MAF661/640 DECEMBER 2019

MAF661/640 SUGGESTED ANSWER DECEMBER 2019

Note to examiners:
Please read each student’s answer carefully, line by line, word by word and understand what the
student is putting on paper. Do not make your own assumptions about what the students are
trying to put forward. Please use your discretion wisely and give marks accordingly.

QUESTION 1

a. Identify the type of business-level strategy previously and currently used by Waxmax Sdn
Bhd and, differentiate these strategies in terms of the competitive advantage and markets
served.

Waxmax previously adopt the cost leadership strategy. This strategy allows the firm to
gain competitive advantage by creating a low-cost position through managing the
relationship throughout the value chain and minimizing the costs throughout the entire
chain. The strategic target market is plastic bottle and containers industry.

Waxmax currently adopt focused differentiation business level strategy. The company
able to gain competitive advantage by seeking to create differentiation in its target market,
the high-end industrial sector that is susceptible to contribute to environmental impact.
WUSTECH has certain features that differentiate it from other similar product. WUSTECH
comprises twenty different cleaning tools available in four colors. Waxmax offers a range
of color-coded cleaning primarily to provide a range of dynamic products functions
particularly to help the customer who chooses to prevent cross contamination at the
factory site. These tools are also tailor-made for certain cleaning task in food processing,
pharmaceutical, healthcare industries and other similar sectors and customers will be
attended by a professional consultant to help the planning on the effective use of
WUSTECH either at the showroom or at the factory sites. The strategic target market are
high-end industrial hygienic sectors such as food, pharmaceutical and health industries.
(2 marks + 3 marks = 5 marks)

b. Discuss three (3) potential pitfalls of the business level strategy currently adopted by
Waxmax Sdn Bhd.

Cost advantage may erode within the narrow segment

The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded
over time. After sometime of adopting the strategy, competitors or early pioneer might face
increasing challenges in competing within the industry. They might be influenced by the
strategy or method adopted by Waxmax and this situation might eventually lead
them/competitors to provide similar products to customers. Waxmax may experience profit
margin dropped as more and more competitors enter their product segment. Once a
significant number of competitors flooded in the market, providing products which are
almost similar type or function as offered by Waxmax, customers will be attracted to try

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the new products offered by different producers. Thus, this situation will gradually erode
the cost advantage created earlier by Waxmax.

Even product and service offerings that are highly focused are subject to
competition from new entrants and from imitation.
Waxmax adopts a focus strategy whereby the company specializes in producing high end
cleaning equipment for specific industries (requires significant high level of hygiene). The
selection of a small niche market with new rivals may likely to provide temporary
advantages only. The advantages gained may be short-lived due to increased number of
new entrants in the market. The new entrants will create higher competition within the
industry and sooner or later will be able to imitate Waxmax’s idea. These challenges would
indirectly affect Waxmax’s financial performance as customers might divert their interest
towards new products from other producers. After sometimes, the imitation will spread
rapidly that may affect businesses significantly leaving only few survivors in the highly
competitive industry.

Focusers can become too focused to satisfy buyer needs.

Waxmax might attempt to attain advantages through a focus strategy however, the offer
may have been too narrow a product. There might also be other manufacturers who can
offer the same kind of products for the special industries. These manufacturers might be
able to provide wider range of products with varieties of different functions and types for
all industries in general. Waxmax might be too focused to satisfy certain customers’ needs
which preclude the company to provide or gain other possible opportunities. Narrow target
market can be seen as one advantage as Waxmax could focus on customers’ request
immediately. However, narrow target market may also imply risk as some customers may
leave Waxmax and choose to try different brand name, leaving only lesser number of
customers to remain with Waxmax. Given the enormous purchasing power of other
companies from various industries, it would be difficult for such specialty company to attain
parity on costs.
(Any 3 relevant answers x 3 marks = 9 + 1 good explanation = 10 marks)

c. Discuss three (3) turnaround strategies that can help in reversing Waxmax’s performance
decline and reinvigorate growth towards profitability.

