solutions manual for Strategic Management and Business Policy Globalization, Innovation and Sustaina

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Case 1 The Wallace Group, Inc. I.

CASE ABSTRACT Harold Wallace, founder, serves as Chairman and President of the Wallace Group. He owns 45 percent of the outstanding stock. The company consists of three operating groups: Electronics, Plastics, and Chemicals, which generate sales of $70 million. Mr. Wallace continues direct operational control over the Electronics Group. Several years ago, Wallace and the Board embarked on a strategy of diversification into plastics and chemicals in order to decrease the company’s dependence on defenserelated business. Presently, the morale within The Wallace Group has deteriorated to the point where some of the employee stockholders made an attempt to force Wallace’s resignation. As a result of this crisis, Wallace has hired Frances Rampar, a management consultant, to conduct a management survey into the problems facing The Wallace Group. Her task is to develop a series of priorities for Wallace’s consideration. Decision Date: No Date

II.

Sales: Net Income:

$70,000,000 $ 1,760,000

CASE ISSUES AND SUBJECTS Corporate Governance Diversification Stages of Corporate Development Vertical Integration Transfer Pricing Sub optimization

Morale and Culture Organizational Structure Top Management Responsibilities Modes of Strategy Formulation Distinctive Competence Entrepreneurship

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (See Figure 1.5 on pages 20 and 21)

Review MBO & Mission

2

3

4

5A

5B

6

7

8

X

O

O

X

O

O

X

X

O

X

O=Emphasized in Case IV. CASE OBJECTIVES

Strategic Alternatives

Strategic Factors

1B

Strategic Posture

1A

Performance

Internal Factors

Evaluation & Control

External Factors

Strategy Implementation

Corporate Governance

Strategy Formulation

X=Covered in Case


Case 1 The Wallace Group 1. To acquaint the students with a CEO’s management of a company that leads to conflict and power struggles among managers. To deal with an issue in corporate governance: Why hasn’t the board of directors become involved in this issue? 2. To have the student act as a consultant. As such, the student should develop a list of the most important problem(s) facing The Wallace Group, and specific action plans to deal with each specific problem. 3. To discuss how to convey potentially negative information to the person who hired you, especially if that person is the principal cause of this negative information. 4. To review the corporation diversification plan from an area of expertise (electronics) into areas (plastics and chemicals), where it has no distinctive competence. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. Dr. Laurence J. Stybel, the case author, suggests two possible ways of handling this case. A. The first option involves students individually formulating a response to the following questions: •

What is the most important problem facing The Wallace Group?

Develop a specific action plan to deal with these problems.

This option typically involves one and a half to two hours for class discussion. B. The second option would be to bring in a guest who would take the role of Harold Wallace. A retired president would be ideal for this kind of exercise. Under this format, students are divided into consulting teams and are given the following instructions: •

Attached is some information about The Wallace Group, Inc. This information includes data regarding corporate operations and operating problems, as perceived by various managers of the company.

Your consulting team should review this material. The team will then meet to analyze critical issues facing The Wallace Group and to identify solutions that The Wallace Group management could either take alone or with consulting assistance from your firm.

On (date) your team will have an opportunity to meet with Mr. Harold Wallace to discuss your diagnosis and action plans. These plans should be as specific as possible, as they may lead to a consulting assignment for your group. In calculating costs associated with your participation in the plan, you propose, assume a professional fee of $100 per day plus out-of-pocket expenses for food, travel, hotel, graphics, etc.

Each team will present its findings to Mr. Wallace separately. 1-2 © 2024 Pearson Education, Ltd.


Case 1 The Wallace Group You will have thirty minutes for the presentation, plus fifteen minutes for Mr. Wallace to question the team. At the conclusion of the presentations, Mr. Wallace will determine which team, if any, would be awarded the consulting contract. In addition to the substantive learning objectives discussed earlier, the second option would achieve the following additional objectives: 1. To have students learn to develop formal oral presentations, 2. To determine a proper approach in conveying potentially negatively charged information to someone perceived as a superior, and 3. To cost out a consulting project based on specific action plans developed by students. It is most effective to go through this option in one evening lasting three to four hours, rather than to space it over two to three classes. Special note from the case author Regardless of the option selected, the key element of this case is that the acquisition strategy of The Wallace Group has been disastrous in producing the following problems: A. The acquisition strategy has moved The Wallace Group away from its area of distinctive competence in electronics into areas where it does not have distinctive competence. In a small firm such as The Wallace Group, this has resulted in a tendency to not effectively utilize scarce technical personnel. It also contributes to the lack of morale on the part of employees because the firm does not have a clear mission. B. The acquisition strategy has locked the electronics group into using the plastics group as its major supplier, thus increasing costs for one group and making them less competitive. Presumably, the Plastics Group is also locked into using the Chemicals Group and is faced with a similar situation. C. A complex MIS apparatus has been constructed by central office to collect data from three very different operational groups. In addition, the central office appears “staff heavy” for such a small firm. This analysis is based on an examination of the organization chart. D. Problems resulting from being heavily dependent on defense-related contracts have not been solved. Mr. Wallace was once heard to have remarked, “We’ll get organized tomorrow. But we’ve got to deal with today’s needs today.” This all too common approach to management must be challenged by the students. This company desperately needs an organized approach to strategic planning which involves both the commitment of Mr. Wallace and the involvement of key employees within the company. 1-3 © 2024 Pearson Education, Ltd.


Case 1 The Wallace Group Designing such a process would not be easy. But the case does seem to indicate that this is the most pressing need faced by The Wallace Group. 1. We have used it as a written paper. The students find the case somewhat difficult to handle because of Mr. Wallace’s direct involvement in the company’s problems. VI. DISCUSSION QUESTIONS 1. What is (are) the most important problem(s) facing The Wallace Group? 2. What recommendation(s) would you (as a consultant) make to Mr. Wallace, and in what order of priorities? 3. How do you educate a Stage I manager (entrepreneur) to become a Stage II or III professional manager? What impact does this problem have on this case? 4. How do you handle the transfer pricing problems involved in the backward integration? The acquisition of the plastic company has locked the Electronics Group into using its plastic products at a higher cost. 5. If Mr. Wallace is found to be one of the major problems, should he be addressed directly or indirectly? 6. Has the Wallace Group’s diversification strategy been effective? If yes, please explain. If no, please explain. *Reprinted by permission of the case author. VII. CASE AUTHOR’S TEACHING NOTE by Laurence J. Stybel* Presented earlier in Section V“, “Suggested Classroom Approaches to the Case.” VIII. STUDENT STRATEGIC AUDIT/STUDENT PAPER I. INTERNAL ENVIRONMENT A. Tremendous dissatisfaction among management and employees. This resulted from Wallace’s failure to delegate to subordinates and a lack of clear strategies or long-term plans, goals, or objectives. B. Lethargy and lack of direction on top management’s part. II. EXTERNAL ENVIRONMENT A. Favorable market niche in electronics. Longstanding reputation of reliable government contracts. Potential for increased sales due to administration’s commitment to a strong military with the latest technology. B. Auto industry on an upward trend with high sales volume suggests solid future sales. III. STRENGTHS 1-4 © 2024 Pearson Education, Ltd.


Case 1 The Wallace Group

A. The company is able to supply many of its own component parts and raw materials because it is well-integrated. B. Solid performance from the plastics and electronics divisions in the past. The Electronics Group has a good track record in developing and manufacturing countermeasure equipment. C. Public corporation provides the firm with flexibility to attract equity capital versus long- or short-term debt. IV. PROBLEM ANALYSIS A. Heavy dependence on government contracts could put the corporation in financial difficulty if further sales diversification cannot be found. B. Poor organizational design creates a span of control problems and results in poor operations. Specific job responsibilities need to be defined at the management level. C. The corporate policy of transfer pricing needs to be addressed in terms of product cost and profit margin. D. Stage I management in Stage III Corporation. E. Unprofitable chemical division needs new management or it needs to be analyzed for sale to someone else. V. RECOMMENDATIONS AND IMPLEMENTATION COSTS A. Develop new organization chart and clearly, define job responsibilities. Let management manage! Mr. Wallace needs to stop trying to run the firm himself. COST: $3,000 B. Diversify product mix and customer base to hedge against loss of large customers. See Mr. Williams. COST: $30 to $50,000 C. Change management of chemical division or sell off based on cost/ or analysis to corporation. COST: Money is needed to buy Mr. Luskic’s 5 percent and $45,000 to attract a good manager from another firm. D. Change management style. Mr. Wallace has got to let his managers manage. At the same time, he must develop long-term strategies and goals that will help the corporation grow. E. Clarify transfer pricing policy. Make sure that all managers understand that it is a team effort. The overall profitability of the corporation is what is important. This policy needs to be weighed in terms of overall profitability to corporation and not individual departments. 1-5 © 2024 Pearson Education, Ltd.


Case 1 The Wallace Group

IX.

EFAS, IFAS, AND SFAS EXHIBITS Were inappropriate for this case.

X.

FINANCIAL ANALYSIS Was inappropriate for this case.

1-6 © 2024 Pearson Education, Ltd.


TEACHING NOTE

Case 2 CrossFit at the Crossroads Case Overview1 This case describes the brief history and meteoric rise of CrossFit from its founding in 2000 through mid-2016. The case opens with Greg Glassman, the founder, reflecting on the company’s past performance in terms of the CrossFit Games and then moves into information about the company in general. CrossFit’s philosophy has proven to be popular with those associated with the military and police, as well as with younger women and mothers; and has generated excellent customer satisfaction. The individual store ‘Boxes’ have also proven to be workable venues for the philosophy and products. The number of boxes and members have been growing rapidly. However, CrossFit faces tough competition in the growing and maturing fitness industry. Competition from other private and public companies is intense, and shows no sign of letting up. In fact, there is plenty of evidence that new entrants and larger firms are attempting to increase their presence in this market as vigorously as is CrossFit. The case also details the heavy criticism coming from industry analysts saying that CrossFit is a fad and a cult. Glassman and CrossFit have decided to embrace the criticisms and turn them into opportunities. Glassman has become a very visible spokesperson for the company philosophy as a result of the critics. He has used controversy to draw attention to himself and the stores. Teaching Objectives This case is intended to be used in an introductory strategic management course. It is probably best suited for undergraduates but could be used with other cases or analysis at the graduate level. It contains good examples of corporate growth strategy and examples pertaining to the decision of how to enter and grow a new business, and it presents the logic of business model development in an industry with which most students can identify. A major aspect of the case has to do with the company’s extremely strong culture. The culture helps differentiate the company from industry competitors, but perhaps the greatest asset of the culture comes from its effects on customers who identify very strongly with the company. The concept of a ‘Third Place’ and providing the opportunity for customers to find associations with those of like mind cannot be overstated. The extremely powerful customer orientation at

1This note was prepared by Andrew Callaghan and Charles B. Shrader for the purpose of aiding instructors with the case titled:

CrossFit, Inc.: The Fitness Industry’s Fastest Growing Brand

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CrossFit has led to the criticism of it becoming a cult. Given this, the case could easily be the focal point for class discussions about the concept of corporate culture. This could also be used as a competitive strategy case in which students are asked to compare or defend alternative strategies for differentiation and competitive positioning. In terms of business-level or competitive strategy, the case is an excellent example of how to differentiate and define a strategic target. There is information in the case regarding the business models of industry competitors and relative performance information. Students could be asked to compare the business models of the leading fitness companies and analyze the models in terms of both economic viability and sustainability. The case is also a good integration case and can be assigned to groups for strategic audits and overall SWOT and environmental assessment. There are other fitness industry cases in the market- for example Harvard publishes a case about Arcadia Fitness (of London 2015) that is fairly recent, and there are existing cases dealing with Bally Fitness which now has sold most of its gyms to LA Fitness. Groups could be assigned an industry analysis of the world fitness industry as well as individual market segments. Students tend to find the fitness topic interesting and will have no difficulty finding materials written about the various competing companies mentioned in the case. Many will be familiar with CrossFit Games and the brand name. Plus, the case is well suited for current events and continual updating. Students should be able to find information about fitness industry competitors and CrossFit can easily be compared with the products and services of other firms. Finally, there have been many news stories about the controversial nature of the CrossFit Philosophy, about Glassman’s leader style, and about the cult following CrossFit seems to engender. There is plenty of information in the case about criticisms and there are plenty of interviews and stories about both Glassman and CrossFit in the news media. This makes the case a good candidate for general discussion about corporate social responsibility and ethics. This case provides the instructor a chance to pursue any of the following content objectives: 1. To illustrate the decision to enter an industry. •

Completing an industry analysis

2. To demonstrate the challenges of developing and growing a new business. •

Determining new ways to promote a product

Identifying marketing channels- the use of social media in business

Defining a selection process for the affiliates

Identifying an image of the product and the best way to portray that image

3. To illustrate the dynamics created by strong industry competitors. •

Identifying competition – directly and indirectly

Determining tactics to contend 2


Identifying a strong core competency and/or method of differentiation

4. To illustrate the importance of business concept innovation in the development of competitive strategy.

5. To illustrate horizontal integration and related diversification. 6. To illustrate executive leadership and corporate culture

Assignment Questions 1. Describe Glassman’s management style. Is he a good leader? Why or why not? 2. Identify CrossFit’s competitors. Give reasons as to why or why not CrossFit will be able to compete with these competitors. 3. Can CrossFit continue successfully competing against larger publicly traded firms? What are the advantages of the CrossFit business model? 4. How should Glassman continue to innovate and grow in a difficult market segment? What are they doing that will make them successful? What are they doing that could make them fail? What should they do differently? 5. How should CrossFit address the many business challenges and ethical criticism facing the company? 6. Is the fitness industry attractive? What forces are key in determining profitability? Does CrossFit have a good position? 7. What is the core competency at CrossFit? What main skills or advantages does it possess? 8. Describe the culture at CrossFit. Is CrossFit a cult? What are the costs and benefits of such a strong culture? 9. If the CrossFit Games were eliminated, would CrossFit be a viable business based solely on the physical fitness aspect?

Analysis 1. Describe Glassman’s management style. Is he a good leader? Why or why not? Glassman is charismatic and irreverent. He is also very self-confident, courageous, and confrontational. He personifies the ‘free will’ philosophy discussed in the case. As such, he exemplifies many of the leadership traits of the entrepreneurial mind-set. His confident air lends 3


to the brand image he is trying build in the company- that of being individually strong and independent. His attitude certainly works in terms of attracting members to CrossFit. On the other hand, this style has its detractors. He comes off as brash and authoritarian to some degree. He certainly is not humble and does not appear to approach what most would call authentic leadership. Instructors could ask students to assess Glassman in these terms above. Does his charisma outweigh the lack of humility? Does he need to have an attitude to make CrossFit work? In general, Glassman provides a good example of how an individual leader provides strategic leadership in determining the firm’s strategic direction (Chapter on Strategic Leadership). He has been effective in terms of determining direction (boxes and games) and building a strong culture. Students might be challenged to suggest ways Glassman might emphasize ethical practices and build the firm’s resource portfolio. Glassman has also done a good job of exploiting and maintaining core competencies, and has built a business on a business philosophy that is distinguishable from others in the industry. By emphasizing games and a comprehensive fitness philosophy he has built into his workforce the knowledge and skills to run the business. This in turn has created a large amount of human and social capital. CrossFit even extends its human capital into its customer base through the strong culture. 2. Identify CrossFit’s competitors. Give reasons as to why or why not CrossFit will be able to compete with these other industry competitors. The major industry-wide competitors are briefly described in the case. The main ones are probably Gold’s Gym and the 24-hour fitness centers. Gold’s Gym has a well-defined business model and a strong core competency (skill centered on weight training), and it has a strong corporate image. Anytime Fitness and 24-Hour Fitness appear to be attempting to appeal to a very wide-ranging customer base. CrossFit also seems to have a well-defined strategic position in the industry, truly intense and complete full body fitness, and it is using games and image to create attention for the business. Cross fit appears to portray the differentiation strategy and is now pursuing a large target market. Students could be asked to identify the differentiating factors of CrossFit’s strategy and whether or not the factors are sustainable. The strong culture is clearly sustainable and the games seem to facilitate growth. The intense individual fitness model, however, seems to be something that could easily be duplicated by other businesses or by other (substitute) technologies. Students will be able to get financial information on publicly traded firms such as Planet Fitness. A comparison of what is in the case with Planet Fitness will give an idea of how unique CrossFit’s business model really is. It will also give an indication of position and opportunity for growth. There is a decent amount of industry description in the case that could lead to a Five Forces analysis as well.

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3. Can CrossFit continue successfully competing against larger publicly-traded firms? What are the advantages of the CrossFit business model? This is an industry that is growing and experiencing some shakeout. It seems likely that there will be some consolidation in the industry both in terms of fitness centers and in terms of fitness programs. Because CrossFit is privately held, it is difficult to compare financials. Nevertheless, being private also provides CrossFit with the flexibility to withstand short-term market fluctuations and to move quickly into new market opportunities. 4. How should Glassman continue to innovate and grow in a difficult market segment? What are they doing that will make them successful? What are CrossFit’s strengths and Weaknesses? What are they doing that could make them fail? What should they do differently? A simple SWOT analysis of CrossFit might result in something such as: • • • •

Strengths = strong culture, clear business model, energetic and charismatic leadership Weaknesses = easily copied value-adding practices, simplistic/myopic world view, lack of diversification Opportunities = industry growth and general interest in fitness, games, franchising Threats = criticism of culture and leader style, large heavily-resourced competitors

SO strategies then would be to grow and leverage the brand. WT strategies, although difficult to realize, would be to tone down the culture and look for alliances in the industry. 5. How should CrossFit address the many business challenges and ethical criticism facing the company? CrossFit probably has never considered any form of stakeholder analysis. Moreover, they may not feel that they need to. They always seem to be preaching to the converted. They seem to view their product and philosophy much in the same way, as do other companies that have cultlike customer followings such as Harley-Davidson. The sense in companies like CrossFit and Harley is that if you are truly interested in the concept (fitness or motorcycle riding) you will naturally seek out the ‘real’ value provider. Customers who are seeking true fitness (or whatever) will natural gravitate to our company. On the other hand, CrossFit has a big opportunity to create a special brand. The current ethical criticism is probably not too potentially damaging to the company in that is it based on the idea that CrossFit is simply too much/over the top. This could be countered by top 5


management doing a series of informational videos touting the virtues of extreme fitness from a virtue ethics point of view. They could try some public relations and could do a better job of telling their story instead of letting others tell it for them. As is, much of the public information about CrossFit comes from news shows that put CrossFit in a questionable light. The company could counteract this with a positive ad campaign of their own. 6. Is the fitness industry attractive? What forces are key in determining profitability? Does CrossFit have a good position? • • • •

Industry Rivalry = the industry is growing which tends to reduce rivalry, but there are well-resourced rivals and local fitness centers seem to be viable Power of Suppliers = suppliers of gym equipment and fitness programming do not seem powerful, and CrossFit is less dependent on equipment than others in the industry Power of Buyers = buyers are plentiful and there are many options and switching costs are low Substitutes = home fitness, online or TV/Video fitness, total body workout machines, other general health and wellness programs- there is currently no substitute of critical importance but there many options Threat of new entrants= there do not seem to be significant cost or access barriers. There is the possibility of companies such as Nike and Reebok entering in terms of sponsoring and then perhaps owning some of the businesses. CrossFit has a clear differentiated model that has claimed a growing niche. The industry overall does not have many barriers as indicated in the case- but that might change in the near future with the advent of company wellness program contracts with branded firms.

On balance, the industry appears to be reasonably attractive in terms of entry barriers, rivalry, and supplier power. Buyers or customers have numerous options right now and there appear to be many (but not significant) alternative to fitness centers. 7. What is the core competency at CrossFit? What main skills or advantages does it possess? CrossFit’s main set of skills centers on high intensity training (HIT). Beyond that is the ability to create a sense of community- a culture. CrossFit’s culture is probably the most sustainable advantage. Using the criteria for building core competencies: • •

Are the capabilities valuable? Both the HIT skills and culture are valuable. Are the capabilities rare? The HIT are probably not rare. Cultures are unique and therefore, rare.

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• •

Are the capabilities costly-to-imitate? Again HIT would not be costly to imitate but the culture would be extremely difficult to imitate. Are the capabilities non-substitutable? There are numerous substitutes for the method of obtaining fitness.

Given this, the main advantage of CrossFit is the culture- the thing for which it is criticized. The HIT skills are much less sustainable.

8. Describe the culture at CrossFit. Is CrossFit a cult? What are the costs and benefits of such a strong culture? Glassman is the purveyor of culture. He portrays and communicates the basic fitness values well. The CrossFit Journal is also a good mechanism for the communication of values and beliefs. The Games also contribute to the culture and enhance the core values. Members such as Christmas Abbot exemplify the culture and embody the fitness philosophy. The entire case is an argument for company culture. The fact they are criticized for being a cult testifies to the strong company set of values. The values are basic overall fitness, whole body fitness, primitive and basic training, core and muscle and endurance work together, and straightforward no-nonsense fitness and training. CrossFit’s strong culture is an example of how corporate culture can substitute for strategy. The culture nurtures the brand. It creates value in terms of differentiating the product or service. It has been the force behind the growth of the company. The case mentions the sociological impact of the culture and the creation of a sense of belonging. CrossFit’s culture does this better or more profoundly than most other companies do. 9. If the CrossFit Games were eliminated, would CrossFit be a viable business based solely on the physical fitness aspect? As noted above, even though the business model is clear and valuable, it is not particularly complicated and could be easily duplicated or copied. CrossFit needs to maintain the Games and the cultural mystique in order to continue to be a gathering place and place of belonging for customers. 10. How has CrossFit performed through the COVD Pandemic into 2023? Since the case was written in 2018, CrossFit has grown to 14,000 gyms spanning 155 countries in 2023 (source: https://www.crossfit.com/about-crossfit-affiliates). The company continues to differentiate and the business model continues to be relevant. Over the years, methods or points of differentiation include have included: • WODs and varied workouts 7


• • • • • • • •

Box gyms – can cater to local demographic o Affiliates/communities determine how to run their own boxes Intensity of workouts Whole life/fitness approach/general fitness Newsletter/journal/blogs Games Company privately owned The Community/Culture Reebok and ESPN alliances

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CASE 3 Everyone Does It I. CASE ABSTRACT When Jim Willis, Marketing VP learns that the launch date for the company’s new satellite will be late by at least a year, he is told by the company’s president to continue using the earlier published date for the launch. When Jim protests that the use of an incorrect date to market contracts was unethical, he is told that spacecraft are never launched on time and that it is common industry practice to list unrealistic launch dates. If a realistic date was used, no one would contract with the company. Decision Date: No Date

FY Sales: Unknown FY Net Income: Unknown

II. CASE SUBJECTS AND ISSUES Electronic Satellite Imaging Aerospace Industry Practice Code of Ethics Role Conflict Marketing Strategy Competitive Tactics

Ethics Decision-Making Moral Relativism Policies & Procedures Evaluations & Control Stakeholders Corporate Culture

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (See Figure 1.5 on pages 22 and 23)

3

4

X

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X

O=Emphasized in Case

IV.

