0.05 3 0.15
3. Hershey is the leader in the USA in dark & premium chocolate 0.07 4 0.28
(44% market share).
 4. Hershey is the leader in chocolate production in the USA 0.08 4 0.32
(34% market share).
5. Hershey has 20.3% market share for candy production in USA. 0.07 4 0.28
6. Hershey sales in 2014 increased 2.4% to $7.4 billion. 0.04 3 0.12
7. Hershey has Chocolate World Stores in Shanghai & Singapore. 0.02 4 0.08
8. Hershey just acquired Krave Pure Foods Inc. 0.03 3 0.09
9. Hershey’s sales outside the USA are growing 3% annually. 0.08 4 0.32
10. The Milton Hershey School for Orphans is the largest of its kind. 0.02 3 0.06

Weaknesses
1. Sales are seasonal, lowest outside of holidays. 0.05 2 0.10
2. Hershey’s uses a functional design with no divisional presidents. 0.04 1 0.04
3. High debt makes Hershey financially vulnerable. 0.04 1 0.04
4. Hershey spends 1% of revenue on advertising vs. rivals spending 4%. 0.04 1 0.04
5. Only 15% of Hershey’s revenues are from outside the USA. 0.07 1 0.07
6. Only 3% of Hershey’s profits come from outside the USA. 0.06 1 0.06
7. Nearly 40% of Hershey sales are generated from mass merchandisers. 0.05 2 0.10
8. There is only one female among Hershey’s top mgt., and no minorities. 0.03 2 0.06
9. Nearly 30% of Hershey’s sales come from supermarkets. 0.03 2 0.06
10. Hershey profits largely are aimed at supporting the Hershey School. 0.03 2 0.06

Total 1.00 2.61

ASSURANCE OF LEARNING EXERCISE 4E:

CONSTRUCT AN IFE MATRIX FOR YOUR UNIVERSITY

ANSWER:
An example is given below. Note that the most highly weighted factor, i.e., the most
important in the industry, is the demand for nursing and business students, and the university
is doing pretty well as indicated by a rating of 3. But note also that the university has some
major weaknesses, especially in terms of crime on campus and old athletic facilities.

Weight Rating WScore

Strengths:
1. Location in a state capital with several Fortune 500 firms .05 4 .20
2. $200 million technology donation for high-tech facilities .07 3 .21
3. Diverse (28%) student body and faculty, up from 21% .09 4 .36
4. Visionary presidential leadership .04 4 .16
5. Nationally-ranked programs in nursing and business .11 3 .33
6. Athletic teams performing excellent, raising visibility .05 3 .15
7. Tuition 15% lower than peer institutions .04 3 .12
8. Our engineering and life sciences buildings are new .03 4 .12
9. We operate at full capacity (100%) in our dorms .05 4 .20
Weaknesses:
1. Urban campus with limited space for expanding .05 2 .10
2. Police arrests on campus rising 5% annually .07 1 .07
3. Gyms and athletic facilities 30 years old .05 1 .05
4. Food service complaints up 11% vs. prior year .03 1 .03
5. 30% of faculty are near retirement age and high paid .04 2 .08
6. Student activity surveys indicate 14% drop in .06 2 .12
satisfaction
7. Alumni giving declining 10% annually .05 1 .05
8. 30% of classes taught by adjunct faculty .04 2 .08
9. Student/faculty ratio of 51 to 1 is high .08 1 .08

TOTAL 1.00 2.51

Conclusion: The university has many areas for improvement, as indicated by the five ratings
of 1 and the overall score of 2.51 on a 1 to 4 scale.

ASSURANCE OF LEARNING EXERCISE 4F: Applying RBV Theory

ANSWER:

Resources Rare Non-imitatable Non-substitutable

1. Executive talent
2. Employee talent
3. Land owned
4. Equipment owned
5. Patents on technology
6. Copyrights on documents
7. Alliances with partners
8. Customer email base
9. Supplier agreements
10. Leases on properties

Answers to End-of-Chapter 4 Mini-Case Questions

1. From a management perspective, do you think the college football
expenditures by BWW are warranted? Why?

Yes. ESPN is Walt Disney Company’s most profitable division or segment.