Three (3) strategies for successful turnaround strategies include:

Asset and cost surgery

Since Waxmax is at the maturity stage, firm may need to pay attention to any assets that
has the possibility to contribute to high costs or do not contribute any returns. These may
include any physical resources that could cause redundancy or not important. The
management of Waxmax may need to take necessary actions probably to the extent of
outright sales or sale and leaseback to free up considerable cash and to recover from the
organisational performance decline. In addition, investments of new assets due to the
advanced technology required, may also need to be deferred. Besides assets, the

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management of Waxmax need to focus on minimizing costs aggressively and ensure fast
collections of receivables to improve cashflow. Outsourcing production can also be a
preferred alternative if in-house production may lead to high cost incurred. Thus,
Waxmax’s management may need to conduct detail comparative costs evaluation of
available alternatives.

Selective product and market pruning

The turnaround strategy may also include evaluating and taking actions of any identified
unprofitable product lines. In general, most mature or declining firms might have product
lines that are losing money or are only marginally profitable. For the purpose of ensuring
effective use resources, Waxmax may need to discontinue such product lines and focus
all resources on a few core profitable product. In the case of Waxmax, as highlighted by
the COO, the management has already identified redundancy of resources and
unprofitable product lines. Further investigation of these problems may need details so as
to make the correct decision. Waxmax may sell off or close down certain product line to
allow the firm to improve its efficiency and its innovativeness as it focused on its core
product, thus contributing towards profitability.

Piecemeal productivity improvements

In implementing the turnaround strategy, Waxmax should find ways to reduce costs which
can help them to improve productivity. Even though the alternative may contribute to small
improvement, if this is consistently leading to improvement, the organization might be able
to achieve substantial positive change in long terms. Waxmax can also improve their
business process through business process reengineering. Currently, with the digitization
of production method, Waxmax may need to reevaluate their business process identifying
and eliminating non-value-added activities. Waxmax may also need to incorporate
industrial benchmarking in its performance measurement practices. Additionally, total
quality management framework can also be implemented throughout the organization to
increase better awareness of quality and costs among employees. This is to encourage
employee input to identify excess costs, increasing capacity utilization and improving
employee productivity with the main aim of reversing the organisational financial
performance.
(Any 3 relevant answers x 3 marks + 1 mark for clear answer = 10 marks)
(Total: 5+10+10=25 marks)

QUESTION 2

a. Briefly explain two (2) other diversification initiatives that can help GCO to create value for
the business besides the current diversification initiatives employed by GCO.

A strategy of acquisition is one where one organisation (such as GCO) takes acquisition
of other existing organisations in the target countries. Acquisitions involve one firm buying
another either through share purchase, cash or the issuance of debt instruments. This

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diversification initiative if taken by GCO can help to create value as firm will directly acquire
another firm’s assets and competencies. GCO will also be able to obtain valuable
resources, such as critical human capital that can help its business to expand its product
offerings; provide opportunity for firms to attain three bases of synergy, leveraging core
competencies, sharing activities and build market power; lead to consolidation within an
industry and force other players to merge; enter new market segments.

Joint venture involves the formation of third-party legal entity whereby the two (or more)
firms each contribute equity. It is another option for diversification whereby corporations
may agree to pool the resources of other companies with their resource based. GCO might
pool its resources with other companies of the same industry to create value by expanding
the business such as entering new markets as manufacturing costs can be reduced in the
value chain and able to develop and diffuse new technologies.

Merger – another possible answer

(2 initiatives and 2 value creation examples and clear explanation 1 = 5 marks)

b. Discuss the first diversification initiative and how three (3) benefits are attained from the
initiative GCO pursued.

The first diversification initiative undertook by GCO is diversification through internal

development or organic growth. Internal development takes place when strategies are
developed by building on or developing the organisation’s own capabilities. Organisations
can diversify by means of corporate entrepreneurship and new venture development. This
is how GCO has diversified their business. GCO from being a training and consulting
provider of environmental management has successfully expanded into new venture
developing sustainability business software solution for various industries.
(1 mark)

Benefits of internal development:

▪ GCO capture the value created by their own innovative activities without having to
share the wealth with other parties. GCO had strengthened their internal resources
having increasing number of expertise. Members of GCO comprises industry
professionals and chartered practitioners who have extensive experience from various
fields which include oil and gas, pharmaceuticals, utilities and chemicals. The high
dedication in innovation, research and development activities and cutting-edge
technologies had fueled GCO’s first diversification through internal development.
Significant support from Mike Furhan founder and CEO of GCO with artificial
intelligence engineering background together with his passionate industry professional
team make the diversification initiative a success.