Strategic Factors

Internal Factors

External Factors

Corporate Governance

2

5A

Strategic Alternatives

1B

Review Objectives & Mission

1A

Strategic Posture

Performance

Strategy Formulation

5B

6

Strategy Implementation

Evaluation & Control

7

8

X

O

X=Covered in Case

CASE OBJECTIVES 3-1 © 2024 Pearson Education, Ltd.


CASE 3 Everyone Does It

1. To provide students with an understanding of the internal factors which cause managers to be placed in ethically compromising positions. 2. To evaluate and determine an ethically responsible course of action for ISI. 3. To offer students an opportunity to identify and evaluate possible positive and negative ramifications of the course of action that they have selected. 4. To illustrate the concept of moral relativism in making ethically questionable decisions. 5. To illustrate Kohlberg’s levels of moral development. 6. To provide students an opportunity to discuss the value of a code of ethics in a business organization. 7. To provide a vehicle to apply the three basic approaches to ethical behavior: utilitarian, individual rights, and justice approach, plus Kant’s two categorical imperatives. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. Assign this case along with Chapter Three: Ethics and Social Responsibility in Strategic Management. Students should be able to identify and apply relevant concepts from Section 3.2, Ethical Decision Making, to the situation described in this case. 2. Treat the case as a role-play and assign students to play the roles of Fred Ballard, Jim Willis, a venture capitalist, and a customer. Ask each person to make a case for his or her point of view. The class can then comment on what should be done. 3. Ask the class how this case might illustrate the concepts of moral relativism and Kohlberg’s levels of moral development. Which level of moral development seemed to fit Jim Willis and his boss, Fred Ballard? 4. Ask the students if a code of conduct would have resolved Jim Willis’ dilemma. This is an opportunity to discuss the value of a code of ethics and the sorts of things that such a code would include. Split the class into four groups. Have each group discuss how a particular approach to ethical behavior could be used to resolve Jim Willis’s dilemma: utilitarian, individual rights, justice, and Kant’s categorical imperatives. After each group discusses the case, ask each one to show how that concept would have resolved the ethical problem. Be prepared for disagreements VI. DISCUSSION QUESTIONS 1.

What are sources of the factors, which created the ethical dilemma?

2.

Is it ever appropriate to withhold negative information from the client? 3-2 © 2024 Pearson Education, Ltd.


CASE 3 Everyone Does It

3.

What should ISI do?

4.

What is meant by the term, “industry practice”? Is this an example of moral relativism?

5.

In what level of moral development is Jim Willis? And his boss, Fred Ballard?

6.

Would a code of ethics have prevented or resolved this ethical dilemma? What should be in a code of ethics? What if ISI had a Code of Ethics which stated that proprietary information could not be disclosed to anyone outside the company and allowed no exceptions?

7.

What would the utilitarian approach to ethical behavior say about full disclosure vs. withholding? Individual rights approach? Justice approach? Kant’s categorical imperatives?

VII. CASE AUTHOR’S TEACHING NOTE by Steven Cox and Shawana P. Johnson * (The Case Abstract, the first three Case Objective, the first three Discussion Questions, and second Suggested Classroom Approach were written by the case authors) ______________ *Reprinted and adapted by permission of the case authors. The type of situation discussed in the case is unfortunately not uncommon. Sales people are routinely asked to withhold information concerning shipping delays, production delays, possible labor unrest, product quality issues, and other customer relevant information. One of the greatest threats to a sales person’s personal integrity and long-term relationship with clients is pressure from within their own company to withhold relevant information. The fear of losing contracts, income, and job status often cause members of a firm to act outside of integrity. Recent cases like Enron/Arthur Anderson (R. Berebeirn, “Executive Action, the Enron Ethics Breakdown,” The Conference Board, No. 15, February 2002) have brought to the forefront how pressure to succeed can influence decision-makers and subordinates alike into unethical decisions. 1. What are sources of the factors, which have created the ethical dilemma? There are several internal and external forces at work here. • Internal forces included: 1. Jim Willis’ boss, Frank Ballard, has given Jim a specific instruction not to disclose the information. 2. The company did not permit the disclosure of company proprietary information without prior approval. 3. The financial health of the company could be jeopardized. 4. Jim Willis’s personal financial well-being could be jeopardized. • External forces included: 1. Jim Willis’ boss, Frank Ballard, has given Jim a specific instruction not to disclose the information. 3-3 © 2024 Pearson Education, Ltd.


CASE 3 Everyone Does It 2. The company did not permit the disclosure of company proprietary information without prior approval. 3. The financial health of the company could be jeopardized. 4. Jim Willis’ personal financial well-being could be jeopardized. 2. Is it ever appropriate to withhold negative information from the client? The answer is: it depends on the situation. Potential problems with production, delivery, and maintenance arise all the time. 3. What should ISI do? VIII. EFAS, IFAS, AND SFAS EXHIBITS Were inappropriate for this case.

IX. FINANCIAL ANALYSIS Was inappropriate for this case.

3-4 © 2024 Pearson Education, Ltd.


Case 4 The Audit I. CASE ABSTRACT This case deals with personal value conflicts within the context of established organizational practices, which run counter to stated policy. The case involves conflicts between professional and possibly personal values on the one hand and peer pressures to conform to the other. “The Audit” is set in a national CPA firm. Sue, a newly hired auditor, has been sent out on an audit where she discovers that the client has been treating payments to a large number of its workers as “independent contractors.” This practice saves the client the payroll taxes that would otherwise be due. In Sue’s professional judgment, this may be improper and should be further investigated to see if it should be noted in the audit report. A conversation with her immediate supervisor gives her no help. Coworkers put pressure on Sue to drop the matter. If she goes over the head of the partner in charge of the audit, she will get them all in trouble as they have ignored the practice in prior years’ audits. They said that while they realized that it was probably wrong, they were sure their supervisor wanted them to ignore it again this year. They encourage her to be a “team player.” Clearly, Sue faces a dilemma. If she drops the issue she will be violating her professional code of ethics. On the other hand, if she continues with the matter, she may well jeopardize her future with the firm. Decision Date:

No Date

II. CASE ISSUES AND SUBJECTS CPA Firm Personal Values versus Group Norms Role Conflict Policies and Procedures Whistle Blowing

Ethics and Moral Relativism Corporate Culture Decision Making Evaluation and Control Code of Ethics

4-1 © 2024 Pearson Education, Ltd.


Case 4 The Audit III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (See Figure 1.5 on pages 20 and 21)

1A

1B

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O

5A

5B

Strategy Implementation

Evaluation & Control

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X

O

Strategic Alternatives

Review MBO & Mission

Strategic Factors

Internal Factors

External Factors

Corporate Governance

Strategic Posture

Performance

Strategy Formulation

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O =Emphasized in Case

X=Covered in Case

IV. CASE OBJECTIVES 1. To help students identify personal value conflicts that occur in the work setting where the individual may be forced to choose between professional standards (or personal values) and group norms. 2. To introduce the idea that small concessions to peer pressure may lead to larger concessions later on. 3. To introduce the counterpoint that the act of disagreeing with one’s supervisors may also lead to unanticipated consequences. 4. To focus on the ethical dilemma posed by a violation, which is relatively minor, but which still appears to the central figure in the case to be a violation of professional standards. 5. Overall, to provide a vehicle for discussing the relationship between personal values, group norms, and codes of ethics. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent value case for open class discussion. • We suggest that you request each student to write out their specific solution to the employee’s dilemma. You can go back to the student’s individual solution after the class discussion. 2. This is an excellent in-class exam case focusing on ethics in decision making. 3. This is an excellent case for role-playing followed by questioning by the students. 4. This case can be placed anywhere on the course where you want to discuss ethics or value-oriented issues. 4-2 © 2024 Pearson Education, Ltd.


Case 4 The Audit

VI. DISCUSSION QUESTIONS 1. What would you do in this situation if you were Sue? 2. Should Sue go over the head of the partner in charge of the audit to upper management? What are the pros and cons of such a decision? •

Would this help or hinder her career at the CPA firm?

3. What role does the group (co-workers) impact on Sue’s choice? The case authors provided eleven excellent discussion questions and answers in the following Section VII, “Case Authors’ Teaching Note: Discussion Questions and Answers.” VII. CASE AUTHORS’ TEACHING NOTE by John Kilpatrick, Gamewell Gantt, and George Johnson* A. Teaching Objectives These were listed in Section IV, “Case Objectives.” B. Discussion Questions and Answers 1. What are the responsibilities or obligations that the main characters in the case owe to themselves? This is the issue of personal integrity and the duty one owes to oneself. Students will inevitably be faced with pressures to bend their standards or to agree with and cooperate with policies and practices, which they find offensive all in the name of job security or promotion. In the words of the short story, how far are you willing to go with this; “kiss, kiss, grovel, grovel?” 2. What are the responsibilities or obligations that the main characters in the case owe to the organization? In our experience at this point, questions of loyalty to the organization inevitably come up. It is possible to introduce the notion that “loyalty” is a two-way street and requires a certain level of trust, integrity, and reciprocity. The issue of organizational culture also should be introduced. Organizations can either encourage, from the top down, the moral “high road,” or discourage compliance with company policies and community or professional standards. This may be done either through the tacit approval of actions that generate revenues but do not place the organization in jeopardy, or by actively encouraging disregard for those same standards. It may be argued that an organization gets the moral climate it deserves. The student should be encouraged to identify the stress which occurs between the respect for organizational values and the need to get along with peers or to advance one’s own career. *Reprinted by permission of the case authors. 3. What are the responsibilities or obligations that the main 4-3 © 2024 Pearson Education, Ltd.


Case 4 The Audit characters in the case owe to their profession? One of the distinguishing characteristics of professionals is the tendency to identify more with their chosen profession than with any particular organization. Another is the importance of upholding the reputation and integrity of the profession by adhering to standards and practices that other members of the profession have concluded are appropriate and important. In “The Audit,” questions of potential conflicts between company policy and practice, and professional standards are all evident. How does a profession maintain its integrity and reputation with its clients and the general public if members are not willing to make difficult choices? The accounting profession is regulated by state licensing boards and state statutes. Each state has its own code of Ethics, which is largely patterned upon the code of ethics of the profession’s national association of the American Institute of Certified Public Accountants (the “AICPA”). Excerpts from relevant sections of the state of Idaho’s Code of Ethics for certified public accountants appear below: Rule 202—Auditing Standards. A licensee shall not permit his name to be associated with financial statements in such a manner as to imply that he is acting as an independent public accountant unless he has complied with the applicable generally accepted auditing standards. Statements on Auditing Procedure issued by the Institute’s Auditing Standards Executive Committee are, for purposes of this rule, considered to be interpretations of the generally accepted auditing standards, and departures from such statements (or other standards considered by the board to be applicable in the circumstances) must be justified by those who do not follow them. Rule 103—Accounting Principles. A licensee shall not express an opinion that financial statements are presented in conformity with generally accepted accounting principles if such financial statements contain any departure from such accounting principles which has a material effect on the financial statements taken as a whole, unless the licensee can demonstrate that by reason of unusual circumstances the financial statements would otherwise have been misleading. Rule 301—Confidential Client Information. A licensee shall not without the consent of his client disclose any confidential information pertaining to his client obtained in the course of performing professional services. An accountant who violates the ’profession’’s code of ethics can be subject to a number of possible sanctions including (1) public and/or private reprimands, (2) license suspension, (3) license revocation, or (4) potential civil liability to the client and to third parties for damages in appropriate cases. In “The Audit,” Sue faces the likelihood of immediate adverse repercussions on the job if she continues to call objections to the client’s practice. She also faces the possibility of even more severe adverse professional consequences if she fails to object and if she is later accused of violating the ’profession’s code of 4-4 © 2024 Pearson Education, Ltd.


