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Name………………………………………
Recopilación Pruebas 2 y pautas
Eaa 305a
Course: Leadership and Business Strategy, eaa 305 a
First Semester 2014 - Second Mid Term Exam
Please write your name in all pages.
This is an “open book” exam.
You have 80 minutes to complete your answers.
You may answer in English or in Spanish.
Question Nº 1.-
In a recent issue of Fortune magazine, Marriott Corp.’s strategy was described as follows:
Marriott gets small to go big
The hotel chain introduces boutiques, buys up Africa and builds in Asia.
By Caroline Fairchild
In the hotel world, it doesn't get much bigger than Marriott International. Founded by J.W. Marriott and his wife in 1927, the company transformed from one root beer stand in Washington, D.C., to about 3,900 properties in 72 countries, and 18 brands, from the Ritz-Carlton to Courtyard. It is the largest hotel company in the U.S. and No. 230 on the Fortune 500. For a time it was slow to act as the company's peers expanded abroad, updating properties for younger, hipper travelers. That has changed. Marriott is now playing an aggressive game of catchup and has plans to open one hotel in Asia, on average, every eight days between now and 2016. Through an acquisition agreement reached in January, it is set to become the largest hotelier in Africa. And with Edition, Marriott is moving into the boutique space. Executive vice president Anthony Capuano says it's the "marathon, not the sprint" that Marriott aims to win.
Out with the old
Many young travelers view Marriott as the preferred hotel of their parents’ generation but perhaps not their own, says Marriott’s global Brand Manager Brian King. The hotel chain is at the tail end of a renovation campaign –for both the Marriott and Courtyard brands –to change that perception. In 2007, King says, the lodging giant invested more than $1 billion to reinvent the lobbies in its Marriott hotels for the “on demand generation” that expects to have every amenity at its fingertips –adding more places for guests to watch the game, grab a bite to eat, drink a beer, or work on their laptops. The company also spent more than $5 million to research and develop ideas that make travel easier, like allowing customers to check in and out with their smartphones.
In with the New
In 2007, Marriott partnered with famed hotelier Ian Schrager –who is credited with inventing the boutique hotel category –to create Marriott’s Edition, which launched in Istanbul in 2011 and opened in London last year. Marriott now plans to bring the brand to North America with a location in Miami Beach coming in the fall and two locations in New York City, one launching in 2015 and the other in 2017.
Additions Abroad
Marriott owns about 10% of the room share in the U.S. and roughly 1.5% of hotel rooms internationally. In 2012 the company made a $1.9 billion investment to dramatically increase its presence abroad. In January, Marriott finalized an agreement to acquire one of the largest hotel groups in Africa, Protea Hospitality, with 116 hotels and more than 10,000 rooms in seven countries. It plans to double presence to 50 Chinese cities by 2016 with the Marriott brand. The company’s executives say they continue to see potential for significant growth in continental Europe, where they are committed to opening 150 economy-tier (low price) Moxy hotels by 2014.
1. a) Please refer to the following sentence in the text:
“In 2007, King says, the lodging giant invested more than $1 billion to reinvent the lobbies in its Marriott hotels for the “on demand generation” that expects to have every amenity at its fingertips –adding more places for guests to watch the game, grab a bite to eat, drink a beer, or work on their laptops.” Note: for those of you who do not know the word lobbies, it refers to the space at the entrance of the hotels.
Is Marriott Corporation changing its mission by doing these changes in the lobbies of its hotels?
1.b) Marriott is executing a strategic plan for growth. Is it organic or inorganic growth? Please be precise and support your analysis in examples provided in the text. (10 points)
1. c) One of the advantages of the Resource Based View is that it provides an explanation both for competitive and corporate strategy. Please explain why. (5 points)
1. d) What are the resources and capabilities upon which Marriott is supporting its growth strategy? You may make assumptions. (Name 5) (5 points)
Question Nº 2
In a recent issue of Fortune magazine, Jo Loves strategy was described as follows:
The sweet smell of Jo Malone's success
Her improbable journey from difficult origins to a global bath and beauty company
Interview by Dinah Eng@FortuneMagazine, February 6, 2014
As a child, Jo Malone did not enjoy a lot of advantages. Dyslexic, she grew up in a troubled family and left school at 14. But Malone, now 50, had her own gifts: ambition and, most of all, an acute and artistic ability to perceive and concoct scents. Starting in her kitchen, Malone created exotic fragrances, and skin and bath products, ranging from Wild Fig & Cassis Cologne to Nutmeg & Ginger Bath Oil. She built her self-named brand into a multimillion-dollar global phenomenon before selling it to beauty conglomerate Estée Lauder. After battling breast cancer, Malone is back with a new company called Jo Loves. Her story:
I grew up in Kent, England, in what Americans would call low-income housing. My dad worked as an architect, and my mom worked for Revlon, then for a skin-care specialist. My dad was a big gambler, and I was the one who held things together when he wasn't around. It was a tough childhood.
I was 14 when my mom had a nervous breakdown. My dad wasn't there, and my younger sister was 9. I left school to look after my mom and raise my sister. A couple of years later my mom got better, so I moved to London at age 16 and lived with some wonderful family friends. I worked in a little flower shop until my mom got sick again. For a while I'd go back and forth from London to support the family. Sometimes in life you don't have the luxury of being able to sit and choose the path you want to walk on.
When I met my husband, Gary, I felt it was time to think about myself and my husband. I married at age 21, and my mom was in a stable condition. So with the help of a cosmetology book, I learned how to make face creams, like my mom had done. I started to do facials and discovered I had a real gift.
One of the great ingredients for success in my life has been my dyslexia, which made me think in unconventional ways. I smell in color. I can see something and translate it into a fragrance. I can test 60 to 80 fragrance notes and will know when something is finished and complete. When women came for my facials, I'd give them a small bottle of Nutmeg & Ginger Bath Oil in thanks. Everyone wanted them.
Around 1990 or so I was in the kitchen filling hundreds of Christmas orders for the bath oils. I was so tired. I was doing facials all day long, and then would be making the products until midnight, seven days a week. My husband, who was a building surveyor, saw an opportunity. He said, "Next year, we should have a shop."
A few years later Gary left his job, and we looked at several places for a store. I didn't like any of them. Then, as I walked past 154 Walton St. in Chelsea, my heart said, "That's the one." There was rubble everywhere, but it felt like the right location. For a retailer, gut instinct is so important. When you don't listen to your inner voice, you make mistakes. We opened in October 1994 our first “Jo Malone” store, and today the area has Stella McCartney, J. Crew, and Carolina Herrera.
So many people said it was the worst time to open a store because we were in a recession, and we were too small. We had challenges, yet I couldn't say we had huge financial struggles.
A month after opening we had VIPs coming to the shop on my birthday, Nov. 5. I was making bath oils at home, and I told my husband, "Don't fill the bottles to the top." [Oil expands whenheated, so space must be left to let that occur safely.] But he thought customers would feel like they were getting full value for their purchase if the bottles were full. That evening, as the bath oils sat underneath the shelf lights, we suddenly heard an explosion like the 1812 Overture. All the stoppers went off the bottles, and we had to close the shop for health and safety. Oil was everywhere. I was in the shop with the hair drier trying to dry all the shelves. My husband and I didn't talk for days.
I found it a challenge to trust other people because I'd been a one-man band for so long. Because the brand holds my name, the product is very personal to me. I won't ever settle for second best.
From the first day of opening the door, I had amazing press: British Vogue, the Financial Times. The business just climbed and climbed. I did an episode of the Oprah Winfrey show, and after it aired, we had coachloads of people coming through the door. It was like a dream come true.
That first year, Bergdorf Goodman in New York approached us to open our first store inside a department store. It turned over $1 million very quickly. We immediately set up other retail partnerships with Neiman Marcus and Saks. I can't ever remember having a piece of paper with a strategy on it. We were turning over money faster than we were spending it, which is everyone's dream. We just opened in places where there was a hunger for the product.
To create that hunger in New York, I went to 50 people I knew there -- a couple of models, a couple of pop stars. I gave each 10 gifts and asked them to please give the samples out as hostess gifts. We didn't have a marketing team. Then, four months before the first store opened in New York, we sent 200 empty Jo Malone shopping bags to friends and asked people to carry them on the streets. It worked powerfully. Our package was seen months before people saw the product. We opened a second store in London and in Harrods. Everything was flying.
We had a lot of offers for the business. People wanted to invest or buy a franchise, but I declined. As the success grew, I started to look for someone I could work with as a lifelong business partner. Leonard Lauder [then CEO of the Estée Lauder Cos.] came into the shop, and we went to lunch. I loved him. He's a great retailer, and I knew the business would be in safe hands. So we sold “Jo Malone” to him in 1999.
We continued to open stores, and I thought I was going to stay forever. But one morning in the shower in 2003, I found a lump in my breast. I was diagnosed with an aggressive form of cancer. I called Evelyn Lauder, who said, "Never forget, you make lemonade from lemons." That stuck with me. I flew to New York, did a year of chemotherapy and surgery, and ran the stores from there.
By then I had a 4-year-old son and was terrified the cancer would come back. One day I was standing in our Madison Avenue store and decided I just wanted to be with my family. I felt like I didn't have anything magical to give anymore. So in 2006, I left.
Every day, I'd get up and think of fragrance, but there was nothing I could do about it. We had signed a lockout agreement for five years. So I decided to make a TV show for BBC One called High Street Dreams, helping other entrepreneurs start their businesses. One day we were filming in a garden, filling bottles of chili sauce, and the feeling came over me that it was time to create my own fragrance again. So in 2011, I'd done my five years, and was cleared by the lawyers to go.
I'm still Jo Malone, the person, so what was I going to call the new company? I don't think anyone sees fragrance the way I do. For me, it's about this love I have for the industry. Jo Malone was who I was when I started 30 years ago. Jo Loves, our new name, is who I am today.
This second time around, I've actually made more mistakes than the first time. I was rushing to get back into it, and we opened a pop-up shop in the wrong location. I rolled it out before the packages were ready and didn't have enough advertising. I underestimated the power of people not understanding who Jo Loves was. They didn't realize I'd left Jo Malone.
In October 2013, I opened Jo Loves on Elizabeth Street in the London shop I worked in years ago when it was a flower shop. I feel like I'm coming back to life and know that this is it. I'm proud of surviving -- surviving life, cancer, and retail. I stayed true to the gift I've been given, and I don't want to have regrets in my life. I'm prepared to take risks and dedicate myself to creating new things. I'll never build another cosmetic company again. This is my offering to the world.
My advice
Don't run toward money. Sometimes we seek a bank loan before we need it. Think about the product you've got and what you can accomplish with it. Keep hold of the equity of your brand as long as you can.
Don't meet only with your managers. Include people who sell your product and have contact with the customers. It's not about trying to sell a million bottles of something. It's about getting people to come back for the second, third, and fourth bottle.
Never feel disheartened if a competitor comes onto your street. You may gain a sale one day and not the next, but you must look at the bigger picture. Look at what you can do to help each other, and it'll end up helping you.
This story is from the February 24, 2014 issue of Fortune.
2a) what was the initial strategy that Jo Malone had as she built her first business – the Jo Malone retail chain of fragrances? (20 points)
2b) did luck play a role in Jo Malone’s business success? (5 points)
2c) in class, Professor Koljatic said that strategies are formulated through trial and error and experimentation which allows for organizational learning. Does Jo Malone’s case confirm or contradict Koljatic’s view? Please explain. (5 points)
PAUTA
Course: Leadership and Business Strategy, eaa 305 a
First Semester 2014 - Second Mid Term Exam
Please write your name in all pages.
This is an “open book” exam.
You have 80 minutes to complete your answers.
You may answer in English or in Spanish.
Question Nº 1.-
In a recent issue of Fortune magazine, Marriott Corp.’s strategy was described as follows:
Marriott gets small to go big
The hotel chain introduces boutiques, buys up Africa and builds in Asia.
By Caroline Fairchild
In the hotel world, it doesn't get much bigger than Marriott International. Founded by J.W. Marriott and his wife in 1927, the company transformed from one root beer stand in Washington, D.C., to about 3,900 properties in 72 countries, and 18 brands, from the Ritz-Carlton to Courtyard. It is the largest hotel company in the U.S. and No. 230 on the Fortune 500. For a time it was slow to act as the company's peers expanded abroad, updating properties for younger, hipper travelers. That has changed. Marriott is now playing an aggressive game of catchup and has plans to open one hotel in Asia, on average, every eight days between now and 2016. Through an acquisition agreement reached in January, it is set to become the largest hotelier in Africa. And with Edition, Marriott is moving into the boutique space. Executive vice president Anthony Capuano says it's the "marathon, not the sprint" that Marriott aims to win.
Out with the old
Many young travelers view Marriott as the preferred hotel of their parents’ generation but perhaps not their own, says Marriott’s global Brand Manager Brian King. The hotel chain is at the tail end of a renovation campaign –for both the Marriott and Courtyard brands –to change that perception. In 2007, King says, the lodging giant invested more than $1 billion to reinvent the lobbies in its Marriott hotels for the “on demand generation” that expects to have every amenity at its fingertips –adding more places for guests to watch the game, grab a bite to eat, drink a beer, or work on their laptops. The company also spent more than $5 million to research and develop ideas that make travel easier, like allowing customersto check in and out with their smartphones.
In with the New
In 2007, Marriott partnered with famed hotelier Ian Schrager –who is credited with inventing the boutique hotel category –to create Marriott’s Edition, which launched in Istanbul in 2011 and opened in London last year. Marriott now plans to bring the brand to North America with a location in Miami Beach coming in the fall and two locations in New York City, one launching in 2015 and the other in 2017.
Additions Abroad
Marriott owns about 10% of the room share in the U.S. and roughly 1.5% of hotel rooms internationally. In 2012 the company made a $1.9 billion investment to dramatically increase its presence abroad. In January, Marriott finalized an agreement to acquire one of the largest hotel groups in Africa, Protea Hospitality, with 116 hotels and more than 10,000 rooms in seven countries. It plans to double presence to 50 Chinese cities by 2016 with the Marriott brand. The company’s executives say they continue to see potential for significant growth in continental Europe, where they are committed to opening 150 economy-tier (low price) Moxy hotels by 2014.
2. a) Is Marriott Corporation changing its mission?
Matko said in class: The Mission: “Why does the company exist”.
He described the elements in a mission statement which is well formulated with the next slide.
Marriott is changing its mission as it is changing its core business - the scope of its business - the What and the Who.
1.b) Marriott is executing a strategic plan for growth. Is it organic or inorganic growth? Please be precise and support your analysis in examples provided in the text. (10 points)
5 points: there are several sentences in the case that indicate that Marriott is trying to grow in its current business.
a) It plans to double presence to 50 Chinese cities by 2016 with the Marriott brand. The company’s executives say they continue to see potential for significant growth in continental Europe, where they are committed to opening 150 economy-tier (low price) Moxy hotels by 2014.
b) “In 2007, King says, the lodging giant invested more than $1 billion to reinvent the lobbies in its Marriott hotels for the “on demand generation” that expects to have every amenity at its fingertips –adding more places for guests to watch the game, grab a bite to eat, drink a beer, or work on their laptops.
c) The company also spent more than $5 million to research and develop ideas that make travel easier, like allowing customers to check in and out with their smartphones”
It is obvious that these investments are being made to sell more in Marriott’s current business – thus ORGANIC growth. To get the 5 points it is sufficient to give one of these examples.
5 points: the case says: “In January, Marriott finalized an agreement to acquire one of the largest hotel groups in Africa, Protea Hospitality, with 116 hotels and more than 10,000 rooms in seven countries”.
Thus, it is also doing inorganic growth.