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▪ Internal development/Organic growth is much easier to manage and plan and offers
less disruption than an acquisition or strategic alliance. GCO has control over the
whole operation and value chain. Therefore, GCO did not face any difficulties
associated with combining activities across the value chains.

▪ Organic growth/internal development does not involve merging with external parties.
Thus, GCO is not dealing with difficulties to merge diverse corporate cultures as
compared to other diversification alternatives. As a means of growth, organic growth
involves much less risk than an acquisition or strategic alliance. Therefore, it is likely
to be suited to the culture of the organisation which is notably risk averse and cautious.

▪ Internal development does not require external funding for the expansion. As internal
funding is often used, the organic approach spreads cost and risk over time and may
allow an organisation to benefit from economies of scale.

(Any 3 relevant benefits x 2 ½ marks each + 1 ½ clear explanation = 9 marks)

c. Discuss the concept of strategic alliances and how the cooperative relationship resulted in
three (3) advantages for GCO.

Strategic alliances are cooperative relationships between two or more organisations.

Alliances may be either informal or formal (formal – involving a written contract). Strategic
alliances assume an increasingly prominent role in the strategy of leading firms both large
and small. Such cooperative relationship has potential advantages; entering new markets,
reducing manufacturing (or other) costs in the value chain and developing and diffusing
new technologies.
(1 marks)
Benefits of strategic alliances:

• Entering new markets. Through strategic alliance, GCO was able to enter new
markets in Philippines through a strong partner Green Expert (GE) Limited, a group of
internationally accredited environmental and safety professionals. GE’s core
competence spans risk, health and safety. GE will help to offer the environmental
management course specifically in the city of Manila. GCO thrived to gain support from
the Manila based training company thus, expanding its product into the global market.

• Reducing other costs in the value chain. Strategic alliance allows firms to pool
capital, value-creating activities or facilities in order to reduce costs. For GE besides
offering their own training, the company will also offer GCO’s courses using GE’s
current resources. For GCO, their training courses will be expanded to the Philippines
market with minimum additional costs compared to establishing their own training
centre in another country which may lead to a substantial financial outlay. Strategic
alliance is a diversification initiative with lower costs incurred but it resulted into
significant advantage gained by GCO.

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• Developing and diffusing new technologies. The strategic alliances partner of GCO
is also a training provider company with a more advanced online training system.
Cooperative relationship with GE would benefit GCO in terms of sharing the advanced
technology used in providing valued training to customers.

(Any 3 relevant benefits x 2 ½ marks each + 1 ½ clear explanation = 9 marks)

(Total: 5+10+10=25 marks)

QUESTION 3

a. Briefly explain the importance of effective organizational control for BHRB to remain
competitive?

Effective control is important for BHRB to continuously update and challenge the
assumptions that underlie the organization’s strategy, thus, goals, and strategies are
continuously monitored, tested, and reviewed. The benefits of continuous monitoring are
evident – time lags are dramatically shortened, changes in the competitive environment
are detected earlier, and the organization’s ability to respond with speed and flexibility is
enhanced. Effective control is important to ensure that BHRB’s goals and strategies are
“fit” within the context of its current strategic environment.
(5 marks)

b. Examine how three (3) types of organizational base of power contribute to the success of
BHRB led by Ahmad Irfan.

Successful leadership requires effective use of power in overcoming barriers to change.

Power is a leader’s ability to get things done in a way he or she wants them to be done.
Power is the ability to influence other people’s behavior, to persuade them to do things
that they otherwise would not do, and to overcome resistance and opposition. Effective
exercise of power is essential for successful leadership. An organizational base of power
is a formal management position that is the basis of the leader’s power. This is the power
that a person wields because of his or her formal management position, and includes
legitimate, reward, coercive, and information power. As with Ahmad Irfan, he derives the
power from these four types of sources.

• Coercive

Coercive power is conveyed through fear of losing one’s job, being demoted, receiving a
poor performance review, having prime projects taken away, etc. This power is gotten
through threatening others. Ahmad Irfan introduces an effective reward system for fair
evaluation of his employees. He gain his power form applying the reward system as he
can influence employees’ behaviour with the implementation of the system.