Case 4 The Audit ethics in having failed to pursue the matter further. Indeed, an auditor who has reason to suspect improper accounting practices has an obligation to further investigate the questionable practice. Failure to do so could result in a violation of generally accepted auditing standards as well as the presentation of financial statements that are not in accordance with generally accepted accounting principles. This case is particularly difficult because Sue’s supervisors and the partner in charge of the audit seem to be encouraging her to violate the ’profession’s code of ethics and professional standards in order to retain the client. 4. What are the responsibilities or obligations that the main characters in the case owe to their peers? Most students will be able to identify with the peer pressures that are being exerted, or are anticipated, in the case. In our experience, many students will underestimate the consequences of attempting to change departmental practice or of disagreeing with one’s supervisor or of going further and engaging in some form of “whistle blowing.” (For a discussion, see Near and Micelli, “Retaliation against whistleblowers: predictors and effects” in the Journal of Applied Psychology (February 1986): 137-146.) 5. What are the responsibilities or obligations that the main characters in the case owe to the business community? Edward T. Hall, a cultural anthropologist who has written a number of books dealing with the practices of subcultures, suggests that employees operate in three cultures: the broad community culture, the business culture of the United States or region, or another country, and that of the specific firm in which the individual works (E. T. Hall, The Silent Language, Doubleday-Anchor, 1973). The question opens the door to a discussion of a number of “rules” of the U.S. business culture and, by way of comparison, those predominating in other cultures. It also leads to questions of the type of business community—”What are the rules of the game?”—which the individual student would like to see. To what extent does this type of business community require that individuals exercise some degree of “moral restraint?” 6. What are the responsibilities that the main characters in the case owe to the broader community? This issue allows the issues identified above to be extended to the local, regional, national, and global communities. While it may be counter-productive to try to get too much mileage out of cases that are fairly narrowly focused, the students can be encouraged to recognize that none of the dilemmas exist in a vacuum. This should be particularly appropriate at the community level. What kind of community do they wish to live in, and in what ways is that issue dependent on the choices of individuals? To what extent are the choices of individuals swamped by policies and practices of major institutions, including those of business? At some point, everything is connected to everything, as the ecologists are inclined to point out. 7. What are the implications for the individual of each of the options? Discussion of this issue can be useful in getting the students to 4-5 © 2024 Pearson Education, Ltd.


Case 4 The Audit really think through the significance and likely outcomes of the various choices. Students with work experience will probably keep the discussion from becoming too naive. Our experience has been that students are eager to explore the ramifications of moral and to some, political choices. 8. How does an organization ensure that the policies, which it develops, will be followed by organization members? This, of course, is an issue for which there is no short or easy answer. Research suggests that a number of characteristics and practices are critical if organization members are going to commit to organizational values. Among these are the full support of top management, recognition and support for compliance, censure for failure to comply, willingness to not reward behavior strictly on the basis of bottom-line performance, and effective communication of policies and the reasons for them. 9. What impact does an organization’s reward system have on member’s decisions when confronted by ethical dilemmas? Specifically, what are the implications of asking for “ethical conduct” while rewarding solely on the basis of narrowly defined (short-term) performance goals? This is simply an extension of the “reward structure” question raised above. The students in colleges of business will have thoroughly absorbed the manager’s responsibility for profitability. However, they may not have been challenged to consider the tradeoffs and conflicts, which sometimes evolve from the pursuit of single or narrowly defined goals. 10. How does a group leader balance between the need to work with his or her group and the need to provide strong leadership? Management and organization behavior classes focus attention on the task or people dimensions, and on the balance between being liked and being effective. This question addresses the ethical dimensions of those conflicts: At what point does the group leader make an issue of a breach of company policy? 11. What is the role of trust in these matters? What are the costs and benefits of using “administrative controls” versus trusting employees to act in good faith? It can be argued that the tendency in many American firms has been to rely on administrative controls: the greater the perceived level of “misbehavior” the more tightly bureaucratic and rule oriented the firm becomes. This line of argument suggests that frequently “misbehavior” is a symptom of some other underlying problem, which is only exacerbated by increasing autocratic or unilaterally designed and imposed controls. At the other end of the spectrum are firms, which focus on developing an atmosphere of trust which, ideally, leads to a lessened need for administrative controls. The goal is to have the employees “internalize” and identify with the objectives of the organization. This, of course, presupposes a high level of integrity on the part of top management in particular. Most firms, and perhaps the values and management style of most managers, lie somewhere in between these two extremes. This question confronts the students with some of the practical managerial issues, which confront managers in attempting to set the ethical tone for the firm. 4-6 © 2024 Pearson Education, Ltd.


Case 4 The Audit

C. General Discussion Short cases provide a number of advantages to an instructor. They can easily be slipped into a course when the instructor or students need a change, or when something planned does not work out. Since the text is only a page or two, students can be given time to read the case in class with minimal lost time. Also, at times it seems that students today struggle with a steady diet of business ethics “essays.” The use of short cases provides some relief and can be used on very short notice. Overall, we have found the interest level to be very high in discussing issues such as are found in this briefcase. The discussions tend to be lively and thought-provoking. Many students have indicated that these discussions have proven to be among the most stimulating and eyeopening of the semester. We have used “The Audit” for a number of pedagogical purposes. The case focuses very clearly on an example of the potential conflicts between group norms and personal and professional standards, of the type which the students will face as they begin their professional lives. The situation serves to highlight the importance of personal values, organizational culture and the responsibilities of management in ensuring an environment in which personal and professional standards are respected. The cases have been used in a variety of courses: sophomore level legal environment courses; junior or senior level management or organization behavior courses; business and society or business ethics; marketing and purchasing; and senior level accounting courses. These materials do not presuppose advanced work in philosophy or ethics. The intention, as noted above, is to present moral dilemmas which students will likely face, and to engage them in the exchange of ideas and the comparing of values and insights. In the process, it is hoped that students will better understand the nature of such value conflicts and the relationship and importance of their own values. For “The Audit,” the instructor should be aware of the auditing standards, which require the noting of certain practices in the audit report as well as some knowledge of the specific standards dealing with the accounting for “independent contractors.” A brief discussion of relevant auditing standards is included below for the instructor’s use. Under the accounting profession’s guidelines, independent accountants are required to opine as to whether or not they believe a client’s financial statements “fairly present” the financial position of the client at a given point in time. If the client in “The Audit” is improperly accounting for wages paid to some workers as payments to independent contractors when those workers are in fact common law employees, the result would be an understatement of the client’s payroll tax expenses and an understatement of liabilities for the potential back taxes, penalties, and interest. This is something that generally accepted auditing standards would require the accounting firm to call to the attention of management of the client and could require a “qualified opinion” (i.e. disclosure in the financial statements) if 4-7 © 2024 Pearson Education, Ltd.


Case 4 The Audit management refused to modify its statements to reflect the correct expenses and liabilities involved. Moreover, under the profession’s guidelines, Sue, as a staff accountant, would have an obligation to document the disagreement with her supervisors as part of the working papers on the audit. Finally, the accounting profession’s code of ethics prohibits an accountant from disclosing confidential information to third parties. Therefore, under the guidelines of the profession, at least, Sue should not report the client’s practice to the state or federal government tax authorities. Not all of the above-specialized knowledge concerning the position of the accounting profession is necessary to use “The Audit” in nonaccounting classes. The information is included in this teaching note for use in upper-level accounting classes where students may have had some exposure to the profession’s guidelines. It is also included to provide background information for instructors who may wish to use the case in general management courses that typically include a broad cross-section of business majors. It should be emphasized, however, that the case is intended to illustrate the discovery of facts that might lead a reasonable auditor to take further action. The relevant question is whether or not Sue should continue to pursue the matter in light of the pressure from her peers and the partner in charge of the audit for her to “drop it.” VIII. STUDENT STRATEGIC AUDIT/STUDENT PAPER Sue is in a difficult position, one with far-reaching consequences. To make it worse, she is receiving a great deal of pressure to do nothing, and the others involved are presenting what seem to be quite a few arguments supporting their position. Several issues were raised to promote the “don’t make waves” position and to be a team player. Paul, the partner in charge of the audit, brought up the point that others in the industry of the company in question followed the same practice. He further encouraged no action by stating that to pursue the issue could mean the loss of the account and hinted of negative repercussions for Sue if this were to happen. Sue’s coworkers, Bill and Mike, echoed the sentiment by urging Sue to be a “team player.” They pointed out that it had been ignored in the past. If Sue were to follow through, her coworkers’ careers would be jeopardized. In addition, her relationship with her superiors would be so threatened, and it would possibly force her to leave the firm. The arguments for raising the issue were not many in the case itself (see Exhibit 1). The fact that the practice was wrong was confirmed. Despite evidence to the contrary, the firm endorses high ethical standards and highlighted the ethical responsibilities as a CPA. Also, Sue’s conscience would bother her if she were to do nothing. The support for this issue is far greater than those mentioned in the case. If the authorities were to discover the understating of taxes, the company could be fined as well as forced to pay back taxes. This would, in 4-8 © 2024 Pearson Education, Ltd.


Case 4 The Audit all likelihood, be a material amount. The stockholders rely on an auditor’s clean opinion to ensure that there is not a material deviation. If she were to overlook this situation, Sue could possibly be expected to overlook the next one. It seems like once a person backs down, it is easier to do so again. As a CPA, this could have serious consequences for her career. As stated previously, Paul hinted at possible negative actions were Sue not to let the issue die. I question whether this is a type of firm one would want to work for anyway. To tailor an opinion because of the risk of losing a client is a very dangerous practice and a highly unethical one. It defeats the entire concept of an auditor’s independence. All these factors are very significant in making the decision, but the one which most moves me to recommend pursuing the issue is Sue’s feelings. If she does not feel comfortable with the situation, she should act on it. To deviate from one’s own standards could lead to a lifetime of regret. Because of this and the other reasons, Sue should follow through on this issue.

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Case 4 The Audit EXHIBIT 1 PROS AND CONS OF PURSUING THE ISSUE Do Not Pursue Issue

-Better relationship with superiors. -Better relationship with co-workers. Pros

—Wouldn’t risk losing account. -Wouldn’t risk losing job. -Other professionals would follow same. .

Cons

-Firm’s members confirmed practice was not correct. -Potential liability. -Bothered conscience. -Firm members might expect her to overlook other issues in the future. -Would not act in a manner that the firm “preached.” -Once you back down it is easier to do it again.

Pursue Issue

- Impact on conscience. - Make a firm statement about her beliefs. - Act in manner firm preached. -Doubtful if you would want to stay with a firm that did not practice what they preach.

-Damage relationship with coworkers. -Damage her future -Might cause firm to lose an account. -Possible damage to coworkers’ careers. ’

IX. EFAS, IFAS, and SFAS EXHIBITS Were inappropriate for this case. X. FINANCIAL ANALYSIS Was inappropriate for this case.

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IBS Center for Management Research

CLBS/1 73

Teaching Note:

Case 5 Best Buy’s Strategy to Beat the Pandemic Blues This teaching note was written by Koti Vinod Babu, under the direction of Namratha V Prasad, IBS Hyderabad.

Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org

www.icmrindia.org


CLBS/1 73

Case 5 - Best Buy’s Strategy to Beat the Pandemic Blues TEACHING NOTE INTRODUCTION TO THE CASE The caselet “Best Buy’s Strategy to Beat the Pandemic Blues” discusses the various measures taken by US-based multinational consumer electronics retailer Best Buy Co., Inc. (Best Buy) to beat the business crisis that stemmed from the COVID-19 pandemic and the resultant lockdown restrictions in the US. Best Buy formulated a crisis management strategy and the case documents the various measures the company took to keep its stores up and running during an unprecedented crisis such as the pandemic. The case also mentions some of the human resource (HR) measures taken by Best Buy to keep up employee morale and encourage vaccination against COVID-19. The various measures taken by Corie Barry (Barry), the CEO of Best Buy, proved effective in keeping up the sales. Can Barry’s successfully crisis management strategy be an example to emulate in the retail industry?

LEARNING OBJECTIVES The case enables students to •

Manage the changes in the external environment

Understand the issues and challenges faced by companies during pandemics

Discuss the importance of crisis management and crisis communication

Create an effective crisis management plan

Analyze the significance of technology in pandemic preparedness and response.

Examine how a company’s digital focus helps it to overcome the challenges posed by the external business environment.

Recognize the role of human resources in devising an effective crisis management plan

TARGET AUDIENCE The case is intended for use in teaching the subjects “Business Continuity & Risk Management”, “Macroeconomics & Business Environment,” “Retail Management,” and “Strategic Management” in both graduate and post-graduate programs.

TEACHING APPROACH AND STRATEGY The students may be asked to study the pre-reading material before commencement of the case discussion. They can use the additional readings and references to get further information on and a thorough understanding of the issues involved. 1


Best Buy’s Strategy to Beat the Pandemic Blues

The moderator can start the class by asking the students about the global pandemic and the impact it has had on retail companies like Best Buy. The moderator can then extend the discussion to the basic issues related to the case such as the COVID-19 pandemic and its impact globally; the importance of crisis management; and the need to design suitable business strategies to handle unforeseen crises. The instructor can divide the entire class into groups to engage all the students. Each group could then be given several minutes to discuss how to answer a question related to the case. After the case has been discussed, the students can be asked to give their opinion on the measures that Best Buy has taken and other steps it could take to further handle the crisis. The moderator can take the discussion further with the help of the following questions:

QUESTIONS FOR DICSUSSION 1. Explain how retail companies in the US like Best Buy were affected by the COVID-19 pandemic and the subsequent state policy. What is a crisis management plan? What are the key leadership practices during the COVID pandemic, which is a crisis unlike any other? Discuss the measures taken by Barry to ensure that Best Buy effectively tackled the pandemic. 2. Discuss HR’s new role in response to the COVID-19 pandemic. What were the HR initiatives taken by Best Buy to keep up employee morale and deal with the crisis? How effective were Best Buy’s strategies to handle the crisis?

PROPOSED SESSION PLAN (60 MINUTES) Appropriate Time for Discussion Introduction

10 minutes

Question 1

20 minutes

Question 2

20 minutes

Conclusion

10 minutes

Total Session Time

60 Minutes

ANALYSIS 1. Explain how retail companies in the US like Best Buy were affected by the COVID-19 pandemic and the subsequent state policy. What is a crisis management plan? What are the key leadership practices during the COVID pandemic, which is a crisis unlike any other? Discuss the measures taken by Barry to ensure that Best Buy effectively tackled the pandemic. A. The COVID-19 pandemic resulted in an unprecedented disruption of business for retailers in the US. Retailers and brands faced various challenges around health and safety, supply chain, labor force, cash flow, consumer demand, and marketing. The major issues faced by the retailers in the US were: •

Change in Demand with Home Bound Consumers Most US consumers learned to cook at home while quarantined and they were expected to continue doing so, even after the pandemic. A large portion of the workforce shifted from working in an office to working from home. This scenario hiked the demand for various goods and services like electronics.

2


Best Buy’s Strategy to Beat the Pandemic Blues

Consumers Switching to Digital Even before the COVID-19 pandemic, many product categories in the retail sector such as books, entertainment, and consumer electronics had been considerably disrupted by digital. Most importantly, grocery was still emerging in terms of a transition to digital. The COVID19 pandemic accelerated the transition to digital commerce. With consumers being asked to practice social distancing, e-commerce orders for groceries and other essentials had become a survival tool for an average American family. It was observed that many American families had tried digital grocery services for the first time during the pandemic.

Extra Cautious Consumers Consumers became more cautious about health than ever before. As no-touch deliveries became a new social norm, consumers turned less receptive to in-store shopping and more cautious while using public touch screens or keypads in stores. Thus, retailers had to develop no-touch customer experiences, with an emphasis on sanitation.

Altered Customer Experiences The online ordering experience became frustrating for many consumers due to the high demand for goods. Many customers found it hard to secure a delivery slot; product inventory was in constant fluctuation; and lead times were longer than usual.

Rising Delivery Costs Due to the high order picking and delivery costs, online orders were less profitable than traditional in-store purchases. On the other hand, it was likely that once the pandemic receded and delivery prices stabilized, households that had relied upon curbside pickup or home delivery during the pandemic would continue to use those services, thereby posing an emerging challenge to the existence of physical stores.

Long-term Financial Impact The economic effects of the pandemic were such that many retailers had a weak balance sheet loaded with debt. The economic climate for retailers was so uncertain that many companies withdrew their earnings and declined to provide estimates of their performance to investors. Crisis Management Plan A crisis management plan is a document that describes the processes that an organization should use to respond to a critical situation that could adversely affect its profitability, reputation, or ability to operate. These are used by business continuity, emergency management, crisis management, and damage assessment teams to prevent or minimize damages and provide guidelines for personnel, resources, and communications.1 Crisis management planning included preparation, process development, testing and training as shown in Figure I. Figure I: Crisis Management Planning •

Determine the crisis management team members.

Document the criteria for determining whether a crisis has occurred.

Establish monitoring systems and practices for early warning of possible crises. Contd…

1

Tobias Schroeder, “What It Is and How to Develop a Crisis Management Plan,” www.blog.softexpert. com, March 23, 2020. 3


Best Buy’s Strategy to Beat the Pandemic Blues Contd…

Specify the spokesperson in the event of a crisis.

Provide a list of the main emergency contacts.

Document who should be notified in the event of a crisis and how this notification should occur.

Identify a process for assessing the incident, its potential severity, and how it will affect the building and employees.

Identify procedures to respond to the crisis and define safe places where employees can go in an emergency.

Develop a strategy for posting and responding on social media.

Develop a process to test the effectiveness of the crisis management plan and update it on a regular basis.

Source: Tobias Schroeder, “What It Is and How to Develop a Crisis Management Plan,” www.blog.softexpert.com, March 23, 2020.

Key Leadership Practices during the COVID-19 Pandemic: The pandemic posed unperceived challenges for leaders in the retail business. It had the hallmarks of a “landscape scale” crisis – an unexpected event or sequence of events of enormous scale and overwhelming speed, resulting in a high degree of uncertainty that gives rise to disorientation, a feeling of lost control, and strong emotional disturbance. During a crisis, which is ruled by unfamiliarity and uncertainty, recognizing that their company faces a crisis is the first thing leaders must do. The leaders must then build a suitable response system for business continuity, wherein effective responses are largely improvised. At that time, a leader cannot use a predefined response plan, but should adopt behaviors and mind-sets that will prevent them from overreacting and help them look ahead. They could follow a strategy suggested in Figure II. Figure II: Key Leadership Practices during an Unprecedented Crisis •

To promote rapid problem solving and execution under high-stress, chaotic conditions, leaders can organize a network of teams. In many cases, the network of teams will include an integrated nerve center covering four domains: workforce protection, supply-chain stabilization, customer engagement, and financial stress analysis.2

The leaders should see to it that team members openly discuss ideas, questions, and concerns without fear of repercussions. This allows the network of teams to make sense of the situation, and how to handle it, through healthy debate.

The senior executives must empower the team members to control many aspects of the organization’s crisis response. This involves giving them the authority to make and implement decisions without having to gain approval.

The crisis management teams should frequently pause from crisis management, assessing the situation from multiple action points, anticipate what may happen next, and then act. Contd…

2

D’Auria and Aaron De Smet, “Leadership in a Crisis: Responding to the Coronavirus Outbreak and Future Challenges,” www.mckinsey.com, March 16, 2020. 4


Best Buy’s Strategy to Beat the Pandemic Blues Contd…

The pause-assess-anticipate-act cycle should be ongoing, for it helps leaders maintain a state of thoughtful calm and to avoid overreacting to new information as it comes in.

It is vital that leaders not only demonstrate empathy toward customers in the stressful pandemic situation, but open themselves to empathy from others and remain attentive to their own well-being.

Thoughtful, frequent communication shows that leaders are following the situation and adjusting their responses as they learn more. This helps them reassure stakeholders that they are dealing with the crisis. Communications should not stop once the crisis has passed. Offering an optimistic, realistic outlook can have a powerful effect on employees and other stakeholders, inspiring them to support the company’s recovery

Source: D’Auria and Aaron De Smet, “Leadership in a Crisis: Responding to the Coronavirus Outbreak and Future Challenges,” www.mckinsey.com, March 16, 2020.

Measures Taken by Barry to Ensure that Best Buy Effectively Tackled the Pandemic: Barry took several key decisions at different points during the pandemic that helped showcase Best Buy in a positive light and saved the business. The measures taken by Barry demonstrated that he had implemented them after constantly evaluating the situation at hand. At the Start of the Pandemic (March-May 2020) •

In March 2020, Barry voluntarily closed the company’s 1,000 stores across the US amidst the lockdown regulations in order to keep its employees and customers safe.

He did not know how long the stores would have to be kept closed, how much business Best Buy would lose to competitors, and whether it would be able to bounce back after that hit to its business.

He then converted some of its stores into curbside pickup points for shoppers. This made it possible for customers to order online at bestbuy.com and then pick them up at the stores, without getting out of their cars.

In addition, Best Buy’s stores served as fulfilment centers to ship online orders to customers’ homes. About 250 stores were specially designated to handle a higher volume of packages, though all stores shipped online orders.

Midst of the Pandemic (May 2020-Early 2021) •

With limitations on in-store shopping beginning to ease, Best Buy opened most of its stores for customers.

As consumers shifted to shopping online, Best Buy’s years of investments in that area helped it adapt to the changed scenario quickly.

There was a sea change in the way people worked or studied, prompting a surge in demand for various electronic items.

The increased foot traffic at Best Buy stores posed a contamination risk to both customers and employees. To curb the contamination risk, Best Buy framed a store policy (See Table I in the case).

Customers had to schedule appointments online if they wanted to visit the store. Best Buy prevented customers from informally entering the stores, checking the items on display, and touching them.

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Best Buy’s Strategy to Beat the Pandemic Blues

End of the Pandemic (January 2021) •

Once the vaccines became widely available, Best Buy was like most other retail companies in the US that were busy framing strategies to safeguard their businesses from the pandemic by making sure that all their employees got vaccinated.

It launched an employee sweepstakes with more than US$ 100,000 in cash prizes to encourage its staff to get vaccinated against the COVID-19 virus and contribute to the allround efforts to beat the ongoing pandemic. While 20 winners were to be chosen from its field employees, one was to be selected from its corporate offices based in Richfield, US.

The company’s stance toward employee vaccinations was to leave the choice of vaccination entirely to the employees and not enforce it.

To further encourage and motivate employees, Best Buy announced a onetime bonus. All hourly employees, regardless of whether they were full-time, part-time, or occasional seasonal employees – received a Gratitude Bonus. While full-time hourly US employees received US$ 500, part-time US employees got US$ 200.