1. c) One of the advantages of the Resource Based View is that it provides an explanation both for competitive and corporate strategy. Please explain why. (5 points)
Resources and Capabilities (R&C) are the source for competitive advantages. Hence, it follows that R&C must be the source of corporate advantage too – as corporate advantage is the advantage the firm gets from managing its portfolio of businesses (in plural).
If you have a competitive advantage in a firm you can try to transfer that advantage to other firms you manage. Think for instance the case of distribution synergies. If a firm enjoys synergies (economies of scope) it is because it is using the same resource or capability in more than one business - for example, CCU distributes beer and soft drinks and wine and liquor (all products in its portfolio) with one single logistics unit – CCU Transportes. Thus, it is using one resource to support several business units, benefiting from the scale effect.
1. d) What are the resources and capabilities upon which Marriott is supporting its growth strategy? You may make assumptions. (Name 5) (5 points)
The slide that describes R&C’s follows:
On the other hand, we explained that economies of scope -´which come from R&C as we saw in the previous answer - are as follows:

Crossing the ideas in both slides, we made conclude that some of the Resources and Capabilities on which Marriott is supporting its growth strategy are:
a) The Brands it has: Marriott, Courtyard, etc. – an intangible resource with many positive effects through brand recognition and loyalty
b) The managerial talent it has: also intangible- a key resource
c) Its market share – an intangible resource which translates into market power
d) Its financial resources- which is obviously a platform for growth which allows it for instance to open new hotels in China and Europe, plus buying a chain in Africa
e) Its network of sales agents and representatives – a resource
f) Its knowledge of the hotel business - a capability
g) Etc. etc.
Question Nº 2
In a recent issue of Fortune magazine, Jo Loves strategy was described as follows:
The sweet smell of Jo Malone's success
Her improbable journey from difficult origins to a global bath and beauty company
Interview by Dinah Eng@FortuneMagazine, February 6, 2014
As a child, Jo Malone did not enjoy a lot of advantages. Dyslexic, she grew up in a troubled family and left school at 14. But Malone, now 50, had her own gifts: ambition and, most of all, an acute and artistic ability to perceive and concoct scents. Starting in her kitchen, Malone created exotic fragrances, and skin and bath products, ranging from Wild Fig & Cassis Cologne to Nutmeg & Ginger Bath Oil. She built her self-named brand into a multimillion-dollar global phenomenon before selling it to beauty conglomerate Estée Lauder. After battling breast cancer, Malone is back with a new company called Jo Loves. Her story:
I grew up in Kent, England, in what Americans would call low-income housing. My dad worked as an architect, and my mom worked for Revlon, then for a skin-care specialist. My dad was a big gambler, and I was the one who held things together when he wasn't around. It was a tough childhood.
I was 14 when my mom had a nervous breakdown. My dad wasn't there, and my younger sister was 9. I left school to look after my mom and raise my sister. A couple of years later my mom got better, so I moved to London at age 16 and lived with some wonderful family friends. I worked in a little flower shop until my mom got sick again. For a while I'd go back and forth from London to support the family. Sometimes in life you don't have the luxury of being able to sit and choose the path you want to walk on.
When I met my husband, Gary, I felt it was time to think about myself and my husband. I married at age 21, and my mom was in a stable condition. So with the help of a cosmetology book, I learned how to make face creams, like my mom had done. I started to do facials and discovered I had a real gift.
One of the great ingredients for success in my life has been my dyslexia, which made me think in unconventional ways. I smell in color. I can see something and translate it into a fragrance. I can test 60 to 80 fragrance notes and will know when something is finished and complete. When women came for my facials, I'd give them a small bottle of Nutmeg & Ginger Bath Oil in thanks. Everyone wanted them.
Around 1990 or so I was in the kitchen filling hundreds of Christmas orders for the bath oils. I was so tired. I was doing facials all day long, and then would be making the products until midnight, seven days a week. My husband, who was a building surveyor, saw an opportunity. He said, "Next year, we should have a shop."
A few years later Gary left his job, and we looked at several places for a store. I didn't like any of them. Then, as I walked past 154 Walton St. in Chelsea, my heart said, "That's the one." There was rubble everywhere, but it felt like the right location. For a retailer,gut instinct is so important. When you don't listen to your inner voice, you make mistakes. We opened in October 1994 our first “Jo Malone” store, and today the area has Stella McCartney, J. Crew, and Carolina Herrera.
So many people said it was the worst time to open a store because we were in a recession, and we were too small. We had challenges, yet I couldn't say we had huge financial struggles.
A month after opening we had VIPs coming to the shop on my birthday, Nov. 5. I was making bath oils at home, and I told my husband, "Don't fill the bottles to the top." [Oil expands when heated, so space must be left to let that occur safely.] But he thought customers would feel like they were getting full value for their purchase if the bottles were full. That evening, as the bath oils sat underneath the shelf lights, we suddenly heard an explosion like the 1812 Overture. All the stoppers went off the bottles, and we had to close the shop for health and safety. Oil was everywhere. I was in the shop with the hair drier trying to dry all the shelves. My husband and I didn't talk for days.
I found it a challenge to trust other people because I'd been a one-man band for so long. Because the brand holds my name, the product is very personal to me. I won't ever settle for second best.
From the first day of opening the door, I had amazing press: British Vogue, the Financial Times. The business just climbed and climbed. I did an episode of the Oprah Winfrey show, and after it aired, we had coachloads of people coming through the door. It was like a dream come true.
That first year, Bergdorf Goodman in New York approached us to open our first store inside a department store. It turned over $1 million very quickly. We immediately set up other retail partnerships with Neiman Marcus and Saks. I can't ever remember having a piece of paper with a strategy on it. We were turning over money faster than we were spending it, which is everyone's dream. We just opened in places where there was a hunger for the product.
To create that hunger in New York, I went to 50 people I knew there -- a couple of models, a couple of pop stars. I gave each 10 gifts and asked them to please give the samples out as hostess gifts. We didn't have a marketing team. Then, four months before the first store opened in New York, we sent 200 empty Jo Malone shopping bags to friends and asked people to carry them on the streets. It worked powerfully. Our package was seen months before people saw the product. We opened a second store in London and in Harrods. Everything was flying.
We had a lot of offers for the business. People wanted to invest or buy a franchise, but I declined. As the success grew, I started to look for someone I could work with as a lifelong business partner. Leonard Lauder [then CEO of the Estée Lauder Cos.] came into the shop, and we went to lunch. I loved him. He's a great retailer, and I knew the business would be in safe hands. So we sold “Jo Malone” to him in 1999.
We continued to open stores, and I thought I was going to stay forever. But one morning in the shower in 2003, I found a lump in my breast. I was diagnosed with an aggressive form of cancer. I called Evelyn Lauder, who said, "Never forget, you make lemonade from lemons." That stuck with me. I flew to New York, did a year of chemotherapy and surgery, and ran the stores from there.
By then I had a 4-year-old son and was terrified the cancer would come back. One day I was standing in our Madison Avenue store and decided I just wanted to be with my family. I felt like I didn't have anything magical to give anymore. So in 2006, I left.
Every day, I'd get up and think of fragrance, but there was nothing I could do about it. We had signed a lockout agreement for five years. So I decided to make a TV show for BBC One called High Street Dreams, helping other entrepreneurs start their businesses. One day we were filming in a garden, filling bottles of chili sauce, and the feeling came over me that it was time to create my own fragrance again. So in 2011, I'd done my five years, and was cleared by the lawyers to go.
I'm still Jo Malone, the person, so what was I going to call the new company? I don't think anyone sees fragrance the way I do. For me, it's about this love I have for the industry. Jo Malone was who I was when I started 30 years ago. Jo Loves, our new name, is who I am today.
This second time around, I've actually made more mistakes than the first time. I was rushing to get back into it, and we opened a pop-up shop in the wrong location. I rolled it out before the packages were ready and didn't have enough advertising. I underestimated the power of people not understanding who Jo Loves was. They didn't realize I'd left Jo Malone.
In October 2013, I opened Jo Loves on Elizabeth Street in the London shop I worked in years ago when it was a flower shop. I feel like I'm coming back to life and know that this is it. I'm proud of surviving -- surviving life, cancer, and retail. I stayed true to the gift I've been given, and I don't want to have regrets in my life. I'm prepared to take risks and dedicate myself to creating new things. I'll never build another cosmetic company again. This is my offering to the world.
My advice
Don't run toward money. Sometimes we seek a bank loan before we need it. Think about the product you've got and what you can accomplish with it. Keep hold of the equity of your brand as long as you can.
Don't meet only with your managers. Include people who sell your product and have contact with the customers. It's not about trying to sell a million bottles of something. It's about getting people to come back for the second, third, and fourth bottle.
Never feel disheartened if a competitor comes onto your street. You may gain a sale one day and not the next, but you must look at the bigger picture. Look at what you can do to help each other, and it'll end up helping you.
This story is from the February 24, 2014 issue of Fortune.
2a) what was the initial strategy that Jo Malone had as she built her first business – the Jo Malone retail chain of fragrances? (20 points)
To start:
Then:
It is obvious in this case, that the key resource behind this business is Jo Malone. Her creativity and God given talent to develop fragrances is the differentiating factor.
So, the question that comes up is what did she do to develop this very successful business. Well, she had a business model which had a Value Proposition - WHO and WHAT – and a value chain- the HOW?.
Who? Women in The UK and USA who buy fragrances
What? Fragrances developed by Jo Malone – The brand in this case is very important
How? – Initially she captured the value created by selling her products in stand alone retail stores which carry the Jo Malone brand and “corners” (stands) in Department Stores. In a second stage, she sold her business to Estee Lauder, and this firm did the value capture through its network of retail points.
2b) did luck play a role in Jo Malone’s business success? (5 points)
Yes. For instance, she was sick with cancer and survived. Luck? I guess you have to be to some extent lucky to survive this dreadful disease.
2c) in class, Professor Koljatic said that strategies are formulated through trial and error and experimentation which allows for organizational learning. Does Jo Malone’s case confirm or contradict Koljatic’s view? Please explain. (5 points)
Yes. Jo Malone experimented the location of her stores, the fragrances etc. IT confirms that successful business models are developed over time through experimentation. A good slide to explain this issue is the one we saw when we talked about Business Models:
Course: Leadership and Business Strategy, EAA 305 a
First Quarter 2013 - Prueba 2.-
Please write your name in all pages.
This is an “open book” exam.
You have 90 minutes to complete your answers.
You may answer in English or in Spanish.
Question Nº 1.-
A recent report in The Economist, a British magazine, reads as follows:“Newspapers are going to live longer than people think,” asserts Mathias Döpfner, the boss of Axel Springer. Perhaps it will in central Europe. The publisher of Bild and the Die Welt, the weekly magazine and daily newspaper with the highest circulation in Germany respectively, recently recorded the most profitable first quarter in its history. The profit margin on its German national newspapers is a startling 27%. The firm is expanding into Poland. If newspapers are in crisis, Mr Döpfner says, he likes crisis.
A year ago the mere survival of many newspapers seemed doubtful. It had become clear that the young, in particular, were getting much of their news online. Readers were flitting from story to story, rarely paying. Advertising too was moving online, but not to newspapers' websites. Rather, it was being swallowed by search engines. The classified-ad market was ravaged by free listings websites. A deep recession, common wisdom had it, would surely finish off newspapers, which have high fixed costs in the form of journalists and printing presses.
In some ways the pain proved even greater than analysts expected. The Newspaper Association of America reports that print and online advertising has fallen by 35% since the first quarter of 2008. Circulation has dropped alarmingly too. Yet almost all newspapers have survived. American newspaper firms like McClatchy stayed mostly profitable even as revenues plunged (see chart next page). Some companies are now worth ten times as much as in the spring of 2009, although they remain far from pre-recession heights.