College football has grown in popularity every year, and the 8-team playoff
system in 2014-2015 was a huge success. Managers of restaurant chains look for
 same-store-growth year-over-year and BWW’s expenditures during college
football season are likely to produce more profits than costs for the company.
Customers also support firms that give back to communities, and BWW has found
a highly visible way to promote its giving-back efforts.

2. From a marketing perspective, do you think the college football expenditures

by BWW are warranted? Why?

Yes. Marketers strive to devise an effective theme that can be used throughout
the year to promote its brand. College athletics is a hugely popular pastime in the
USA. BWW’s expenditures on advertising, especially during the Division 1
College Football playoffs, garners millions of customers. BWW could likely
even carry their support of college athletics to the next level by supporting
Division 1 (especially) basketball and baseball, and even by becoming active in
women’s athletic events.

3. From a finance perspective, do you think the college football expenditures by

BWW are warranted? Why?

Yes. Chapter 4 talks about breakeven analysis. Marketing expenditures are a

fixed cost that drive up a company’s breakeven point. The question is whether
the expenditures can in addition drive revenue up sufficiently to surpass those
additional fixed costs. BWW continues to use this marketing approach year after
year, so the presumption is that the strategy is worthwhile, because shareholders
expect continually increasing profitability and growth – leaving little room for
ineffectiveness.

4. Management, marketing, and finance executives do not always agree, so how

could differences in opinion be resolved?

Focus on shared goals and objectives, derived from collective input in the
strategic planning process, and collective decisions made about policies,
strategies, and resource allocation. Top executives typically all own large blocks
of the firm’s common stock, and all desire to see the firm’s stock price increase,
so there is a vested interest among the executives in being mutually supportive of
the firm’s vision and mission.

5. As BWW spends more on advertising, does its breakeven point go up or

down? Illustrate.

The breakeven goes up. See the breakeven diagram in the chapter that illustrates
the impact of raising fixed costs on the breakeven quantity (of chicken wings,
etc.) that must be sold to at least make a profit.

6. How does BWW’s approach to marketing compare to recent trends

regarding how to best spend advertising dollars?
BWW’s television approach is a bit “old” but old may be effective for BWW because
their customers are all talking about BWW on social media. Recent research reveals that
the most effective marketing methods for firms with fewer than 500 employees is the
company website (50%), Facebook and/or other social media sites such as Twitter (27%),
print yellow pages (25%), and Internet yellow pages (15%). Nearly two million firms of
all sizes now pay to advertise on Facebook, up from about one million 18 months ago.
Spending on online advertisements globally is increasing about 25 percent annually,
according to eMarketer, and represents about 39 percent of total advertising spending in
the USA. Advertising on television is on a downward spiral, according to Time Warner,
Discovery Communications, and Comcast. “Upfront” ads for the 2014-2015 TV season
declined about 6 percent. Heavy marketers such as Allstate and Mondelez International
now openly speak about shifting TV ad dollars to digital platforms. Allstate shifted 20
percent of its TV ad dollars to digital from 2013 to 2015.

NOTE – THE FOLLOWING IS AN EXCELLENT, FUN, NOT-IN-THE-BOOK,

ADDITIONAL ASSURANCE OF LEARNING EXERCISE FOR CHAPTER 4

EXERCISE TITLE: What Internal Functional Areas Are Most Important To Examine
In Strategic Planning?

Purpose

A prioritized list of internal factors is needed for effective strategic planning. Oftentimes
the process entails all managers individually ranking the factors identified, from 1 (most
important) to 20 (least important). Prioritization is absolutely essential in strategic
planning because no organization can do everything that would benefit the firm; tough
choices among good choices have to be made.
Internal functional areas that yield strengths/weaknesses can be divided into six
broad categories or areas: (1) Management; (2) Marketing; (3) Finance/Accounting; (4)
Production/Operations; (5) R&D; and (6) MIS. For some companies or organizations at
various times, some areas are more important than others. This exercise reveals the authors’
ranking of the relative importance of six functional areas for inclusion in a strategic planning
internal assessment.
The purpose of this exercise is to examine more closely the functional areas of
business. 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.