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• Legitimate

Legitimate power comes from having a position of power in an organization, such as being
the boss or a key member of a leadership team. This power comes when employees in
the organization recognize the authority of the individual. Ahmad Irfan gains legitimate
power as he is the CEO of BHRB. As a CEO he has the power or authority to determine
the overall direction of the company and the resource needs of the company. The position
also allow him to influence, persuade and overcome resistance and opposition.

• Reward

Reward power is conveyed through rewarding individuals for compliance with one’s
wishes. This may be done through giving bonuses, raises, a promotion, extra time off from
work, etc. Reward power can also be used to increase morale. Ahmad Irfan also gain his
power from the reward system he had introduced in BHRB. The system will help in
providing fair employee evaluation and compensation to motivate employee to achieve
organisational goals.

• Information power

Arise from manager’s access, control, and distribution of information that is not freely
available to everyone in an organization. This could be positive or negative information
that is used in decision support. Informational power is also meant possible use of
information from persuading or manipulating opinions. Informational power can be used
to measure and improve tasks, processes, and strategies. The manager could share the
information to motivate the staff. Ahmad Irfan gain informational power as he works closely
with the top management team. He is all alert of the critical knowledge and information
thus able to lead the team to pursue strategic actions such as innovation, providing
excellent services, undertaken diversification and effective management.

(Any 3 type of organization power x 3 marks each + 1 mark for goods explanation
= 10 marks)

c. Discuss any three (3) characteristics of an effective reward system that can serve useful
purposes for BHRB to remain competitive.

Reward systems represent a powerful means of influencing an organization’s culture,

focusing efforts on high-priority tasks, and motivating individual and collective task
performance. Reward system is the policies that specify who gets rewarded and why and
become an effective motivator and control mechanism.

Effective reward and incentive systems share a number of common characteristics.

1. Objectives are clear, well understood, and broadly accepted.

To be effective, incentive and reward systems need to reinforce basic core values,
enhance cohesion and commitment to goals and objectives, and meet with the BHRB’s
overall mission and purpose.

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2. Rewards are clearly linked to performance and desired behaviors.

Reward system should be aligned to motivate employee performance that is consistent

with the BHRB’s strategy, attract and retain people with the knowledge, skills, and
abilities required to realize the firm’s strategic goals and create a supportive culture
and structure. Reward is to reinforce the positive behaviors that earned the reward in
the first place. If employees at BHRB understand what behaviors they are being
rewarded for, they are more likely to repeat those behaviors.

3. Performance measures are clear and highly visible.

For rewards to be effective, it must be visible and seen by the employees at BHRB.
Because visible rewards help to motivate employees to a higher level of performance.
They help to satisfy individual’s esteem and recognition needs.

4. Feedback is prompt, clear, and unambiguous.

Feedback is about giving information in a way that encourages the employee at BHRB
to accept it, reflect on it, learn from it, and hopefully make changes for the better. The
feedback on reward system should be prompt, closely following the performance of
the employee and contain encouragement, clear and unambiguous.

5. The compensation “system” is perceived as fair and equitable.

Equitable is concerned with the fairness in distributing rewards to the employees of

BHRB. It means rewards should be perceived as equitable and fair. The fairness can
be among the BHRB’s employees in one hand and fairness relative to what people get
for the similar job in another organization, on the other.

6. The structure is flexible; it can adapt to changing circumstances.

Rewards, to be effective, should be flexible to vary with changes in the performance.

This means rewards should vary as per the changes in actual performance of the
employees at BHRB.

(Any 3 characteristics x 3 marks each + 1 mark for goods explanation = 10 marks)

(Total = 5+10+10 marks = 25 marks)

QUESTION 4

a. Briefly explain how the form of entry strategy adopted by Duke Painter helped the
company to gain market success and in turn faced the disadvantages when it ventured
into the decorative paint manufacturing business.

Duke Painter adopted the new entry imitative strategy when ventured into the water-based
paint. The company ventured into this market after seeing other entrepreneurs achieved
success in the decorative paint market. As Duke Painter has better capabilities in

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marketing orientation and manufacturing system, Didi foresee advantage in this market.
Nevertheless, despite Duke Painter’s success, after being established, the company now
faced strong competition from major competitors such as Boost Painter Enterprise and
Winkey Color Enterprise, which led to market decline. This is the main disadvantage of
adopting imitative strategy. A company may lose its competitive advantage towards its
main competitor or when other new entrants start to join the market.