Steep cover-price rises have helped. But for the most part newspapers have cut their way out of crisis. In the past year McClatchy reduced payroll costs by 25%. Many publications closed bureaus and forced journalists to take unpaid leave. There have been clever adaptations, too. At Gannett, another American firm, 46 local newspapers now carry national and international news from USA Today, the firm's national paper. A group of New Jersey newspapers jointly produces features and editorials. Bob Dickey, who runs Gannett's community papers, says they have realized there is no need to work out what to say about the Gulf oil leak seven times.
Another unexpected boon is that spending on paper—the second-biggest expense at many firms, after staff pay—has plummeted by as much as 40%. A global commodities slump depressed prices. Newspaper companies are using less of the stuff, printing fewer words on smaller, thinner pages. Particularly on Mondays, papers are often so light that they are hard to fling from a car or bicycle to a doorstep.
The possibility that paper prices will roar back as the world economy accelerates is only one danger facing newspaper firms. Readers may suddenly balk at paying higher prices for thinner products. Yet it is also possible that advertising will begin to recover from severely depressed levels. If that happens, profit margins will inflate quickly.
Outside America newspapers have fared better, as a report to be published by the OECD next week shows. In countries like Germany they have suffered a “single whammy”—recession, but not rapid structural change.
In emerging markets one must look hard to find any sign of crisis at all. In Brazil advertising wobbled only briefly during the recession. The total circulation of Brazilian newspapers has expanded by 1m in the past ten years, to 8.2m. Brazil's growing middle class is hooked on a clutch of inexpensive new papers that are heavy on murders and bikinis. In 2003 just three of Brazil's top ten papers were tabloids. Today five of them are.
That emphasis on giving readers what they want to read, as opposed to what lofty notions of civic responsibility suggest they ought to read, is part of a global trend. Newspapers are becoming more distinctive and customer-focused. Rather than trying to bring the world to as many readers as possible, they are carving out niches. Proprietors and editors are trying to identify distinctive strengths and investing what money they have in those areas.
In America many newspapers have plumped for local news and sport, leaving everything else to bigger outfits or to wire services like The Associated Press. Several of them now refuse to deliver papers to readers far from the urban core. Such readers are expensive to reach and less alluring to advertisers. Papers are also courting small local businesses with technology that allows them to design their own ads cheaply. In short, metropolitan newspapers are turning into city newspapers. That may help them in the long term. Jim Chisholm, a newspaper analyst, points out that small local papers have fared better than larger regional ones in many countries, including America.
The survival of newspapers is by no means guaranteed. They still face big structural obstacles: it remains unclear, for example, whether the young will pay for news in any form. But the recession brought out an impressive and unexpected ability to adapt. If newspapers can keep that up in better times, they may be able to contemplate more than mere survival.
1.1. - What is going on in the newspaper industry? Assume you are a consultant to the CEO of a newspaper in the USA. It is obvious that external environment is changing and that the rivals in this industry are losing their competitive advantages. What kind of analysis would you do to understand what is going on? What would you answer to the initial question? (10 points)
1.2.- Are newspapers in the USA changing their “mission” as a result of these external changes you identified in your first answer? How about the Brazilian newspapers? Please explain your answer. (10 points)
1.3. - Michael Porter coined the term “generic business strategy”, which refers to the concepts of competing on ‘differentiation’ or ‘low cost’. From what The Economist says, would you say that newspapers are now following which one of these two generic strategies? Or, are the newspapers competing with both of these generic strategies simultaneously? Please explain (10 points)
1.4. - Contrary to what The Economist reports, Chilean newspapers seem to be doing quite well. El Mercurio in particular seems to be buoyant (‘boyante’, in Spanish, in case you do not know the word in English). Please use a theoretical framework to explain why it is that El Mercurio seems to be doing so well, having sustained its competitive advantage. Since there is no information about El Mercurio in the report, make the assumptions you deem necessary. (10 points)
Question Nº 2
A recent report in The Economist, the British magazine, reads as follows:
The man from Apple
Why J.C. Penney dumped Ron Johnson
Retailers praise Apple’s stores almost as effusively as designers do its hardware. In America its sales people outsell those at Tiffany, a jeweller, measured by dollars per square foot of space. So when J.C. Penney, a struggling department-store chain, hired Ron Johnson, Apple’s top retailer, to be its boss in 2011 there was much rejoicing.
On April 6th Mr Johnson was fired. His exit came shortly after J.C. Penney announced that sales in the fourth quarter of its fiscal year were 28% lower than a year earlier—the worst such collapse in retailing history, some commentators claimed. The chain lost nearly $1 billion during the year. Under Mr Johnson’s management, J.C Penney’s share price dropped by more than half. Bill Ackman, an activist investor who was instrumental in bringing him on board, admitted that his mistakes had brought the chain “very close to a disaster”.
American retailers are still feeling nervous from the financial crisis and intimidated by online rivals like Amazon. Department-store sales in 2012 were more than 10% below their pre-crisis levels. Employment in retailing has climbed only halfway back after job losses in 2008-09.
But much of the pain at J.C. Penney was inflicted by Mr Johnson, who did not seem to like his new employer very much. The 1,100-store chain, one of America’s largest,caters to middle-aged women on tight budgets. Historically it has enticed them with frequent promotions and sales. Upon arrival Mr Johnson announced that he wanted not merely to improve J.C. Penney but to “transform” it.
That turned out to mean remaking J.C. Penney into a cheap version of Apple’s sleek stores. Mr Johnson came up with a new logo, the chain’s third in four years, and fired many of the staff at its Texas headquarters. He eliminated salespeople’s commissions in favour of fixed hourly wages. J.C. Penney’s bargain bazaars started to become glamorous “speciality department stores”, housing boutiques for famous brands. Levi’s, a jeans maker, set up its first “denim bars”—a copy of Apple’s “genius bars”—in Mr Johnson’s stores.
His customers might have accepted these novelties, even come to like them. What soured them was an abrupt change to pricing. Out went discounts and one-day sales (J.C. Penney ran these promotions 600 times a year). In came “fair” prices, which prevailed on most days, plus promotions on the first and third Fridays of every month. Two-thirds of customers did not understand the new scheme, according to one analysis. They fled. Even online sales dropped during Mr Johnson’s tenure. Last June he tried to win shoppers back by reintroducing discounts.
The makeover was not wholly misguided. Even before he arrived J.C. Penney had been smartening itself up to appeal to younger and richer shoppers. His predecessor, Mike Ullman, started the department-store-as-mall idea, inviting outsiders like Sephora, which sells cosmetics, to set up mini-shops. That was happening at “a sane pace”, says Howard Davidowitz, a retail consultant in New York. Mr Johnson, by contrast, barrelled ahead “with no testing of new ideas”.
A deal he struck with Martha Stewart, a decorating giant, to sell her home furnishings is stuck in court. Macy’s, a rival, claims it infringes on an exclusive arrangement it had with Ms Stewart. If J.C. Penney loses, it might have to liquidate $100m of inventory, according to Citigroup analysts.
The chain’s fate is now unclear. Mr Ullman, once criticised by Mr Ackman for managing it badly, has been brought back, perhaps temporarily. The share price fell further after news of his rehiring. Standard & Poor’s downgraded the company’s credit rating in February. Some suspect the chain will be taken private or sold to a rival.
Mr Johnson was not wrong to be bold. Faced with depressed consumers and online attackers, traditional retailers need to be radical. But radicalism should try to keep loyal shoppers, not repel them. Mr Johnson’s mistake was to mix up selling chic gadgets with flogging pairs of socks. They are apples and oranges.
2.1.- Mr Johnson has been asked to leave his job as CEO of J.C. Penney. Why? In this case, there seem to be two explanations: a simple, direct reason for the decision by the Board to fire him and a more profound explanation. Please describe both. (10 points)
2.2. - Assuming your answer to 2.1 is right, please explain what could Mr Johnson had done different from what he did (10 points).
Question Nº 3.-
Retailing has been revolutionized by amazon.com with its business model. The internet giant has already captured two thirds of the market for books in the USA, being followed by Barnes and Noble (B&N), the traditional retail bookseller, with a 12% market share.
A recent study by a consulting company shows that Amazon is selling its books at a 25% discount versus traditional book sellers, like B&N. In spite of this discounting, operating income at Amazon is close to 10% of sales (7.2c per every 75c sold) while B&N only gets 4.9c for every dollar sold. The explanation for this wide difference in profitability is in the much lower rental and Sales, General and Administrative expenses that Amazon enjoys. Once non operational charges are subtracted, B&N is in a loss position, while Amazon makes money.
The following table shows, an indexed comparison of the profit and loss statements for both companies, as prepared by the consulting company.
P&L Comparison indexed to B&N pricing.

3.1 Assume you are advising the CEO of B&N as a consultant. Give one reason, and only one reason, why B&N will not be successful if it tries to imitate Amazon in its business model of selling books on the internet. Your answer should begin with: ”because of the ….”(5 points
3.2. - Please provide a short and plausible explanation of why is Amazon’s cost of goods sold lower than B&N’s. (5 points)
Course: Leadership and Business Strategy, EAA 305 a
First Quarter 2013 - Prueba 2
Please write your name in all pages.
This is an “open book” exam.
You have 90 minutes to complete your answers.
You may answer in English or in Spanish.
Question Nº 1.-
A recent report in The Economist, a British magazine, reads as follows: ……

1.1. - What is going on in the newspaper industry? Assume you are a consultant to the CEO of a newspaper in the USA. It is obvious that external environment is changing and that the rivals in this industry are losing their competitive advantages. What kind of analysis would you do to understand what is going on? What would you answer to the initial question? (10 points)
The answer is in the question:’ the external environment is changing’. The analysis to be done is the 6 forces analisys, pioneered by Porter as a 5 forces analysis but “complemented” by Andy Grove and others with the 6th force: the Complementors.
The key in the analysis and the only force that needs to be looked at to answer the question is substitution…. “It had become clear that the young, in particular, were getting much of their news online” says the article. That is pure substitution!
The process of value destruction is described as follows: Readers were flitting from story to story, rarely paying. Advertising too was moving online, but not to newspapers' websites. Rather, it was being swallowed by search engines. The classified-ad market was ravaged by free listings websites.
If revenues fall because of substitution, profits will fall.
Why is it not happening in Germany with the Bild and Die Welt, is impossible to know since the story does not give the information.
1.2.- Are newspapers in the USA changing their “mission” as a result of these external changes you identified in your first answer? How about the Brazilian newspapers? Please explain your answer. (10 points)
USA – 6 points, 2 for each
YES!
The mission is the reason for the existence of the organization. In practical terms, it answers the three fundamental questions of any organization the Who, What, How.
The newspapers have changed the WHO –
· Newspapers are becoming more distinctive and customer-focused. Rather than trying to bring the world to as many readers as possible, they are carving out niches
· Several of them now refuse to deliver papers to readers far from the urban core. Such readers are expensive to reach and less alluring to advertisers
· In short, metropolitan newspapers are turning into city newspapers.
The newspapers have changed the WHAT –

· That emphasis on giving readers what they want to read,
· In America many newspapers have plumped for local news and sport
· Newspaper companies are using less of the stuff, printing fewer words on smaller, thinner pages. Particularly on Mondays, papers are often so light that they are hard to fling from a car or bicycle to a doorstep.
The newspapers have changed the HOW –
· But for the most part newspapers have cut their way out of crisis. In the past year McClatchy reduced payroll costs by 25%. Many publications closed bureaus and forced journalists to take unpaid leave. There have been clever adaptations, too. At Gannett, another American firm, 46 local newspapers now carry national and international news from USA Today, the firm's national paper. A group of New Jersey newspapers jointly produces features and editorials. Bob Dickey, who runs Gannett's community papers, says they have realized there is no need to work out what to say aboutthe Gulf oil leak seven times.