Instructions

Rank the six internal areas as to their relative importance (1 = most important, 5 = least
important) in doing strategic planning. First, rank the areas as an individual. Then, rank
the areas as part of a group of three. Thus, determine what person(s) and what group(s)
here today can come closest to the expert ranking. This exercise enables examination of the
relative effectiveness of individual versus group decision making in strategic planning.

The Steps

1. Fill in Column 1 in Table 1 to reveal your individual ranking of the relative

importance of the six areas (1 = most important, 2 = next most important, etc.).
For example, if you feel management is the 3rd most important functional area in
doing strategic planning, then enter a 3 in Table 1 in Column 1 beside
Management.
2. Fill in Column 2 in Table 1 to reveal your group’s ranking of the relative
importance of the six areas (1 = most important, 2 = next most important, etc.).
3. Fill in Column 3 in Table 1 to reveal the expert’s ranking of the relative
importance of the six functional areas.
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. Normally, group decision making is superior to individual decision
making, so 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 – Internal Functional Area Analysis: Comparing Individual versus

Group Decision Making

Internal Functional Areas Column 1 Column 2 Column 3 Column 4 Column 5

1. Management
2. Marketing
3. Finance/Accounting
4. Production/Operations
5. R&D
6. MIS

Sums

Answer: The Expert Ranking

Internal Functional Areas Authors’ Ranking

 (1 = most important; 6 = least important)

1. Management 1
2. Marketing 3
3. Finance/Accounting 2
4. Production/Operations 4
5. R&D 6
6. MIS 5

Rationale

The authors have developed hundreds of IFE Matrices for organizations over three
decades. The expert rankings given above are based on their experience and reading the
reference articles given at the end of Chapter 4. First, management is typically the most
important internal functional area because it includes strategic planning, as well as employee
morale, organizational structure, and executive competence in leading. Next, the second most
important functional area is financial/accounting, because all firms, even nonprofits and small
businesses, must manage their limited finances effectively, and all firms have an income
statement top and bottom line and a balance sheet that needs to balance. Third most important
generally is marketing because this function includes first and foremost customers and no
organization can survive, much less prosper, without a loyal customer base. Fourth most
important generally is production/operations because oftentimes as much as 80 percent of a
firm’s assets are tied up in plant/equipment/land, coupled with this function including effective
supply chain operations. Fifth most important generally is MIS because effective decisions
are best made when accurate/reliable/timely information is continuously gathered and used,
although many firms are too informal in managing this function. Lastly, although for some
firms this function may be number one in importance, is R&D. Even many high-tech firms
will minimize R&D expenditures by pursuing a follow-the-leader rather than first-mover
strategy to develop new and improved products.
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 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 having
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 strategies.
8. Compare 1) cooperation among competitors, 2) joint venture 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 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 them personally, to have
an objective (or goal) to accomplish something just as to obtain a BBA Degree is
motivating. Without a clear objective, there is much less incentive/motivation 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 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 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 though broad guidelines are given in Chapter 5 for
each strategy. Sometimes strategies can fit into two categories or 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 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 just large corporations.
Even nonprofit organizations have customers, employees, creditors, budgets, etc. The
only difference between profit and nonprofit firms are 1) nonprofits 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 student attention to the “Implications for Students”
section, because this is important information as the team prepares and 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 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
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, 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 non-

competitors? 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 with 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 in-
house 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 capacity.
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 day-
to-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 experience 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 academic 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

(3) (4) (5)

(1) My (2) Group
The Strategies EXPERT Absolute Absolute
Rank Rank
Rank Value 1-3 Value 2-3

1. Backward integration
Purchase cocoa farm
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 6
Purchase cocoa farm

2. Forward integration 4
Build 100 stores

3. Horizontal integration 1
Acquire Tootsie Roll

4. Market development 3
Build mfg. plant in Africa

5. Market penetration 5
Launch marketing campaign

6. Product development 2
Launch organic candy products

7. Unrelated diversification 7
Acquire a construction firm

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.