2. Discuss HR’s new role in response to the COVID-19 pandemic. What were the HR initiatives taken by Best Buy to keep up employee morale and deal with the crisis? How effective were Best Buy’s strategies to handle the crisis? A. The COVID-19 pandemic caused a massive disruption in lives and in business, and human resources (HR) was the key to supporting companies and implementing changes in the workplace. Organizations have to frame a forward-thinking HR strategy on how they deliver the best work experience to staff. Issues like employee support, leadership development, pay and benefits, and shifts and strategic partnerships across the organization are some of the most important ways HR can lead and partner with staff, and drive for the best results in their organizations as shown in Figure III. Figure III: HR’s New Role in Response to the COVID-19 Pandemic •

HR can facilitate discussions that help ensure the right amounts of reinvention, reproportioning, and re-prioritizing of business goals to adapt to shifting customer demands and markets in response to the crisis created by Covid-19.

HR has a key role to play in developing leaders, ensuring they are successful, and holding them accountable.

Leaders require new and enhanced skills in managing from a distance, motivating employees toward a vision in the midst of uncertainty, providing calm and clarity, aligning work among team members, and building community.

An organization’s success is based on having talent in the right roles at the right times, and HR is integral to this process. Managing talent through the pandemic requires fundamental shifts. This dynamic requires strategic redeployment, flexibility, reskilling, and tapping into the gig economy with speed and effectiveness.

Social capital is the goodwill, fellowship, linkages, and shared understanding that allow staff to work together most effectively. HR has a role to play in helping the organization build, maintain, and sustain social capital among employees.

Establishing mentorship programs and affiliation groups, developing teams and ensuring thorough onboarding are ways in which HR can make a difference. Contd…

6


Best Buy’s Strategy to Beat the Pandemic Blues Contd…

Engagement is tough to ensure when people are working from home, because it is the physical workplace that brings people together, contributes to their focus, and allows the creation of companionship. HR should see that they are motivated to work from home as they do in office.

HR should ensure diversity, equity, and inclusion. This includes educating the organization, understanding the realities of diverse experiences, and taking proactive steps to equalize the playing field.

HR can offer expanded support in everything from employee assistance programs to programs for mindfulness, exercise, nutrition, and financial counselling.

HR must support different options regarding where people work, when they work, and even the extent to which they are supported in their home offices with furniture solutions.

HR is also the keeper of employment, pay, and benefits systems. HR departments can ensure empathy and equitable processes when layoffs are unavoidable.

HR should address the compensation needs of all employees – including work share programs, commission-based plans, and more. The seamless administration of these processes with perfect quality is critical to employees’ financial health and employee trust.

As the pandemic has necessitated a new approach to the rules and practices that guide the organization, many organizations have had to establish regulations based on federal or state mandates and have had to formalize their approaches. HR must respond quickly to develop these with the broad input from stakeholders.

The HR role involves taking the lead in reimagining the organization, developing talent strategies, addressing wellbeing and work-life, administering HR systems, and facilitating re-entry to the office. These are all critical and uniquely skilled contributions HR can make.

Source: Tracy Brower, “HR’s Compelling New Role in Response to the Coronavirus,” www.forbes.com, June 7, 2020.

HR Initiatives Taken up by Best Buy to Keep up Employee Morale and Deal with the Crisis: •

Best Buy closed down its stores voluntarily to ensure the safety of its employees at the start of the pandemic.

It did not fire any employees. On the contrary, it provided job security to them by reassigning physical stores as curbside pickup points for shoppers and online order fulfilment centers.

When it re-opened its stores, it took its employees into confidence and framed a string of measures to ensure their safety.

Surveys and feedback from store managers and employees were done frequently to ensure that they were providing a safe experience for employees and customers.

After the launch of vaccines, it framed strategies to make sure that all its employees got vaccinated. It launched an employee sweepstakes with more than US$ 100,000 in cash prizes to encourage its staff to get vaccinated against the COVID-19 virus and contribute to the allround efforts to beat the ongoing pandemic.

7


Best Buy’s Strategy to Beat the Pandemic Blues

To keep up employee morale and as a token of gratitude to them for sticking with the retailer doing an unprecedented crisis, Best Buy announced a onetime bonus to its employees. All hourly employees, regardless of whether they were full-time, part-time, or occasional seasonal employees – received a Gratitude Bonus. While full-time hourly US employees received US$ 500, part-time US employees got US$ 200. The bonus was given to all hourly employees who were with the company as of February 15, 2021, regardless of whether they were staying with the company or leaving.

All of Best Buy’s efforts to handle the crisis seemed to work out. •

During the six weeks after Best Buy closed stores beginning in March 2020, it retained 81% of its sales compared with the same period in 2019.

Sales in May, June, and July of 2020 increased 5.8% over the sales in same period in 2019. Analysts had predicted that the sales increase would be at 2.3%, but Best Buy actually exceeded their expectations.

For the three months ended October 31, 2020, the company booked US$ 11.85 billion in sales, up 21% from the same period in 2019.

Suggested Readings and References: 1. Tracy Brower, “HR’s Compelling New Role in Response to the Coronavirus,” www.forbes.com, June 7, 2020. 2. Tobias Schroeder, “What It Is and How to Develop a Crisis Management Plan,” www.blog.softexpert.com, March 23, 2020. 3. Berman, Barry / Evans, Joel R. Pearson, “Retail Management – A strategic Approach,” (Prentice Hall, Ninth Edition). 4. Gilbert, David, “Retail Marketing Management,” (Pearson Education, Second Edition). 5. Edward Shapiro, “Macroeconomic Analysis,” (Harcourt Brace Jovanovich Inc.). 6. Roger E.A. Farmer, “Macroeconomics,” (Thomson).

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IBS Center for Management Research

BSTR/6 19

Teaching Note:

Case 6 - Zoom’s Rise Amidst the COVID-19 Pandemic This teaching note was written by Syeda Ikrama, under the direction of Syeda Maseeha Qumer, IBS Hyderabad.

www.icmrindia.org


BSTR/6 19

Case 6 - Zoom’s Rise Amidst the COVID-19 Pandemic TEACHING NOTE ABSTRACT The case documents the meteoric rise of Zoom, a cloud-based conferencing tool, amidst the COVID-19 pandemic as work from home and social distancing became the new norm. Zoom was the most downloaded app globally with 37.8 billion downloads in Q2 2020. Founded in 2011 by Eric S. Yuan (Yuan), the tool allowed users to interact virtually with each other through audio, video, and chat. The case discusses the business model of Zoom and the reasons behind its success, including its ease of use as well as high-quality audio/video output. With lockdowns in place the world over in early 2020 and the risk of the virus spreading, remote working became a reality. It was during this period that Zoom really took off. Zoom’s features — ranging from user-friendly tools for sharing presentations to fun options such as “virtual backgrounds” — contributed to its widespread adoption as millions of people transitioned to working from home during the pandemic. Zoom offered customers the best experience in its video meetings. Across the world, Zoom also kept students learning and enabled friends and families to stay connected while practicing social distancing. Zoom, which started off as an enterprise solution, became a go-to service for remote education, exercise classes, church services, and happy hour celebrations. Also, many companies used it to conduct meetings and organize their work processes. Zoom’s total revenue for fiscal year 2020 grew 88% year-over-year to US$623 million. Despite its phenomenal success, Zoom came under scrutiny over its handling of privacy and security, including its failure to prevent uninvited guests from barging in on sessions. Other challenges included intense competition from deep pocketed rivals such as Microsoft, Google, and Cisco with their products Teams, Meet, and Webex, and building a large global channel partner network quickly, to continue growing its reach and market penetration. Going forward, the challenges before Yuan were to sustain Zoom’s success, convert free users into paying customers, fix its security problems, and restore customer trust.

LEARNING OBJECTIVES This case is designed to enable students to: •

Understand the business model of Zoom

Analyze the impact of COVID-19 on the video conferencing industry

Understand Zoom’s growth strategy during the pandemic and the reasons behind its success

Identify the challenges faced by Zoom in sustaining its position in the highly competitive video conferencing industry.

Examine the ways in which Yuan can overcome Zoom’s shortcomings.

This case is meant for students of graduate and undergraduate programs in Management as part of their Business Strategy/ Corporate Strategy curriculum. 1


Zoom’s Rise Amidst the COVID-19 Pandemic

TEACHING APPROACH AND STRATEGY The case can be used to illustrate Zoom’s phenomenal growth during the COVID-19 pandemic. The instructor may initiate the discussion by giving an overview of the company and its business model. The participants can then proceed to discuss the global outbreak of COVID-19 and its impact on the video conferencing industry. The instructor can discuss the strategies adopted by Zoom during the pandemic and the reasons behind its success. He/she can conclude the session by discussing the challenges faced by Zoom and whether it can sustain its success in a post pandemic world. Some broad assignment questions are listed here: 1. Critically analyze the business model of Zoom 2. Discuss Zoom’s growth strategy amidst the COVID-19 pandemic. 3. Discuss the challenges faced by Zoom. What steps should Yuan take to overcome Zoom’s shortcomings and maintain its dominance in the global video conferencing industry?

SESSION PLAN Time Introduction

05 min

Discussion on Q1

20 min

Discussion on Q2

15 min

Discussion on Q3

15 min

Closing discussion

05 min

Total Expected Session Time

60 min

ANALYSIS 1. Critically analyze the business model of Zoom. A. Zoom is a remote video conferencing SAAS platform that allows users to virtually interact with each other using video, helping them maintain their workflow even when they are not available physically. Zoom has seen a spectacular rise in terms of user numbers as a result of the global COVID-19 pandemic. Earlier, it was known only within enterprises and businesses, but that has changed with the outbreak of the pandemic. The success of Zoom can be attributed partly to its simple yet effective business model. Zoom follows the freemium business model. The freemium business model is a model in which a product/service will be available free of cost and if users want to use additional features, then a premium amount has to be paid. In a nutshell, the freemium business model involves providing a basic version of a product or service for free, with the intention of persuading sufficient numbers of customers to pay for a more advanced version. Freemium models are usually used in the media, software, and web-application industries to attract more users initially and later convert them into premium customers. A freemium business model offers customers a free option for a service that has a reduced set of features compared to a premium and paid for offer (See TN Exhibit I and TN Exhibit II).

2


Zoom’s Rise Amidst the COVID-19 Pandemic

TN Exhibit I:

Freemium Business Model

Source: https://www.garyfox.co/freemium-business-model/

TN Exhibit II:

Freemium Business Model: Advantages and Disadvantages Advantages • •

• • •

Disadvantages

It is easy to get a large user base when a product is offered for free. Businesses can easily acquire customers who promote the product to the prospects, and help the companies grow exponentially. “Free” holds a special appeal for customers and is inviting. Businesses with freemium offers attract many users when they are launched. There is a decreased customer acquisition cost. Since the users are already in the company’s ecosystem, it becomes easier to monetize them. The company does not have to spend on any ads or sales personnel as it can advertise premium features on the platform. Customer feedback can be easily collected based on the product features. It generates advertisement incomes and keeps freemium users engaged. It increases adoption rates besides boosting word of mouth publicity. 3

It is difficult to monetize. The biggest challenge in freemium is to find a way to make customers pay for the premium features Freemium users may not get totally converted to premium users, leading to difficulties in monetization. It drains resources with low ROI. The time, resources, and money needed to convert free users to paid ones can quickly deplete cash. A company may burn its cash reserves fast in supporting a large number of nonpaying customers. It is very challenging to strike a balance between freemium users and paid users. A company may want to make its freemium product engaging but not so good that people would never need to pay. On the other hand, a company may want to keep its freemium customers in the loop as long as possible because that increases the likelihood of their switching to premium.