Brazil - 4 points
The Brazilian newspapers have changed the WHO and WHAT:
· Brazil's growing middle class is hooked on a clutch of inexpensive new papers that are heavy on murders and bikinis. In 2003 just three of Brazil's top ten papers were tabloids. Today five of them are.
1.3. - Michael Porter coined the term “generic business strategy”, which refers to the concepts of competing on ‘differentiation’ or ‘low cost’. From what The Economist says, would you say that newspapers are now following which one of these two generic strategies? Or, are the newspapers competing with both of these generic strategies simultaneously? Please explain (10 points)
Both
Although they have been lucky – one of the reasons for business success as we saw in class- costs of paper have gone down 40% - newspapers have:
· Reduced costs
· by making lighter and smaller newspapers (as in Brazil with the change to tabloids)
· by laying off journalists and using syndicated news services like associated Press or USA Today editorials
· Newspaper companies are using less of the stuff, printing fewer words on smaller, thinner pages.
· Increased differentiation/segmentation
· “Rather than trying to bring the world to as many readers as possible, they are carving out niches”.
· That emphasis on giving readers what they want to read, as opposed to what lofty notions of civic responsibility suggest they ought to read, is part of a global trend.
· Papers are also courting small local businesses with technology that allows them to design their own ads cheaply.
1.4. - Contrary to what The Economist reports, Chilean newspapers seem to be doing quite well. El Mercurio in particular seems to be buoyant (‘boyante’, in Spanish, in case you do not know the word in English). Please use a theoretical framework to explain why it is that El Mercurio seems to be doing so well, having sustained its competitive advantage. Since there is no information about El Mercurio in the report, make the assumptions you deem necessary. (10 points)
As we saw in class, threats to sustainability- the maintenance in time of competitive advantage – may be described with Ghemawat’s model, as shown below:
If the model is identified as useful for the analysis, 7 points.
We do not know what is happening in Chile in terms of substitution, but there are two plausible explanations for the good results of El Mercurio:
· EMOL seems to be a good answer to the substitution threat
· The lower cost of paper must have offset other threats.
Question Nº 2
A recent report in The Economist, the British magazine, reads as follows:
The man from Apple....
2.1.- Mr Johnson has been asked to leave his job as CEO of J.C. Penney. Why? In this case, there seem to be two explanations: a simple, direct reason for the decision by the Board to fire him and a more profound explanation. Please describe both. (10 points)
· Simple, direct reason : “Under Mr Johnson’s management, J.C Penney’s share price dropped by more than half”.
· Profound explanation: Changed the business model unsuccessfully!
Old Who /What:
· “caters to middle-aged women on tight budgets.
· What soured them was an abrupt change to pricing. Out went discounts and one-day sales (J.C. Penney ran these promotions 600 times a year)”
New What:
· Upon arrival Mr Johnson announced that he wanted not merely to improve J.C. Penney but to “transform” it.
· That turned out to mean remaking J.C. Penney into a cheap version of Apple’s sleek stores
· In came “fair” prices, which prevailed on most days, plus promotions on the first and third Fridays of every month. Two-thirds of customers did not understand the new scheme, according to one analysis. They fled. Even online sales dropped during Mr Johnson’s tenure. Last June he tried to win shoppers back by reintroducing discounts.
New How
· Mr Johnson came up with a new logo, the chain’s third in four years, and fired many of the staff at its Texas headquarters. He eliminated salespeople’s commissions in favour of fixed hourly wages.
· J.C. Penney’s bargain bazaars started to become glamorous “speciality department stores”, housing boutiques for famous brands. Levi’s, a jeans maker, set up its first “denim bars”—a copy of Apple’s “genius bars”—in Mr Johnson’s stores.
Etcetera. It is not necessary to list all the points above to have the 10 points. What is important is the understanding the the direct explanation is the drop in the stock price but this is only a reflection of a failed new business model
2.2. - Assuming your answer to 2.1 is right, please explain what could Mr Johnson had done different from what he did (10 points).
Experiment – successful strategies come from trial and error- in pricing, lay outs and designs of stores. It would have been slower, but probably he would have hit on the right moves for JC Penney.
Think Big, Start Small, Scale up fast.
Course: Leadership and Business Strategy , EAA 305a
First Semester 2011
Second Mid term exam
Please write your name in all pages. You may answer in English or in Spanish.
This is an “open book” exam. Time: 80 minutes. Please be brief in your answers
Question 1. - (40 points)
In class we discussed the ‘Globalization of CEMEX’ case, at length. Most of the discussion was centered in CEMEX’s competitive advantage (CA). However, at the time of the discussion of the case, we had not covered yet the subject of Corporate Strategy, so we could not discuss the issues about CEMEX’s geographical diversification.
1a) how was CEMEX creating value by acquiring cement companies in countries as diverse as Spain, Egypt, the Philippines and Indonesia? Name two ways in which CEMEX was creating value through its geographical diversification. (
1b) Below please find a paragraph from the case which refers to the expansion of the company into emergent countries:
‘While the logic of expanding to the U.S., Spain, and, in particular, Latin America, had been relatively obvious, CEMEX had had to develop better tools for screening opportunities as it ventured farther afield.
CEMEX looked at several factors in deciding whether to invest in other countries. A country had to have a large population and high population growth as well as a relatively low level of current consumption. In addition, CEMEX wanted to lead the market or at least control 25% of it. These considerations tended to favor opportunities in emerging countries. Quantitative factors were assigned a 65% weight in country analysis, and qualitative factors, such as political risk, a weight of 35%.
If detailed market analysis was the top-down component of the process for identifying opportunities, the process of identifying target companies constituted its bottom-up component.
CEMEX’s conceptual framework for looking at targets is summarized in Exhibit 12. CEMEX pursued
controlling stakes—often as close to 100% as possible—in the companies that it bought into, in order to maximize flexibility. When identifying a possible acquisition target, CEMEX also examined the potential for restructuring both the target company and the market as a whole. Restructuring the target company meant increasing its efficiency and optimizing capacity utilization. Restructuring the market might involve reductions in the number of players or volume of imports, moves toward rational pricing, fragmentation of distribution channels, product differentiation and other attempts to get closer to the customer.’
Exhibit 12: Framework for Acquisition Analyses
Examining the ‘Attractiveness profile’ in exhibit 12.1.- , we realize that the ‘upside potential’ is very well explained in the paragraph from the case: they were looking for countries which ‘ have a large population and high population growth as well as a relatively low level of cement consumption’. So, they were looking for markets with high growth potential. We have learned that growth is very important in the price of the stock (remember Gordon’s formula!), so this criterion for attractivenessmakes a lot of sense.
However, the explanation regarding the second criterion, ‘Strategic Fit to CEMEX’, is really not explained. The case talks about taking a controlling stake in the acquisition targets and about the opportunities for ‘restructuring’, but does not explain the concepts : Business Portfolio, Operations overlap and Risk-return profile, as these relate to the acquisition targets.
Your job now is to interpret and explain these three concepts, answering with theories we have used in this course. Please be brief….all these concepts may be explained with one sentence.
1.b.1) What is the meaning and importance of the concept ‘Business portfolio’? How does it relate to Corporate Strategy? (10 points)
1.b.2) What is the meaning and importance of the concept ‘Operations Overlap’ ? How does it relate to Corporate Strategy? (10 points)
b.3) What is the meaning and importance of the ‘Risk return profile’ ? How does it relate to Corporate Strategy (10 points)
Question 2.- (20 points)
In class we discussed the Nucor case which starts with the following paragraphs:
‘On December 7, 1986, F. Kenneth Iverson, chairman and chief executive officer (CEO) of
Nucor Corporation, awaited a delegation from SMS Schloemann-Siemag, a leading West German
supplier of steelmaking equipment, at his company’s headquarters in Charlotte, North Carolina.
Iverson had to decide whether to commit Nucor to a new steel mill that would commercialize thin slab casting technology developed by SMS. Preliminary estimates indicated that the mill would cost
$280 million, and that start-up expenses and working capital of $30 million each would push the total cost to $340 million, or nearly as much as Nucor’s net worth. Successful commercialization of thin-slab casting would let Nucor enter the flat sheet segment that accounted for half the U.S. market for steel. SMS’s compact strip production (CSP) process was, however, just one of several competing, commercially unproven thin-slab casting technologies, all of which might be leapfrogged by the turn of the century’.
As Iverson wrestled with these trade-offs, he reviewed the Valuation Analysis for the project which showed a negative NPV of 28.4 million dollars, that is, value destruction for that amount, as shown in the next table’:
Assuming that the NPV calculations are the best estimates Nucor could come up for the Valuation Analysis and are probably correct, please answer the following questions:
2.a) Should Nucor’s Board of Directors approve the investment in the new plant? Why? Under what conditions? (10 points)
2b) Please explain how the decision on the new thin slab mill relates to Nucor’s Strategy. Hint: although you may use words to explain the decision, Matko thinks that it is simpler to use a diagram (framework , if you prefer another word) from the class on the Resource Based Theory (10 points).
Question 3.- (10 points)
The Coca Cola Company publishes the following statements in its web site:
“The world is changing all around us. To continue to thrive as a business over the next ten years and beyond, we must look ahead, understand the trends and forces that will shape our business in the future and move swiftly to prepare for what's to come. We must get ready for tomorrow today. That's what our 2020 Vision is all about. It creates a long-term destination for our business and provides us with a "Roadmap" for winning together with our bottling partners.
Our Mission
Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.
· To refresh the world...
· To inspire moments of optimism and happiness...
· To create value and make a difference.
Our Vision
Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.
· People: Be a great place to work where people are inspired to be the best they can be.
· Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs.
· Partners: Nurture a winning network of customers and suppliers; together we create mutual, enduring value.
· Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.
· Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
· Productivity: Be a highly effective, lean and fast-moving organization.”
In their article ‘Building Your Company’s Vision’, Collins and Porras describe the importance of a well defined Vision. They propose a framework for the Vision , which encompasses 4 parts: Purpose, Values, Vivid description of the Company’s Future and BHAG. In class, Matko assimilated the concept of “Purpose”, from that paper, to what most people call the ‘Mission’. Then, Matko suggested a framework for formulating the Mission of a company which would allow for a ‘well defined’ mission statement.
Please turn your attention to the Mission Statement for Coca Cola Inc. (the ‘Our Mission’ paragraphs only) Does the Coca Cola’s Mission Statement fulfill the requirements for a ‘well defined’ mission, if Matko’s framework is followed? (10 points)
Pontificia Universidad Católica de Chile
Escuela de Administración
Course: Leadership and Business Strategy , EAA 305a
First Semester 2011
Second Mid term exam
Please write your name in all pages. You may answer in English or in Spanish.
This is an “open book” exam. Time: 80 minutes. Please be brief in your answers
Question 1. - (40 points)
In class we discussed the ‘Globalization of CEMEX’ case, at length. Most of the discussion was centered in CEMEX’s competitive advantage (CA). However, at the time of the discussion of the case, we had not covered yet the subject of Corporate Strategy, so we could not discuss the issues about CEMEX’s geographical diversification.
1a) How was CEMEX creating value by acquiring cement companies in countries as diverse as Spain, Egypt, the Philippines and Indonesia? Name two ways in which CEMEX was creating value through its geographical diversification. (10 points)
Las empresas crean valor en su estrategia corporativa a través de economías de ámbito (scope economies) entre las empresas que tienen en su portfolio que accionistas individuales no pueden lograr.
Cemex logra economías de ámbito en varias formas:
· Transferencia de conocimientos (core competences); a través del Post Merger Integration (PMI) Cemex logra transferir sus ventajas de una filial a otra en términos de eficiencia operacional y de agregación de valor (diferenciación)
· Sinergias financieras: entre otras, logra tasas de interés más bajas al endeudarse en países de mas bajo riesgo (España en vez de México), hace operar un mercado de capitales interno, etc.
· Sinergias gerenciales; al tener un Headquarter central, es posible que haya sinergias en aspectos tales como IT, Legal, RRHH corporativo, etc.
Lo que es incorrecto contestar es que Cemex logra economías de escala que se convierten en ventajas corporativas. Lo que la empresa hace es comprar empresas que tienen altas % de M° en los mercados locales (países específicos)donde si obtienen ventajas competitivas… pero por la naturaleza del producto, que es difícilmente transable en el comercio internacional, no se exporta ni importa mucho, dichas ventajas provenientes de la escala no se traducen en sinergias operacionales entre las filiales. Por lo demás, un inversionista individual podría comprar acciones de las filiales y obtener a través de ellas los beneficios de la escala de esas compañía
1b) Below please find a paragraph from the case which refers to the expansion of the company into emergent countries:
‘While the logic of expanding to the U.S., Spain, and, in particular, Latin America, had been relatively obvious, CEMEX had had to developbetter tools for screening opportunities as it ventured farther afield.
CEMEX looked at several factors in deciding whether to invest in other countries. A country had to have a large population and high population growth as well as a relatively low level of current consumption. In addition, CEMEX wanted to lead the market or at least control 25% of it. These considerations tended to favor opportunities in emerging countries. Quantitative factors were assigned a 65% weight in country analysis, and qualitative factors, such as political risk, a weight of 35%.
If detailed market analysis was the top-down component of the process for identifying opportunities, the process of identifying target companies constituted its bottom-up component.
CEMEX’s conceptual framework for looking at targets is summarized in Exhibit 12. CEMEX pursued
controlling stakes—often as close to 100% as possible—in the companies that it bought into, in order to maximize flexibility. When identifying a possible acquisition target, CEMEX also examined the potential for restructuring both the target company and the market as a whole. Restructuring the target company meant increasing its efficiency and optimizing capacity utilization. Restructuring the market might involve reductions in the number of players or volume of imports, moves toward rational pricing, fragmentation of distribution channels, product differentiation and other attempts to get closer to the customer.’
Exhibit 12: Framework for Acquisition Analyses
Examining the ‘Attractiveness profile’ in exhibit 12.1.- , we realize that the ‘upside potential’ is very well explained in the paragraph from the case: they were looking for countries which ‘ have a large population and high population growth as well as a relatively low level of cement consumption’. So, they were looking for markets with high growth potential. We have learned that growth is very important in the price of the stock (remember Gordon’s formula!), so this criterion for attractiveness makes a lot of sense.
However, the explanation regarding the second criterion, ‘Strategic Fit to CEMEX’, is really not explained. The case talks about taking a controlling stake in the acquisition targets and about the opportunities for ‘restructuring’, but does not explain the concepts : Business Portfolio, Operations overlap and Risk-return profile, as these relate to the acquisition targets.
Your job now is to interpret and explain these three concepts, answering with theories we have used in this course. Please be brief….all these concepts may be explained with one sentence.
1.b.1) What is the meaning and importance of the concept ‘Business portfolio’? How does it relate to Corporate Strategy? (10 points)
Todo portfolio diversificado tiene beneficios propios de la diversificación de disminución de riesgo….no poner los huevos en la misma canasta. Nos podemos imaginar que al evaluar un Acquisition target Cemex analiza cual es la correlacion de los flujos de la empresa evaluada con la del resto del portfolio. De hecho, en varias frases del caso los ejecutivos se vanaglorian que a través de la diversificación geográfica han disminuido la volatilidad de los resultados como conjunto.
1.b.2) What is the meaning and importance of the concept ‘Operations Overlap’ ? How does it relate to Corporate Strategy? (10 points)
En línea con la respuesta 1b, , podemos imaginar que al evaluar un acquisition target tratan de identificar las economías de ámbito o sinergias entre la empresa target y el negocio existente de Cemex. En ese sentido, podrían evaluar por ejemplo, como a través de transferir conocimientos sobre producción y logística pueden mejorar los resultados de la compañía, una vez que es adquirir.
b.3) What is the meaning and importance of the ‘Risk return profile’ ? How does it relate to Corporate Strategy (10 points)
Siempre hay un trade off entre retorno y riesgo en las inversiones. En esta dimensión, lo que Cemex probablemente hace es analizar los retornos posibles de la target acquisition y los riesgos ( en términos financieros de volatilidad) que tiene esa inversión. Se puede comparar distintas alternativas de inversión como para elegir aquella de mayor retorno para un cierto nivel de riesgo.
Question 3.- (10 points)
The Coca Cola Company publishes the following statements in its web site:
“The world is changing all around us. To continue to thrive as a business over the next ten years and beyond, we must look ahead, understand the trends and forces that will shape our business in the future and move swiftly to prepare for what's to come. We must get ready for tomorrow today. That's what our 2020 Vision is all about. It creates a long-term destination for our business and provides us with a "Roadmap" for winning together with our bottling partners.
Our Mission
Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.
· To refresh the world...
· To inspire moments of optimism and happiness...
· To create value and make a difference.
Our Vision
Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.
· People: Be a great place to work where people are inspired to be the best they can be.
· Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs.
· Partners: Nurture a winning network of customers and suppliers; together we create mutual, enduring value.
· Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.
· Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
· Productivity: Be a highly effective, lean and fast-moving organization.”
In their article ‘Building Your Company’s Vision’, Collins and Porras describe the importance of a well defined Vision. They propose a framework for the Vision , which encompasses 4 parts: Purpose, Values, Vivid description of the Company’s Future and BHAG. In class, Matko assimilated the concept of “Purpose”, from that paper, to what most people call the ‘Mission’. Then, Matko suggested a framework for formulating the Mission of a company which would allow for a ‘well defined’ mission statement.
Please turn your attention to the Mission Statement for Coca Cola Inc. (the ‘Our Mission’ paragraphs only) Does the Coca Cola’s Mission Statement fulfill the requirements for a ‘well defined’ mission, if Matko’s framework is followed? (10 points)
Coca Cola Mission Statement.
Dijimos en clases que la misión determina la razón de existir de la empresa….como dicen Collins y Porras un propósito para la empresa. Para evitar que la misión sea un documento vago y que no guie la toma de decisiones, Matko sugirió que la Misión sea un resumen del modelo de negocios de la empresa y en ese sentido sugirió que en su construcción se responda el Who, What y How.
Analizando la misión de Coca Cola
Refresh the world….identifica el Who y el what….
· the world dice que es una compañía de alcance global…un who global
· refresh dice que se busca satisfacer la necesidad y deseos de refresco
El How tiene que ver con los otros dos puntos de la misión….por ejemplo generar optimismo, alegría y pasarlo bien con Coca Cola es un punto central en la misión y también es un punto central en el marketing de la empresa (en el apoyo a eventos deportivos y musicales en que la empresa pone sus presupuestos promocionales , que hacen que la gente este alegre y optimista) Generar valor y ser diferente dice que la compañía apela en su How a la ‘diferenciación’…es decir, dice que no compite por precio sino que por ser diferente….diferenciada.
De modo que es una Mision bien hecha. Eso lo complementan y aclaran con su Vision, que es una vivid description de lo que lacompañía quiere ser (esto de la visión no es parte de la respuesta requerida ya que no se pregunto).
Name………………………………………………..
Course: Leadership and Business Strategy , EAA 305a
First semester 2009
Second Mid Term Exam
Please write your name in all pages.You may answer in english or in spanish.
Question 1.- (20 Points)
At the beginning of 2001 Peach Computers competed exclusively in the computer industry and generated approximately 95% of its revenue from the sales of computers and computer related software and approximately 5% of Peach's revenues were generated from sales of other peripherals. Further, of these revenues 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas.
In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.
Write your answer with a letter in the space provided
1.a
In 2001, Peach Computers' diversification strategy was best characterized as
A.
related-linked diversification.
B.
dominant-business diversification.
C.
single-business diversification.
D.
related-constrained diversification.
Answer:
1.b
By 2003, Peach Computer's diversification strategy was best characterized as
A.
unrelated diversification.
B.
related-constrained diversification.
C.
related-linked diversification.
D.
dominant-business diversification.
Answer:
1.c
Which type of economies of scope is Peach Computers experiencing between its units?
A.
Share activities
B.
Core competencies
C.
Multipoint competition
D.
Tax advantages
Answer:
1.d.
If no other firm in the computer industry was using a diversification strategy similar to Peach Computers', this diversification strategy could be said to be
A.
rare and costly-to-duplicate.
B.
rare and less costly-to-duplicate.
C.
common but costly to duplicate.
D.
common and less costly-to-duplicate.
Answer:
1.e
If, when Peach Computers introduced its PeachPit in 2001, the company used its profits in the computer industry to subsidize its operations in the electronics industry and used this subsidy to sell the PeachPit for a price that was less than the cost of producing and selling the MP3 players, this would be an example of
A.
mutual forbearance.
B.
escalation of commitment.
C.
predatory pricing.
D.
multipoint competition.
Answer:
Question 2.- (20 points)
Please answer the following multiple choice questions. Write your answer with a letter in the space provided