(Indicate strategy - 1, how to gain competitive advantage - 2 and pitfalls - 2 = 5 marks)

b. Explain two (2) factors that Duke Painter considered when assessing the level of
competitive threat before taking new competitive action to focus on the paint container.

Prior to competitive action, Duke Painter need to be aware of its potential competitive
threats. Company needs to have keen sense of who their closest competitors and kind of
competitive actions they might be planning. Aware of competitors and cognizant of
what threat might pose is the first step in assessing the level of competitive threat.
Competition will be more intense among companies that are competing for the same
customers and having highly similar sets of resources.

The two (2) factors used to assess whether are not companies are close competitors:

i. Market commonality
Duke Painter assessed whether or not competitors are vying for the same
customers and how many markets they share in common. A company has a high
degree of market commonality because they make very similar products and
have many buyers in common. If Duke Painter has high degree of market
commonality, it means the competitive threat is stronger. Based on the threat
analysis conducted, the task force team of Duke Painter identified the level of
competitive threat as quite high as competitors are relatively established in the
market which they are also targeting same segment of customers.

ii. Resource similarity

Another factor considered by Duke Painter is the degree of its rivals to draw on
the same types of resources to compete. This factor would also determine the
level of competitive threat. If rivals have highly similar resources means a
stronger competitive threat is present. This information is important to plan on
the types of competitive actions available in future. How strong a response an
attacked rival can mount will be determined by its strategic resource
endowments. The analysis conducted by the task force team identified that
competitors adopted high technology. Companies that have highly similar
resources bases will be hesitant to launch an initial attack but pose a serious
threat if required to mount competitive response. Greater the strategic resources
earned by rivals, the higher the firm’s capability to respond.

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(2 x 4.5 marks = 9 marks + 1 mark for ‘good’ answer = 10 marks)

c. Discuss how the entrepreneurial orientation dimensions of autonomy and innovativeness

can lead to competitive advantages and competitive disadvantages for Duke Painter.

Autonomy refers to a willingness to act independently in order to carry forward an

entrepreneurial vision or opportunity. For Duke Parker, top management has appointed
an autonomous task force team to work on the new product. Thus, this may enhance the
team to foster entrepreneurial thinking. This team is a special formed group out of the
firm research department. Since this team is separate from the organisation’s norm and
strategies, they may allow the individual to get out from under the pressures of their daily
routines to engage in better creative problem solving.

Autonomy represents a type of empowerment that is directed at identifying and leveraging

entrepreneurial opportunities. Creating autonomous work units and encouraging
independent actions may have disadvantages. Autonomous team may lead to lack of
coordination. Excessive decentralization may have strong potential to create
inefficiencies such as duplicating efforts and wasting resources on projects with
questionable feasibility.

Innovativeness refers a willingness to introduce novelty through experimentations and

creative processes aimed at developing new products. Duke Parker top management
allocate significant amount of budget to foster creativity and experimentations. To
ensure the investment will produce successful outcome, the task force team conduct a
preliminary investigation gathering relevant feedback from users. The feedbacks are being
used in the process of designing the product. Since innovativeness requires firm to depart
from existing technologies, practices and beyond the current state of the art, Duke Parker
had also invested in better technology for the product and process research and
development. Successfully developing and adopting innovation can help firms to
generate competitive advantage and provide major source of competitive advantage as
innovation is an important means of internal corporate venturing.

Despite being a source of great progress and strong corporate growth, investment in
innovation may have pitfalls. Expenditures on R&D aimed at identifying new products or
processes can be a waste of resources if the effort does not yield results or does
not meet customer expectations. Another danger is related to the competitive climate.
Even if a company innovates a new capability or successfully applies a technological
breakthrough, another company may develop a similar innovation or find a use for it
that is more profitable. Finally, R&D and other innovation efforts are among the first to
be cut back during an economic downturn.
(5 marks x 2EO = 10 marks)
(Total: 5 +10+10 = 25 marks)
END OF SOLUTION

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