Zoom’s Rise Amidst the COVID-19 Pandemic

Advantages •

Disadvantages

Beta Testing. Having freemium users on • the platform allows the company to test new product features on them.

The operations are expensive. The company incurs heavy operational costs in the form of storage, marketing, or product development. These can be quite taxing on the company’s balance sheet as it has to invest heavily in these areas without seeing a financial return. The customer churn rate is high as some of the freemium customers may not want to pay for premium features.

Zoom follows a freemium business model, wherein it provides free limited services initially to hook users and then turns them into paying subscribers in exchange for upgraded services. Revenue is generated through a premium version with added features to the standard free offering. The company earns most of its revenue by offering subscription plans with varying features. Subscription revenue is driven primarily by the number of paid hosts, as well as purchases of additional products including Zoom Rooms and Zoom Video Webinars. Customers can use Zoom’s Meetings and Chat product for free. This allows the users to host group meetings with up to 100 people for 40 minutes. If more advanced features or a greater capacity (in terms of users and time) are needed, premium plans have to be purchased. Zoom’s freemium model focuses on getting its free users to become paying customers, helping to increase the adoption rates as well as boost word of mouth publicity Zoom offers four subscription plans – Free, Pro, Business, and Enterprise – with limited features in each plan. Customers can host unlimited 1-to-1 meetings and access core features like HD Video/Voice, desktop sharing, recording, and whiteboarding under the basic Free plan. More advanced features such as prolonged meeting duration, reporting, custom personal meeting ID, company branding are available as the plan is upgraded (See Case Exhibit II). Zoom has been able to scale its revenues by leveraging on a free product in the B2C space. If a participant wants to host a meeting, they can subscribe to one of the paid plans or sign up for the free Basic plan. By attracting free hosts through their Basic plan, the company drives usage on its platform, and its free hosts then introduce and invite new participants to experience the benefits of Zoom. As the free hosts realize the benefits of the platform, they often subscribe to a paid plan to gain access to additional functionality. 2. Discuss Zoom’s growth amidst the COVID-19 pandemic. The pandemic has propelled Zoom to the forefront of global video collaboration in enterprises and households across the globe. It has triggered a new market disruption for Zoom that has enabled it to tap into a massive new consumer base across the globe that has never used video conferencing before. Ansoff Growth Strategy Matrix To portray growth strategies, Igor Ansoff (1957) presented a matrix that focused on a company’s present and potential products and markets. By considering ways to grow through existing and new products and in existing and new markets, there are four possible productmarket combinations (See TN Exhibit III). They are: •

Market Penetration

Market Development

Product Development •

Diversification 4


Zoom’s Rise Amidst the COVID-19 Pandemic

TN Exhibit III:

The Ansoff Growth Matrix

Adapted from Furrer, O. (2016). Corporate level strategy: Theory and applications. Routledge.

Zoom pursued growth through Market Penetration, Market Development, and Product Development. Market Penetration: The first quadrant in the Ansoff matrix is market penetration. The firm seeks to achieve growth with existing products in its current market segments, aiming to increase its market share. This is often adopted as a strategy when the organization has an existing product with a known market and needs a growth strategy within that market. The Freemium model itself is a market penetration strategy which drives new customer acquisition. Zoom adopted a multipronged go-to-market strategy with optimal routes-tomarket, including direct sales representatives, online channel, resellers, and strategic partners. Zoom’s platform is designed to make it easy to host meetings. By attracting free hosts to use its platform, the company promotes usage that allows hosts and their meeting attendees to experience the difference in Zoom. Zoom’s customer base spans numerous industry categories, including education, entertainment/media, enterprise infrastructure, finance, government, health care, manufacturing, non-profit/not for profit and social impact, retail/consumer products, and software/internet. Market Development: The firm seeks growth by targeting its existing products at new market segments. This strategy is used when the firm targets a new market with existing products. Zoom entered new geographical markets, especially during the COVID-19 pandemic, as it offered its products to organizations and government agencies in several countries globally. It catered to the education industry, health sector, small enterprises sector, training and development industry, and also to the general public who used the Zoom app for informal meetings like parties, funeral services, prayers, and protests. 5


Zoom’s Rise Amidst the COVID-19 Pandemic

It achieved accelerated international expansion. With users, offices, and data centers strategically located around the world, the company reached new customers globally (See Case Exhibit III). Product Development: The firm develops new products targeted at its existing market segments. Product development in the Ansoff matrix refers to firms which have a good market share in an existing market and therefore might need to introduce new products for expansion. Zoom developed a variety of products tailored toward private consumers as well as businesses. These included core products Zoom Meetings and Chat as well as Zoom Rooms and Workspaces. Zoom Meetings could be attended and held via a web browser, or desktop and mobile applications. The Chat worked as an extension to the Zoom Meetings where users could interact through a chat with each other, share files, or create groups. Zoom Rooms and Workspaces were used by large scale organizations to conduct virtual meetings. Reasons behind Zoom’s Success: Zoom established the right resources, processes, and profit formula to dominate the marketplace. It had the right product, core competencies, and business model to scale during the pandemic. Zoom’s success during the COVID-19 pandemic can be attributed to the following reasons: •

Zoom’s Free Plan: The free plan was almost fully-fledged, offering the same features as its competitors, but at no cost.

Ease of Use: Zoom focused on making its product user friendly with a series of iterative enhancements.

Product Features: Zoom worked on giving its users the best video and audio experience and built a product which had high precision and quality.

Simple user interface: Zoom’s user interface was simple and easy to use with features like audio/ video chat, record, screen share, virtual hand raise, polls, mute participants, and change virtual backgrounds.

Affordability: Zoom’s subscription plans were more affordable and palatable to both individuals and small/medium sized businesses.

Customer-centric approach: Zoom’s products were developed to provide the best customer experience and totally relied on customer satisfaction.

Visionary Leadership: Yuan built investors’ trust, boosted employee morale, collaborated with high end technology companies and satisfied customers.

Low Latency: Zoom’s videos tried to stay under 150 milliseconds – since it was after 150 milliseconds that a conversation started to feel unnatural – by optimizing the connection on per-device basis instead of focusing on the worst ones in the loop.

Multipronged go-to-market strategy: The company leveraged on its freemium to build a continuous flow of paying customers

Broad interoperability: One of the most important features of Zoom’s platform was its broad interoperability with a range of diverse devices, operating systems, and third-party applications. The Zoom app was accessible from the web and from devices running Windows, Mac OS, iOS, Android, and Linux.

Easy integration: Zoom also integrates with most apps that make scheduling, accessing files, generating leads, and collaborating effortlessly easy 6


Zoom’s Rise Amidst the COVID-19 Pandemic

3. Discuss the challenges faced by Zoom. What steps should Yuan take to overcome Zoom’s shortcomings and maintain its dominance in the global video conferencing industry? A. Following are the challenges faced by Zoom: •

Security and privacy issues. These include Zoom bombings and data leakages.

A significant number of the so-called Zoom bombings – the practice of uninvited parties hijacking video conversations to disrupt the usual proceedings – were reported since the global quarantine began.

Privacy shortcomings. Zoom was accused of passing on data to third parties, including Facebook, without notifying the users. The iOS version of Zoom's app reportedly sent analytics to Facebook even for users who did not have a Facebook account, thus violating the privacy of its users.

Security measures were compromised in the past and could be compromised in the future. If Zoom’s security measures were compromised in the future, it could damage the company’s reputation, impair its sales, and harm business. In addition, Zoom’s products and services might be perceived as not being secure. This perception might result in customers and hosts curtailing or ceasing their use of its products, thereby incurring significant liabilities for the company and harming its business

Intense competition in the video conferencing industry where deep pocketed rivals like Microsoft, Google, Cisco, and others were coming up with the same product features and pricing.

Product performance. Health experts and cyber psychologists pointed out potential inefficiencies in Zoom calls as they lacked an element of personal and eye contact and led to Zoom fatigue.

Managing growing customer base. The steep rise in the number of users during the pandemic strained the company, forcing it to invest more on expanding capacity to meet the needs of new users, many of whom were not paying customers. Moreover, it faced a difficult task in managing 17 data centers on a cloud-based platform with different regions, time zones, and employees working in stay-at-home work settings

Increased costs as it was unclear how many of Zoom’s free users would turn into subscribers.

While Zoom had been focusing on building strong technology partnerships, it had yet to lay out a robust distribution strategy for its channel partner program. The company primarily relied on direct sales and needed to build a large global channel partner network quickly, to continue growing its reach and market penetration. The strategic situation of Zoom can be analyzed using the SWOT analysis (See TN Exhibit IV): The SWOT analysis is a strategic framework used to study the internal and external environment of a business by identifying its strengths, weaknesses, opportunities, and threats. TN Exhibit IV: Zoom: SWOT Analysis Strengths: • Video-first cloud architecture • Freemium strategy • Reliable, high-quality communications • Viral demand driven by individual users • Best user interface

Weaknesses: • Security issues • Data privacy concerns • Zoom fatigue & health issues • End-to-end encryption not supported Contd…

7


Zoom’s Rise Amidst the COVID-19 Pandemic Contd…

• • • • • • •

Cost effective subscription plans High video quality Low video latency Easy to use Growing base of happy customers Multipronged go-to-market strategy Unique technology and infrastructure enabling best-in-class reliability, scalability, and performance.

Opportunities: Threats: • Expand international market. With the • Competition from Microsoft, Webex, new norm of physical distancing and GoToMeeting (See Case Exhibit X). work-from-home, the demand for video • Competitors offering similar products at communication services is gaining same prices. momentum. • Security flaws • The COVID-19 pandemic has created • Compliance with applicable the opportunity for rapid growth for international laws and regulations, Zoom. As the pandemic persists including laws and regulations with globally, Zoom is positioned to record respect to privacy, telecommunications more growth in the number of users and requirements, data protection, consumer meetings held on the app. protection • According to Global Market Insights, the video conferencing market was projected to grow from US$14 billion in 2019 to US$50 billion by 2026. Going forward, Yuan can take the following steps to overcome Zoom’s shortcomings: • To maintain revenue growth, post the pandemic, Yuan should focus on expanding the Zoom ecosystem, progressing with technological innovations, and providing the best in class customer service in order to yield future growth •

The IT Security Administrators of the company should implement stringent policies to tackle security and privacy issues

Zoom can diversify into new product verticals using virtual reality and augmented reality

It can grow its partnership ecosystem and collaborate with high end technology startups to develop innovative products

Yuan should track the competitive strategies adopted by Zoom’s competitors and also keep an eye on their direction of scaling up

Zoom should take customer feedback to update the product features and functionality and maintain its growth momentum.

It should think about how to convert free users into paying customers: o

Unless new, attractive, and useful premium features offer users incredible value as they engage with the product, they may not have the incentive to ever upgrade to a paid plan over their freemium solution.

8


Zoom’s Rise Amidst the COVID-19 Pandemic

o

Rethink the pricing strategy. Nudge free users to becoming paying customers by providing feature-based add-ons within the freemium plan.

o

Gather actionable market intelligence from both the free and paid users. Learn their behavior and sell the intelligence to industry players.

o

Invite advertisers to target the users.

o

Build a community from the users and customers.

Suggested Readings and References: 1.

Robin, “Zoom Profits Double as Lockdown Boosts “Future of Working Anywhere,” www.netimperative.com, September 2, 2020.

2.

Rachel Phua, “The Future of Work is a Hybrid Model, not a Completely Remote One, Says Zoom CEO Eric Yuan,” www.channelnewsasia.com, August 25, 2020.

3.

Vicki Turk, “Zoom Took Over the World. This is What Will Happen Next,” www.wired.co.uk, August 6, 2020.

4.