2a.
In order for corporate diversification to be economically valuable
A.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
B.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
C.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
D.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
Answer: C
Page: 213
Difficulty: Moderate
Chapter Objective: 2
2b
Which of the following economies of scope is less costly-to-duplicate?
A.
Employee compensation
B.
Core competencies
C.
Multipoint competition
D.
Exploiting market power
Answer: A
Page: 233
Difficulty: Moderate
Chapter Objective: 6
2c.
Compared to two very risk businesses that have cash flows that are not highly correlated over time and that are operating separately, the risk of a diversified firm operating in those same two businesses simultaneously is
A.
somewhat higher.
B.
lower.
C.
the same.
D.
substantially higher.
Answer: B
Page: 225
Difficulty: Moderate
Chapter Objective: 3
2d.
Vertical integration is a type of
A.
business strategy.
B.
generic strategy.
C.
differentiation strategy.
D.
corporate strategy.
Answer: D
Page: 180
Difficulty: Moderate
Chapter Objective: 1
2e.
Which of the following international strategy options would be considered to be the least vertically integrated?
A.
Licensing
B.
Foreign direct investment
C.
Importing/exporting
D.
Joint ventures
Answer: C
Page: 201
Difficulty: Moderate
Chapter Objective: 7
Question 3.- (20 points)
The Coca Cola Company had global sales for US$31.7 billion dollars in their 2008 Fiscal year. Ebitda reached US$9.9 billion.Return on Assets reached 12% and Return on Equity 26%.
A short description of the Coca Cola Company resources and capabilities is the following:
f) Coca-Cola has a distinctive red can with a trademarked white wave image that goes around the can.
g) Coca-Cola has access to substantial working capital (cash).
h) Coca-Cola has talented marketing professionals.
i) Coca-Cola also has well established set of reporting structures, reward systems, communications systems, and IT systems.
j) Coca-Cola has the ability to put these various resources together in effective marketing campaigns.
3.a) What kind of resources and capabilities is Coca Cola endowed with? (5 points)
• resources are the tangible and intangible assets that a firm controls, which it can use to conceive of and implement its strategies
• capabilities are a subset of resources that enable a firm to take full advantage of other resources the firm controls
Four Types of Resources
• Financial—the money available to the firm from whatever source (debt, equity, retained earnings, etc.)
• Physical—machinery, factories, offices, raw materials, geographic location, technology
• Human—training, experience, individual intelligence, judgment, work ethic
• Organizational—reporting structures, reward systems, coordinating systems, relationships, etc.
Coca-Cola has a distinctive red can with a trademarked white wave image that goes around the can. These are physical resources.
Coca-Cola has access to substantial working capital (cash). This is a financial resource.
Coca-Cola has talented marketing professionals. These are individual human resources.
Coca-Cola also has well established set of reporting structures, reward systems, communications systems, and IT systems. These are organizational resources.
Coca-Cola has the ability to put these various resources together in an effective marketing campaign. This is a capability.
Thus we would correctly refer to Coca-Cola’s marketing capability as one of its resources right along with its other physical, capital, human, and organizational resources.
3.b) Apply the VRIO framework. Why is Coca Cola so profitable? (5 points)
The VRIO framework is the analysis ‘tool’ of the RBV. This framework is a way of examining resources to determine if a resource is likely to be a source of competitive advantage. Four criteria must be met if a resource is to lead to competitive advantage. These four criteria are represented by questions in the framework. The framework allows us to draw conclusions about competitive advantage based on answers to the four questions.
Four Questions
• Value – Does the resource enable the firm to exploit an opportunity or neutralize a threat? The evidence of a positive response to this question is usually that the resource somehow increases revenue or decreases cost.
• Rarity – Is the resource rare? Is the resource rare enough that there is still scarcity in the marketplace for this resource?
• Imitability – Is the resource costly to imitate? Specifically, is the resource so costly to imitate that no one would try to imitate it?
• Organization – Is the firm organized in such a way that the resource can be exploited?
The question of Value: The can and the trademarked white wave image are symbols that signal the Brand. Through many years of advertising, Coca Cola has built brand equity, a very strong customer preference around the world with high brand awareness and purchase intentions. This Brand image is very valuable in a low involvement category, where customers buy on impulse.
The question of Rarity: Coca Cola has a “secret” formula and enjoys scale and scope economies.
The question of Imitability: Because the brand is trademarked, it can not be imitated.
The question of organization: Coca Cola is a global company, with subsidiaries all over the world. It is well organized to exploit its resources.
3c) Is Coca Cola’s competitive advantagesustainable? Which are the most important threats the company faces? (10 points)
The threats Coca Cola faces in sustaining it’s competitive advantage, in what is commonly referred as Ghemawat’s framework, are:
Threats to value creation:
IMITATION: rivals may generally imitate positioning, but they can not imitate the branding because of the trademark. However, “private labels” are a threat particularly in the “low end” of the market, with customers who are price conscious. This threat could be characterized as “medium” strenght.
SUSTITUTION: this is probably the strongest threat….there are many substitutes, mineral water, fruit juices, energy drinks, power drinks, etc. as the market evolves. Coca Cola has responded entering these markets with products such as Dasani, nectar Andina, Powerade, etc.
Threats to rent capture
INNEFICIENCIES : with time organizations tend to increase their bureaucratic costs and become , in general, less cost conscious. This is a medium threat, which the company has to permanently battle to maintain its cost position.
HOLD UP: Both suppliers and buyers may gain negotiating power on the focal firm and extract rents away from it. In this case, there is a minor threat from suppliers…..all inputs are commodities:water, sugar, cans, flavors, etc. However, the threat from buyers is very big…..retail chains can use their power to negotiate big volume discounts and what is worse, launching their own private labels, also referred to as “private brands”. This private label brands are used as a negotiating tool by retailers.
This same analysis may be made with Porter’s five forces, which is almost identical to Ghemawat’s framework: substituton, new entrants, rivals, buyers and suppliers.
Question 4. (20 points)
4a) Semiconductors (also known as microchips) are the “mind” of modern computers, having replaced vacuum tubes several decades ago. Computer systems built with semiconductors require far less energy, are magnitudes time smaller and more reliable than such built with tubes. What kind of innovation were the semi conductors? (5 points)
From the class slides on Innovation:
· A disruptive technology or disruptive innovation is an innovation that improves a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.
· In contrast to "disruptive innovation", a "sustaining innovation” does not have an effect on existing markets.
· Sustaining innovations may be either "discontinuous“ (i.e. "revolutionary") or "continuous" (i.e. "evolutionary").
· Revolutionary innovations are not always disruptive. Although automobile was a revolutionary innovation, it is not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market remained intact until the debut of the lower priced Ford Model-T in the 1920s.
From the slide on revolutionary innovation :
Semiconductors
vacuum tubes
A revolutionary innovation often falsely quoted as a disruptive technology. Systems built up with semiconductors require far less energy, are magnitudes of size smaller and more reliable than such with tubes.
4b) In class we discussed the Jack Welch/ General Electric case.
Is Jack’s dictum: “Be # 1 or # 2 – fix it, sell it or close it” a strategy? Explain (5points)
It is not a Competitive Strategy, since it does not answer the three fundamental questions: Who, What and How?
It is a Corporate Strategy , since it answers the question: What businesses should we be in?
In the early ‘80s, when Welch formulated this strategy, planning grids ( remember BCG’s grid) were very popular and this is a variation of such a planning tool.
The economic logic behind being Nº 1 or Nº 2, relates to scale economies. If a firm is in such a position, it may be assumed it has more volume than its competitors, thus scale economies play its role.
We now know that there is a second alternative to scale in competitive advantages: differentiation, which does not require high volumes for value creation.
4c) What do you think of his notion of “stretch targets? (10 points)
The notion of “stretch goals or targets” inserts in the strategic planning process, described below:
(
Vision
Objectives
External
Analysis
Internal
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
The Strategic Management Process
)
The question is what objectives (goals) to pursue. Most companies build their budgets with incremental improvements in mind…..reducing costs a little, increasing market share a little, increasing profits a little.
Welch decided to challenge GE’s management to set goals which were very ambituous, beyond what “normally” could be achieved, i.e., increasing opertating profits from 8% of sales to 15% of sales.
Achieving stretch goals meant re thinking the mindset under which GE companies were operating: re engineering the companies ( redesigning processes), inventing new ways to create value to customers (i.e., increasing the service level to final customers) , etc.
The stretch goals were medium term goals and not built into yearly budgets, but planned on 3 to 5 years cycles. Most GE companies achieved extraordinary results as they rethought their operations.
There is a downside to stretch goals , however. If managers think these goals are not achievable, motivation may go down and what is worse, it may push people to un ethical behaviour to reach them.
Curso: Leadership and Business Strategy , EAA 305 A
First semester 2008
Segunda Prueba
Please write your name in all pages. You may answer in English or in Spanish..
Question 1. - True/False Questions (place an X on the left of the option that you consider correct). Two points each for right answers, no answer zero point, wrong answer minus 1 point.
1.
One of the central questions that all strategic managers must address, regardless of the industry they work in, is “What is our competition going to do next?”

True

False
2.
A "good strategy" does not necessarily have to create a competitive advantage.

True

False
3.
A resource can be a source of competitive advantage even if the resource is controlled by numerous firms.

True

False
4.
When firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it, this resource or capability is described as perfectly imitable.

True

False
5.
A process is said to be path dependent when imitating firms are not able to understand the relationship between the resources and capabilities controlled by a firm and that firm’s competitive advantage.

True

False
6.
Objectives are the specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.

True

False
7.
By conducting an internal analysis, a firm identifies the critical threats and opportunities in the industry's competitive environment.

True

False
8.
In general, a firm has a competitive advantage when it is able to create more economic value than rival firms.

True

False
Question 2.- Multiple Choice Questions (mark with an X the option that you consider correct) Two points each for right answers, no answer zero point, wrong answer minus 1 point)
1.
A firm's _________ is defined as its theory about how to gain competitive advantages.
A.
objectives
B.
mission
C.
vision
D.
strategy
2..
Shared activities that can provide the basis for operational economies of scope are quite common among related diversified firms, as well as firms following an unrelated diversification strategy.

True

False
3.
For an internal capital market to create value for a diversified firm, it must offer some efficiency advantages over an external capital market.

True

False
4.
Both shared activities and internal capital allocation are examples of economies of scope that havethe potential for generating positive returns for a firm's equity holders.

True

False
5.
A firm's ________ is its long-term purpose that defines both what a firm aspires to be in the long run and what it wants to avoid in the meantime.
A.
mission
B.
vision
C.
objective
D.
goal
6.
Which of the following statements regarding firm mission is accurate?
A.
While some firms have used their missions to develop strategies that create significant competitive advantages, firm missions can hurt a firm's performance as well.
B.
Virtually all firms have used missions to develop strategies that create significant competitive advantages, while very few firms have used missions that can hurt their performance.
C.
It is very rare for firms to be able to use their missions to develop strategies that create significant competitive advantages, and most firm missions actually hurt their performance.
D.
Missions tend to have very little impact on a firm's ability to create significant competitive advantages.
7.
________ are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
A.
Visions
B.
Missions
C.
Competitive Advantages
D.
Objectives
8.
In order for corporate diversification to be economically valuable
A.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
B.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
C.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
D.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
9.
_______________ helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage.
A.
Competitive analysis
B.
Internal analysis
C.
Comparative analysis
D.
External analysis
10.
___________ are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience and wisdom.
A.
Managerial competencies
B.
Core competencies
C.
Competitive advantages
D.
Core advantages
11.
When a firm is able to create more economic value than rival firms it is said to have a(n)
A.
comparative advantage.
B.
competitive advantage.
C.
strategic choice.
D.
economic advantage.
12.
Which of the following statements regarding competitive parity and competitive advantage is accurate?
A.
Some firms develop valuable, rare, and costly-to-imitate resource and capabilities in being efficient second movers-that is, imitating and improving on the product and technological innovations of other firms.
B.
Firms that benchmark their performance against the performance of successful competitors can expect to develop at least a temporary competitive advantage.
C.
Firms must be first movers to gain competitive advantages.
D.
Even if all a firm does is create value in the same way as its competitors, the firm can expect to earn at least a temporary competitive advantage.
LaserTech is a manufacturer of industrial lasers and has developed a new, patented, technology that allows their customers to manufacturer their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech’s executives believe that no other rivals have a similar technology, and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech’s system which includes processes that are protected by trade secrets making it difficult for rivals to understand the relationship between the company’s new technology and its competitive advantage.
13.
LaserTech’s new technology appears to be
A.
Valuable and rare but not costly to imitate.
B.
Valuable and either rare or costly to imitate.
C.
Valuable but neither rare nor costly to imitate.
D.
Valuable, rare and costly to imitate.
14.
LaserTech’s new technology is an example of
A.
Financial resources.
B.
Physical resources.
C.
Human resources.
D.
Organizational resources.
15.
The inability of customers to develop or acquire technology similar to that of LaserTech is an illustration of
A.
Resource immobility.
B.
Resource heterogeneity.
C.
Causal ambiguity.
D.
Path dependence.
Question 3.-
The Victorinox "Swiss Army Knife" is over 100 years old. This useful pocket Multi-Tool was legally registered on June 12, 1897. Over 34,000 of these pocket tools with the distinctive Swiss cross leave the factory in central Switzerland each day. Ninety per cent are for export to over 100 different countries and serve as ambassadors for Switzerland.
Karl Elsener, the company founder, wanted to create work in sparsely industrialized central Switzerland and counter the emigration spawned by unemployment. To go from hand-crafting to industrial production was at the time adventurous and required enormous determination. Today, this family business in Schwyz provides 950 jobs. After the soldier's knife, which every recruit receives upon entering the army, Karl Elsener developed a new, elegant and light weight pocket knife, with six practical tools. He called this new model the "Officers and Sports Knife".
After an unparalleled success story around the world, the Victorinox "Swiss Army Knife" is even orbiting the earth as part of the standard equipment of the Space Shuttle Crew. The knife has also been successfully proven on expeditions: in the arctic ice of the North Pole; on the highest peak on earth, Mount Everest; in the tropical rain forests of the Amazon, and elsewhere. Time and again, it has been a life saver in situations of extreme danger and great need. The New York Museum of Modern Art and the State Museum for Applied Art in Munich have selected it for their collection of excellence in design, and, since Lyndon B. Johnson, US presidents present guests with Victorinox pocket knives. Today, the "Officers' Knife" is available in over 100 different models. Each knife must undergo seamless quality controls before being released for sale.
This century old heritage has been extended to Cutlery and the Swiss Army Watches, which reflect the ingenious design and outstanding durability Victorinox, has come to stand for over the years. Uncompromising craftsmanship makes these watches worthy to carry the "cross and shield" emblem that symbolizes the legend of Victorinox and the Swiss Army Brand. Pictures of some of these products are shown below.
The CEO of the company recently stated that he hopes there will come a time when you can just show the cross and the shield and people will know. Thus, they are attempting to develop complete brand loyalty and brand recognition.

a) What is Victorinox generic competitive strategy? Why? (5 points)
b) What resources and capabilities is Victorinox’s strategy based upon? (10 points)
c) Identify what kind of corporate strategy is Victorinox pursuing. (5 points)
Question 4.-
“Imagine losing ten percent of your business overnight.” This is exactly what happened to Victorinox, the manufacturer of Swiss Army Knives, the day after the tragic events of 9/11 occurred.
As with many other companies, Victorinox executives had to decide how torespond to the business environment changes resulting to the 9/11 events. Airline carry-on restrictions and the fact that a good number of these knives were sold at airports, were two major factors presenting threats to Victorinox business. Echoing the dogged determination of Victorinox’s founder, executives selected two courses of action to restore business. These actions included expanding their product line and identifying alternative selling locations.
The executives were discussing expanding the product line to include travel gear and apparel, with advanced technologies, to be manufactured in China, but sold under the Swiss Army brand. Prototypes of these new products are shown below.
They planned to pursue new retail locations for selling their products with stores in shopping centers around the world owned and managed by the company, which would sell exclusively Victorinox products. Up to now, the company sold their traditional products to independent resellers who were licensed to sell the products, but who could sell competitive products. The Marketing Manager for Victorinox was the most enthusiastic supporter in the company of the idea of having Swiss Army stores. In a company meeting she said: “Other companies which sell apparel and/or accessories such as Hermes, Gucci, Burberry and Swatch are doing it .”
a) If Victorinox goes ahead with the idea of expanding their product line (to travel gear and apparel) and establishing alternative selling locations, will it change its corporate strategy? (5 points).
b) Identify advantages and disadvantages (two each) of expanding the Victorinox business to travel gear and apparel. ( 5 points)
Curso: Leadership and Business Strategy , EAA 305 A
First semester 2008
Segunda Prueba
Please write your name in all pages. You may answer in English or in Spanish..
Question 1. - True/False Questions (place an X on the left of the option that you consider correct). Two points each for right answers, no answer zero point, wrong answer minus 1 point. The answers , indicating a reference in the text book and an indication of difficulty, follow:
1.
One of the central questions that all strategic managers must address, regardless of the industry they work in, is “What is our competition going to do next?”
x
True

False
Answer: True
Page: 3
Difficulty: Easy

2.
A "good strategy" does not necessarily have to create a competitive advantage.

True
x
False
Answer: False
Page: 4
Difficulty: Moderate

3.
A resource can be a source of competitive advantage even if the resource is controlled by numerous firms.

True

False
Answer: False
Page: 84
Difficulty: Hard

4.
When firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it, this resource or capability is described as perfectly imitable.

True

False
Answer: False
Page: 85
Difficulty: Hard

5.
A process is said to be path dependent when imitating firms are not able to understand the relationship between the resources and capabilities controlled by a firm and that firm’s competitive advantage.

True

False
Answer: False
Page: 87
Difficulty: Hard

6.
Objectives are the specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.

True

False
Answer: True
Page: 9
Difficulty: Easy

7.
By conducting an internal analysis, a firm identifies the critical threats and opportunities in the industry's competitive environment.

True

False
Answer: False
Page: 9
Difficulty: Moderate

8.
In general, a firm has a competitive advantage when it is able to create more economic value than rival firms.

True

False
Answer: True
Page: 11
Difficulty: Easy

Question 2.- Multiple Choice Questions (mark with an X the option that you consider correct) Two points each for right answers, no answer zero point, wrong answer minus 1 point)
1.
A firm's _________ is defined as its theory about how to gain competitive advantages.
A.
objectives
B.
mission
C.
vision
D.
strategy
Answer: D
Page: 5
Difficulty: Easy

2.
Shared activities that can provide the basis for operational economies of scope are quite common among related diversified firms, as well as firms following an unrelated diversification strategy.

True

False
Answer: False
Page: 216
Difficulty: Moderate

3.
For an internal capital market to create value for a diversified firm, it must offer some efficiency advantages over an external capital market.

True

False
Answer: True
Page: 223
Difficulty: Moderate

4.
Both shared activities and internal capital allocation are examples of economies of scope that have the potential for generating positive returns for a firm's equity holders.

True

False
Answer: True
Page: 230
Difficulty: Moderate

5.
A firm's ________ is its long-term purpose that defines both what a firm aspires to be in the long run and what it wants to avoid in the meantime.
A.
mission
B.
vision
C.
objective
D.
goal
Answer: A
Page: 6
Difficulty: Easy

6.
Which of the following statements regarding firm mission is accurate?
A.
While dome firms have used their missions to develop strategies that create significant competitive advantages, firm missions can hurt a firm's performance as well.
B.
Virtually all firms have used missions to develop strategies that create significant competitive advantages, while very few firms have used missions that can hurt their performance.
C.
It is very rare for firms to be able to use their missions to develop strategies that create significant competitive advantages, and most firm missions actually hurt their performance.
D.
Missions tend to have very little impact on a firm's ability to create significant competitive advantages.
Answer: A
Page: 8
Difficulty: Moderate

7.
________ are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
A.
Visions
B.
Missions
C.
Competitive Advantages
D.
Objectives
Answer: D
Page: 9
Difficulty: Easy

8.
In order for corporate diversification to be economically valuable
A.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
B.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
C.
there must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
D.
there must not be any valuable economy of scope among the multiple businesses in which a firm is operating and it must be more costly for managers in a firm to realize these economies of scope than for outside equity holders on their own.
Answer: C
Page: 213
Difficulty: Moderate

9.
_______________ helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage.
A.
Competitive analysis
B.
Internal analysis
C.
Comparative analysis
D.
External analysis
Answer: D
Page: 9
Difficulty: Moderate

10.
___________ are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience and wisdom.
A.
Managerial competencies
B.
Core competencies
C.
Competitive advantages
D.
Core advantages
Answer: B
Page: 218
Difficulty: Moderate

11.
When a firm is able to create more economicvalue than rival firms it is said to have a(n)
A.
comparative advantage.
B.
competitive advantage.
C.
strategic choice.
D.
economic advantage.
Answer: B
Page: 11
Difficulty: Moderate

12.
Which of the following statements regarding competitive parity and competitive advantage is accurate?
A.
Some firms develop valuable, rare, and costly-to-imitate resource and capabilities in being efficient second movers-that is, imitating and improving on the product and technological innovations of other firms.
B.
Firms that benchmark their performance against the performance of successful competitors can expect to develop at least a temporary competitive advantage.
C.
Firms must be first movers to gain competitive advantages.
D.
Even if all a firm does is create value in the same way as its competitors, the firm can expect to earn at least a temporary competitive advantage.
Answer: A
Page: 102
Difficulty: Hard

LaserTech is a manufacturer of industrial lasers and has developed a new, patented, technology that allows their customers to manufacturer their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech’s executives believe that no other rivals have a similar technology, and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech’s system which includes processes that are protected by trade secrets making it difficult for rivals to understand the relationship between the company’s new technology and its competitive advantage.
13.
LaserTech’s new technology appears to be
A.
valuable and rare but not costly to imitate.
B.
valuable and either rare or costly to imitate.
C.
valuable but neither rare nor costly to imitate.
D.
valuable, rare and costly to imitate.
Answer: D
Page: 93
Difficulty: Moderate

14.
LaserTech’s new technology is an example of
A.
financial resources.
B.
physical resources.
C.
human resources.
D.
organizational resources.
Answer: B
Page: 74
Difficulty: Easy

15.
The inability of customers to develop or acquire technology similar to that of LaserTech is an illustration of
A.
resource immobility.
B.
resource heterogeneity.
C.
causal ambiguity.
D.
path dependence.
Answer: A
Page: 75
Difficulty: Hard

Question 3.-
The Victorinox "Swiss Army Knife" is over 100 years old. This useful pocket Multi-Tool was legally registered on June 12, 1897. Over 34,000 of these pocket tools with the distinctive Swiss cross leave the factory in central Switzerland each day. Ninety per cent are for export to over 100 different countries and serve as ambassadors for Switzerland.
Karl Elsener, the company founder, wanted to create work in sparsely industrialized central Switzerland and counter the emigration spawned by unemployment. To go from hand-crafting to industrial production was at the time adventurous and required enormous determination. Today, this family business in Schwyz provides 950 jobs. After the soldier's knife, which every recruit receives upon entering the army, Karl Elsener developed a new, elegant and light weight pocket knife, with six practical tools. He called this new model the "Officers and Sports Knife".
After an unparalleled success story around the world, the Victorinox "Swiss Army Knife" is even orbiting the earth as part of the standard equipment of the Space Shuttle Crew. The knife has also been successfully proven on expeditions: in the arctic ice of the North Pole; on the highest peak on earth, Mount Everest; in the tropical rain forests of the Amazon, and elsewhere. Time and again, it has been a life saver in situations of extreme danger and great need. The New York Museum of Modern Art and the State Museum for Applied Art in Munich have selected it for their collection of excellence in design, and, since Lyndon B. Johnson, US presidents present guests with Victorinox pocket knives. Today, the "Officers' Knife" is available in over 100 different models. Each knife must undergo seamless quality controls before being released for sale.
This century old heritage has been extended to Cutlery and the Swiss Army Watches, which reflect the ingenious design and outstanding durability Victorinox, has come to stand for over the years. Uncompromising craftsmanship makes these watches worthy to carry the "cross and shield" emblem that symbolizes the legend of Victorinox and the Swiss Army Brand. Pictures of some of these products are shown below.
The CEO of the company recently stated that he hopes there will come a time when you can just show the cross and the shield and people will know. Thus, they are attempting to develop complete brand loyalty and brand recognition.

d) What is Victorinox generic competitive strategy? Why? (5 points)
Differentiation.
Following Porter’s model of generic competitive strategies the Victorinox case is a good example of a competitive advantage built around providing value to the customer on a basis of increasing the willingness to pay, through ingenious design and outstanding durability . Victorinox has come to stand for over the years. Uncompromising craftsmanship makes these watches worthy to carry the "cross and shield" emblem that symbolizes the legend of Victorinox and the Swiss Army Brand.
e) What resources and capabilities is Victorinox’s strategy based upon? (10 points)
1) The strength of the brand. “They are attempting to develop complete brand loyalty and brand recognition”. The country image of Switzerland is also a factor in their brand reputation (the "cross and shield" emblem).
2) Patents:. “This useful pocket Multi-Tool was legally registered on June 12, 1897”
3) Factory: “Over 34,000 of these pocket tools with the distinctive Swiss cross leave the factory in central Switzerland each day”
4) High Quality: “Each knife must undergo seamless quality controls before being released for sale”; “Uncompromising craftsmanship”, “outstanding durability”
5) Excellence in design. “ingenious design”
f) Identify what kind of corporate strategy is Victorinox pursuing. (5 points)
Related Diversification
From Barney, Chapter 7.-
“A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously. If all the businesses in which a firm operates share a significant number of inputs, production technologies, distribution channels, similar customers, and so forth, this corporate diversification strategy is called related diversification.”
Question 4.-
“Imagine losing ten percent of your business overnight.” This is exactly what happened to Victorinox, the manufacturer of Swiss Army Knives, the day after the tragic events of 9/11 occurred.
As with many other companies, Victorinox executives had to decide how to respond to the business environment changes resulting to the 9/11 events. Airline carry-on restrictions and the fact that a good number of these knives were sold at airports, were two major factors presenting threats to Victorinox business. Echoing the dogged determination of Victorinox’s founder, executives selected two courses of action to restore business. These actions included expanding their product line and identifying alternative selling locations.
The executives were discussing expanding the product line to include travel gear and apparel, with advanced technologies, to be manufactured in China, but sold under the Swiss Army brand. Prototypes of these new products are shown below.
They planned to pursue new retail locations for selling their products with stores in shopping centers around the world owned and managed by the company, which would sell exclusively Victorinox products. Up to now, the company sold their traditional products to independent resellers who were licensed to sell the products, but who could sell competitive products. The Marketing Manager forVictorinox was the most enthusiastic supporter in the company of the idea of having Swiss Army stores. In a company meeting she said: “Other companies which sell apparel and/or accessories such as Hermes, Gucci, Burberry and Swatch are doing it .”
c) If Victorinox goes ahead with the idea of expanding their product line (to travel gear and apparel) and establishing alternative selling locations, will it change its corporate strategy? (5 points).
The strategy will become an unrelated diversification strategy. From Barney: “Firms such as General Electric that generate less than 70% of their revenues from a single product market and whose businesses share few, if any, common attributes, are said to be pursuing unrelated corporate diversification”.
They will continue to share the same brand name, but except for it, they are changing their customer base (i.e. women apparel), operations (Made in China), will be integrating vertically, operating stores, etc.
d) Identify advantages and disadvantages (two each) of expanding the Victorinox business to travel gear and apparel. ( 5 points)
Advantages:
1) Potential growth in profits, coming from more sales
2) Economies of scope in using the brand name, management talent, etc.,. The brand will have more exposure.
Disadvantages
1) it is questionable whether the brand name will transfer its strength to the new business. It is possible that the brand will be hurt.
2) Will the products be manufactured with “Uncompromising craftsmanship”? Will the products have “outstanding durability”. These are critical resources which generate competitive advantages for the company. If these conditions are not met, the brand will be seriously damaged..
e) Is the idea of expanding distribution through a network of stores owned and managed by Victorinox consistent with the Vision of the company? (10 points)
Vision is a vivid description of the company in the future which establishes the route the company wants to pursue.
There are many questions about this idea.
Victorinox would be changing substantially its strategy, if it moves away from their “heritage” products, Swiss made, going into these new businesses. Their business model and value chain will be significantly changed. The risks are high that the changes in the strategy may damage the heritage value of the brand.
The opening of stores is even more complicated. They will start operating stores. Do they have the capabilities to do it profitably? Are there any economies of scope in doing it? The fact that other companies are doing it is not a good reason to do it.
Hence, it does not seem consistent with their heritage nor with the vision they had up to now.
Now, management may change the vision, if the circumstances (internal and external analysis) give merit to the idea. I (Matko) personally think these are bad ideas.
Pontificia Universidad Católica de Chile
Escuela de Administración
Course: Leadership and Business Strategy , EAA 305a, section 1. 80 minutes
First semester 2010 2nd. Mid Term Exam
Please write your name in all pages. You may answer in English or in Spanish. This is not an “open book” exam.
There are 9 questions in this exam, for 90 points in total…everybody who gets 70 points or more will get a “7” and the grading scale will be built proportionally from 70 points down, so you will need 40 points to get a “4”. As always, how many questions you answer is your decision.
Question Nº 1.- (10 points)
LaserTech is a manufacturer of industrial lasers and has developed a new, patented, technology that allows their customers to manufacturer their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech’s executives believe that no other competitors have a similar technology, and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech’s system, which includes processes that are protected by secrets, making it difficult for rivals to understand the relationship between the company’s new technology and its competitive advantage.
In the following multiple choice questions circle the letter in front of the correct answer:

LaserTech’s new technology appears to be
A.
valuable and rare but not costly to imitate.
B.
valuable and either rare or costly to imitate.
C.
valuable but neither rare nor costly to imitate.
D.
valuable, rare and costly to imitate.

If one of LaserTech’s rivals were to decide to “divest” (sell) its industrial laser manufacturing business in response to LaserTech’s new technology, this would be an example of
A.
competition dynamics.
B.
tacit collusion.
C.
a sustainable core competence.
D.
competitive parity.

If LaserTech’s new technological development was due to investments in research and development the company made over the past twenty years, this would be an example of
A.
social complexity.
B.
tacit collusion.
C.
path dependence.
D.
causal ambiguity.

LaserTech’s new technology is an example of
A.
financial resources.
B.
physical resources.
C.
human resources.
D.
organizational resources.

The inability of competitors to develop or acquire technology similar to that of LaserTech is an illustration of
A.
resource immobility.
B.
resource heterogeneity.
C.
causal ambiguity.
D.
path dependence.
Question 2.- (10 points)
A recent survey published in the McKinsey Quarterly Journal [footnoteRef:1] reported on the effectiveness of different incentives, both financial and non financial. The survey reports the answers to the questions: which incentives are more effective? And, which are used in your company? [1: June 2009 Mc Kinsey Global Survey of 1047 executives , managers and employees from a range of sectors.
]
The results were the following:

Effectiveness ,
% of respondents
Frequent use, % of respondents

answering "extremely" or "very effective"
answering "always" or "most of the time"
Financial incentives

Performance based cash bonus
60%
68%
Increase in base pay
52%
61%
Stock or stock options
35%
24%
Nonfinancial Incentives

Praise and commendation
67%
63%
by immediate manager

Pontificia Universidad Católica de Chile
Escuela de Administración
Course: Leadership and Business Strategy , EAA 305a, section 1. 80 minutes
First semester 2010 2nd. Mid Term Exam
Please write your name in all pages. You may answer in English or in Spanish. This is not an “open book” exam.
There are 9 questions in this exam, for 90 points in total…everybody who gets 70 points or more will get a “7” and the grading scale will be built proportionally from 70 points down, so you will need 40 points to get a “4”. As always, how many questions you answer is your decision.
Question Nº 1.- (10 points)
LaserTech is a manufacturer of industrial lasers and has developed a new, patented, technology that allows their customers to manufacturer their products more precisely with a higher level of consistency and at a lower cost than they could previously. LaserTech’s executives believe that no other competitors have a similar technology, and that it would be very difficult for rivals to copy this technology since the benefits of the new technology can only be realized within LaserTech’s system, which includes processes that are protected by secrets, making it difficult for rivals to understand the relationship between the company’s new technology and its competitive advantage.
In the following multiple choice questions circle the letter in front of the correct answer:

LaserTech’s new technology is an example of
A.
financial resources.
B.
physical resources.
C.
human resources.
D.
organizational resources.

The inability of competitors to develop or acquire technology similar to that of LaserTech is an illustration of
A.
resource immobility.
B.
resource heterogeneity.
C.
causal ambiguity.
D.
path dependence.
81.
LaserTech’s new technology appears to be
A.
valuable and rare but not costly to imitate.
B.
valuable and either rare or costly to imitate.
C.
valuable but neither rare nor costly to imitate.
D.
valuable, rare and costly to imitate.
Answer: D
Page: 93
Difficulty: Moderate
Chapter Objective: 5
82.
If one of LaserTech’s rivals were to decide to divest its industrial laser manufacturing business in response to LaserTech’s new technology this would be an example of
A.
competitive dynamics.
B.
tacit collusion.
C.
a sustainable distinctive competence.
D.
competitive parity.
Answer: A
Page: 96
Difficulty: Moderate
Chapter Objective: 7
83.
If LaserTech’s new technological development was due to proprietary investments the company made when it was first founded twenty years ago this would be an example of
A.
social complexity.
B.
tacit collusion.
C.
path dependence.
D.
causal ambiguity.
Answer: C
Page: 87
Difficulty: Moderate
Chapter Objective: 7
84.
LaserTech’s new technology is an example of
A.
financial resources.
B.
physical resources.
C.
human resources.
D.
organizational resources.
Answer: B
Page: 74
Difficulty: Easy
Chapter Objective: 2
85.
The inability of customers to develop or acquire technology similar to that of LaserTech is an illustration of
A.
resource immobility.
B.
resource heterogeneity.
C.
causal ambiguity.
D.
path dependence.
Answer: A
Page: 75
Difficulty: Hard
Chapter Objective: 1
Question 2.- (10 points)
A recent survey published in the McKinsey Quarterly Journal [footnoteRef:2] reported on the effectiveness of different incentives, both financial and non financial. The survey reports the answers to the questions: which incentives are more effective? and which are used in your company? The results were the following: [2: June 2009 Mc Kinsey Global Survey of 1047 executives , managers and employees from a range of sectors.
]

Effectiveness ,
% of respondents
Frequent use, % of respondents

answering "extremely" or "very effective"
answering "always" or "most of the time"
Financial incentives

Performance based cash bonus
60%
68%
Increase inbase pay
52%
61%
Stock or stock options
35%
24%
Nonfinancial Incentives

Praise and commendation
67%
63%
by immediate manager

Attention from Leaders
63%
41%
Opportunities to lead projects/task forces
62%
54%
The incentive method which appears as the most effective is “Praise and commendation by immediate manager” among non financial incentives and “Performance based cash bonus” among financial incentives. On the other extreme,, as less effective, are “Opportunities to lead projects” and “Stock options” respectively.
Briefly, provide an hypothesis which explains these results based on our class discussions and readings for the course.
This survey results are consistent with Herzberg’s motivation theory…..motivators are related to achievement and recognition.
‘Praise and commendation by immediate managers’ is a recognition “factor” and it may be assumed comes after achievement.
Stock options, would be effective for CEO´s and other top managers, who are evaluated based on the performance of the stock. For most “ rank and file” managers, who do not have an impact on the company’s stock performance , stock options do not relate to their individual achievements; hence, stock options do not work as a motivating factor.
One cautionary word, though, before you discard stock options for the ‘rank and file’……stock options are an incentive for people to continue working in the company….if you have stock options , you will be less prone to move to another company. This last comment is not part of the answer I expected.
Question 3.- (10 points)
BIC, the Global Company, produces well known products such as disposable razors, cigarette lighters, and pens. What kind of diversification is this? What are the economies of scope that BIC exploits in the value chains of the different businesses in the portfolio? If you need to make assumptions to answer this question, go ahead. (10 points)
Related diversification. Why? BIC gets synergies, economies of scope, in the value chains of the different business in which the company is in. The company shares resources and capabilities, core competences, in the three businesses.
Consider , for instance, the synergies in manufacturing….all three businesses use molded plastics….in distribution, the three businesses share the same distribution channels…and then , the brand….the different products are all disposable products….the brand BIC connotes quality at affordable prices.
Question 4.- (10 points)
Cash left after funding all positive net present value projects in a company, represent “free cash flow” -- cash without any encumbrance. For example, Microsoft was recently sitting on a cash horde in excess of $45 billion – cash that the company had no use for!
Firms, rightly or wrongly, generally embark on a diversification spree when confronted with free cash flow. What would be a “sound” logic (“correct logic” if you wish to use a different word) , which could be used to guide the strategic decisions of a company using its free cash flow to do acquisitions? Name at least two elements in that logic.
Two possibilities:
1. That the company may extend its core competences to the new business
2. That the company has synergies with the new business, that is, there are economies of scope between both value chains in their system of activities.
Question 5.- (10 points)
The book publishing industry traditionally was characterized by a long value chain. The publisher contracted with authors to write books and entered into agreements with commercial printers (such as R.R. Donnelley and Quebecor) to print the books. Books were distributed to bookstores through wholesalers such as Ingram and Baker & Taylor. The major problem with this value chain was the amount of unsold books returned by booksellers. Publishers faced return rates as high as 30 percent, which added significantly to their costs. Seeing this inefficiency as an opening, Amazon changed the value chain. By going directly to publishers, Amazon was able to lower costs by cutting out wholesalers. More importantly, they placed orders with publishers after customers ordered from their website. This allowed Amazon to reduce drastically the returns to publishers (from 30% to 3%) and use this to bargain for better prices from them. What kind of corporate strategy is Amazon following? Explain. (10 points)
Down stream vertical integration. By going direct to publishers and by ordering to fill customer orders, Amazon reduced transaction costs (book returns) and captured wholesalers margins.
Question 6.- (10 points)

Juan Perez, a close friend, calls you and asks to borrow $10,000 so the he can open a pizza restaurant in his hometown. He acknowledges that there is a high degree of rivalry in this market, that the cost of entry is low, and that there are numerous substitutes for pizza, but he believes that his pizza restaurant will have some sustained competitive advantages. For example, he is going to have an Italian chef, a variety of imported beers, and a late-night delivery service. Will you lend him the money? Why or why not?
NO. The pizza business is a very competitive business , there are many competitors like Domino’s, Pizza Hut , Telepizza, etc. None of the distinctive features of the new business passes the VRIO test. In other words, , the competitive advantage , although valuable, is not Rare and it is easy to imitate. Whether it is well organized or not is difficult to asses from the information given.
Question 7.- (10 points)
Explain the concept behind “disruptive innovations”. Provide an example.
· A disruptive technology or disruptive innovation is an innovation that improves a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.
· Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations.
· A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.
From the class slides:
Question 8.- (20 points)
The Coca Cola Company (KO) licenses one exclusive bottler in each territory the company covers, to manufacture and distribute it’s soft drinks. Coca Cola sells the “concentrate” to the bottler , which in turn adds water, gas and sugar, putting the liquid in bottles, and then ships the product to the retailers who buy the products.
Retailers are very different in size (think Jumbo vs. the cafeteria in our school) and Coca Cola requires their bottlers to guarantee distribution, in fact they expect their bottlers to provide close to 100% coverage of the trade.
In Chile , Coca Cola Chile SA , a fully owned subsidiary of the Coca Cola Co. , has a licensing agreement with Embotelladora Andina, by which Andina has an exclusive contract to manufacture and sell KO products in the Región Metropolitana. That is, other Coca Cola bottlers, like Embonor and Embotelladora Polar, can not compete with Andina , selling Coke, Fanta and Sprite in the R.M. Likewise, Andina can not sell in Embonor’s or Polar’s territories.
c) Why doesn’t Coca Cola do forward integration and take control (“own”) of the bottling operations?(10 points)
Because the economic returns of bottling are much lower than the returns of selling the concentrate. They would have to “tie” a lot of capital in the business. Additionally, Coca Cola does not have core competences in logistics….their strengths are in marketing.

d) If competition is so effective in creating efficient markets, suggest an hypothesis for the reason that Coca Cola does exclusive distribution contracts with their bottlers. One could think that having competition among Andina, Embonor and Polar in Santiago, distributioncoverage would be higher and prices to consumers, lower. (10 points)
In order to get better distribution. Given the fact that Coca Cola expects to have a very wide distribution of its products, which implies reaching small shops as well as large mass merchandisers (i.e. Jumbo) , in effect what they do is establish a monopoly for their bottlers and establish distribution objectives for them.
By using this system, small shops are subsidized by the bottlers using the margins they make in selling to the mass merchandisers. So, they force the bottlers to have cross subsidies. They make a lot of money shipping to Jumbo and probably they loose money selling to small shops.
If they allowed competition in a territory, bottlers would lower prices to mass merchandisers to be able to get their business and would sell at very high prices to small shops….in effect, reducing coverage of small shops ( many would not be willing to buy at high prices.)
14
Nucor Corporation
Valuation Analysis of Thin-Slab Caster Mill
Change the Red Numbers Only:
Key Assumptions in valuation of mill:
Operating rate after 199285%
Price per ton in 1989$325
Price inflation per year after 19890%
Cost inflation per year after 19890%
Weighted average cost of capital10%
Salvage value of mill in 2000$0
Valuation Analysis of Mill
19871988198919901991199219931994199519961997199819992000
Tons sold (Thousands)0050400650850850850850850850850850850
Price per ton00325325325325325325325325325325325325
Cash cost per ton00250250250250250250250250250250250250
All numbers below are in $Millions
Revenues0016,3130,0211,3276,3276,3276,3276,3276,3276,3276,3276,3276,3
Cash costs0012,5100,0162,5212,5212,5212,5212,5212,5212,5212,5212,5212,5
Depreciation0022,522,522,522,522,522,522,522,522,522,522,522,5
Operating earnings00-18,87,526,341,341,341,341,341,341,341,341,341,3
Profit sharing00-1,90,82,64,14,14,14,14,14,14,14,14,1
Start-up costs0015150000000000
Pre-tax income00-31,9-8,323,637,137,137,137,137,137,137,137,137,1
Tax00-10,8-2,88,012,612,612,612,612,612,612,612,612,6
EBIAT00-21,0-5,415,624,524,524,524,524,524,524,524,524,5
Depreciation0022,522,522,522,522,522,522,522,522,522,522,522,5
Cash flow ops001,517,138,147,047,047,047,047,047,047,047,047,0
Cash flow ops001,517,138,147,047,047,047,047,047,047,047,047,0
Invest NWC00-1,6-11,4-8,1-6,50,00,00,00,00,00,00,027,6
CAPEX-10-140-13000000000000
Salvage Value00000000000000
Cash flow to Capital-10-140-130,25,730,040,547,047,047,047,047,047,047,074,6
Net Present Value:-28,42
PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE
ESCUELA DE ADMINISTRACIÓN

PONTIFICIA UNIVERSIDAD CATÓLICA DE CHILE
ESCUELA DE ADMINISTRACIÓN

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