“Why Zoom Is Successful & How it Makes Money,” www.whatisthebusinessmodelof.com, June 21, 2020.

5.

Eric S. Yuan, “CEO Report: 90 Days Done, What’s Next for Zoom,” www.blog.zoom.us, July 1, 2020.

6.

Rishi Iyengar, “Zoom’s Revenue Soars 169% as People Flock to Service During Pandemic,” www. edition.cnn.com, June 2, 2020.

7.

Netalie Sherman, “Zoom Sees Sales Boom Amid Pandemic,” www.bbc.com, June 2, 2020.

8.

Stephanie Tanneson, “Zoom Becomes Video Conferencing Leader During COVID-19. Why?” www.blog.zoominfo.com, May 6, 2020.

9.

Ashish Das, “The Zoom Success Story and Rise of an Immigrant Billionaire,” www.theaugust.com, May 02, 2020.

10.

Ari Levy, “Zoom’s CEO Emigrated from China 22 Years Ago and Spoke Little English — Now He’s Worth Almost $3 Billion,” www.cnbc.com, April 19, 2019.

11.

Molly Sloan, “The 3 Secrets Behind Zoom’s Triple-Digit Growth,” www.drift.com, April 10, 2020.

12.

Brian Feldman, “Is it Safe to Use Zoom,” www.nymag.com, April 9, 2020.

13.

Jane Wakefield, “Zoom Boss Apologises for Security Issues and Promises Fixes,” www.bbc.com, April 2, 2020.

14.

Tom Warren, “Zoom Announces 90-day Feature Freeze to Fix Privacy and Security Issues,” www.theverge.com, April 2, 2020.

15.

Supantha Mukherjee, Akanksha Rana, and Aditya Soni, “Zoom Takes Lead Over Microsoft Teams as Virus Keeps Americans at Home: Apptopia,” www.reuters.com, April 1, 2020.

16.

Eric S. Yuan, “A Message to Our Users,” www.blog.zoom.us, April 1, 2020.

17.

Samantha Murphy Kelly, “Zoom’s Massive 'Overnight Success' Actually Took Nine Years,” www.edition.cnn.com, March 27, 2020.

18.

Jordan Novet, “Zoom Has Added More Videoconferencing Users This Year Than in All of 2019 Thanks to Coronavirus, Bernstein Says,” www.cnbc.com, February 26, 2020.

19.

Ron Miller, “Zoom Video Conferencing Service Raises $100 Million from Sequoia on Billion-dollar Valuation,” www.techcrunch.com, January 17, 2020.

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Case 7 - The COVID-19 Pandemic: Herculean Challenges for Business and CSR Instructor’s Manual 1. What is your assessment of how businesses approached the pandemic? Can you name some businesses that have practiced good issue and crisis management during COVID19? Many businesses approached the pandemic by shifting their business models to focus on short-term survival strategies that allowed them to create enough value for both the customer and the firm. Professor Mauro Guillen terms this “pivoting”—and it can be successful for companies during a crisis.1 However, three conditions are necessary for the pivot during the pandemic: • Align the firm with at least one trend that the pandemic created or intensified • Laterally extend the company’s existing capabilities that cements its original strategic intent. • Offer a sustainable path to profitability that enhances/preserves brand value in the minds of consumers. Students might be introduced to these three conditions to think about shifting brands and product/service delivery. Businesses that have made this work include Spotify’s pivot to original content with podcasts, Shopify’s e-commerce platform shift to distances of less than 15 miles between sellers and buyers (compared to Amazon), Unilever’s shift to prioritizing personal hygiene product brands over other products, Red Roof hotels offering day rates for workers during the pandemic, Best Buy’s shift to more virtual support and technology repair, Walgreen’s shift to offering delivery on grocery and personal care products.

2. Of the dimensions of CSR introduced in the case, which one do you see as most/more relevant regarding how businesses should prioritize their strategic actions during a crisis like a pandemic? Students should identify the four dimensions – the economic, legal, ethical and philanthropic dimensions. During a crisis, like a pandemic, the priority is the economic objective which is to survive and to provide the goods and services that consumers and employees need. However, during times of crises, unethical and illegal behaviors can also surface, so businesses must make decisions in tandem with these obligations to be legal and ethical that are required and expected. Crises planning and rapid response required strong, topdown leadership. Decentralized decision making was also emphasized as the pandemic exposed See M.F. Guillen (2020), “How Businesses Have Successfully Pivoted During the Pandemic,” Harvard Business Review online (July 7), Accessed January 12, 2023 at How Businesses Have Successfully Pivoted During the Pandemic (hbr.org); Priya Merchant (2021), “Pivoting During the Pandemic: How These Businesses Succeeded,” Entrepreneur online (January 21), Accessed January 12, 2023 at Pivoting During the Pandemic: How These Businesses Succeeded (entrepreneur.com). 1


supply chain vulnerabilities. For example, anticipating hoarding and stock-outs and adapting quickly was important; employees required specific guidance and security; and online sales and social media were utilized

3. CSR inevitably involves tensions between its different dimensions: legal versus ethical, economic versus philanthropic, etc. Where do you see these tensions with regard to businesses’ actions during the pandemic? The economic objective was to survive and to provide the goods and services that consumers and employees need. Businesses’ legal responsibilities changed along with regulations related to COVID-19. Mandates such as mask-wearing and vaccinations were challenging. Businesses were also required to view their stakeholders with an ethical lens. Issues brought on by the pandemic included worker health and well-being, rationing of medical care, ethical management of crises, hazards posed to essential workers, disruption to domestic lives, women being disproportionately affected, black U.S. entrepreneurs facing unequal access to capital, and Asians becoming the subject of hate crimes and discrimination. Businesses’ commitment to their philanthropic responsibilities increased as charitable responses to COVID-19 surpassed all other recent disasters to date. The pandemic did not derail businesses’ commitment to environmental initiatives and addressing climate change. 4. Are there some helpful lessons for businesses to learn from the pandemic? What are these lessons? Which pertain to crisis management and which pertain to ongoing management? The pandemic has brought challenges for business/society relationships, as well as some opportunities. For businesses that have embraced CSR as part of their corporate missions and strategies, the pandemic might be viewed as just a different context for them to apply their CSR principles along economic, legal, ethical, and philanthropic dimensions. The lessons learned from the COVID-19 pandemic might actually spur businesses to rethink their CSR strategies.


IBS Center for Management Research

Teaching Note:

Case 8 - Verizon – Adapting to a Contactless World This teaching note was written by Anil Anirudhan, under the direction of Sanjib Dutta, IBS Hyderabad.

www.icmrindia.org

BSTR/6 13


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Case 8 - Verizon – Adapting to a Contactless World TEACHING NOTE ABSTRACT The case ‘Verizon – Adapting to a Contactless World’ is about the digitalization initiatives taken by Verizon Communications Inc. (Verizon). With changing customer expectations, the Covid-19 pandemic, and increasing trend of digitalization by its competitors, Verizon came up with ‘Touchless Retail’ at its stores to stay relevant. The case deals with the digital elements Verizon introduced in its stores as part of the various measures it implemented to enhance customer experience. The measures would reduce the physical touch points and at the same time provide for a superior customer shopping experience. The impact of Covid-19 was visible in the changing shopping patterns of customers across the globe. The case next dwells upon the challenges faced by Verizon due to the Covid-19 pandemic and its ‘Touchless Retail’ strategy. The competitors’ response to the Covid-19 pandemic is discussed further on. The case ends with the plans of Verizon to continue with its ‘Touchless Retail’ strategy, to open more of the closed stores, and invest in 5G and fiber technology for a better customer experience.

TEACHING OBJECTIVES This case will enable the students to: • • •

Analyze the retail digitalization framework and its dimensions. Evaluate the importance of digitalization of retail in the present and future scenario. Understand the erosion of traditional retail functions due to digitalization.

TARGET AUDIENCE The case can be used for teaching the concept of ‘retail digitalization’, ‘physical elements’, and ‘digital elements’ in “Retail Management” as part of “Business Strategy” curriculum in both graduate and post-graduate study programs.

TEACHING APPROACH AND STRATEGY • •

• •

This case can be used in classroom discussions to understand the concept of ‘Retail Digitalization’ in an organization. The instructor can ask the students to come prepared with the case prior to the discussion. The session can begin with an ice breaking question such as: 1) Did the Covid-19 pandemic hasten the process of retail digitalization? With the help of the ice-breaking question, the instructor can introduce the content of the case and ask the students to give their inputs. The students can be divided into groups and asked to discuss the questions provided for the purpose. 1


Verizon – Adapting to a Contactless World

The next part of the discussion would be around traditional and digital retail systems and processes.

The challenges faced by Verizon in digitalization can be discussed further along with the ‘Touchless Retail’ format being implemented at its stores.

The case can be concluded with the groups being asked to summarize the concepts learnt and to put forth their views on the future outlook for the company.

QUESTIONS FOR DISCUSSION 1. Examine the framework for retail digitalization. 2. Discuss the retail digitalization strategy. Evaluate the ‘Touchless Retail’ strategy of Verizon. 3. Examine the impact of digital transformation in retail. What were the measures planned by Verizon to overcome the challenges due to the Covid-19 pandemic?

PROPOSED SESSION PLAN (60 MINUTES) Appropriate Time for Discussion Introduction

10 minutes

Question 1

10 minutes

Question 2

15 minutes

Question 3

15 minutes

Conclusion

10 minutes

Total Session Time

60 Minutes

ANALYSIS 1. Evaluate the framework for retail digitalization. A. An actionable framework encompasses three dimensions in the retail environment. The first dimension is the Physical Space, the second is the Information Space, and the third dimension is the Transaction Space. Retail Digitalization

Physical Space

Information Space

Transaction Space

Source:http://www.madjor.com/en/knowledge/bricks-pixels-framework-digitizing-retail-experiences

Physical Space: Retail stores are primarily physical spaces and they have product displays and shelves and floor plans. The physical space also includes seating arrangements for the staff who manage the sales and operations. Other features are ambience, lighting, music, and usage of fragrances. This first dimension deals with the stores’ physical attributes and the utilization of digital tools to optimize these attributes. The various actions would be to track and analyze footfall inside the stores to optimize the store design and layout and usage of beacons to track the consumer behavior to organize the sections inside the store to maximize spending.

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Verizon – Adapting to a Contactless World

o

Due to the Covid-19 pandemic, Verizon embarked on utilizing digital technology to provide a safe and satisfying shopping experience for its customers. The Verizon stores were provided with sanitizing stations and safety partitions for the customers and the staff. Information Space: Information inside of a store refers to the signage and labels. Information about the products, their usage, what they are most suited for, features, and characteristics of the products can be provided to the customers through the use of technology. Overlaying digital information combined with a physical experience will provide a more context aware, immersive, personalized and seamless experience for the customer. Some of the actions would be a digital way finding system that guides the customer toward the various products based on their online product search. Another measure would be face recognition enabled display that guides the customer to the respective sections based on their gender and age. Some more actions would be QR codes on the products that display the product information along with user reviews. o

Social distance markers were prominently placed inside and outside the Verizon stores to ensure less physical contact between the customers and staff. There was a reduction of the in-store floor furniture in the areas of customer seating and the children’s zone to ensure cleanliness. The demo devices were reduced by 15 percent and accessories were reduced by 50 percent

Transaction Space: This is the final stage of the store experience for the customer and the retailer. Digital tools can be used to enhance the customer experience and make for a pleasant experience for the customer and pave the way for a future enduring relationship with him/her. Some of the actionable measures would be self-checkout counters, integration of e-wallets as payment tools for cashless transactions, and mobile payment terminals that are available anywhere inside the store. o

The customers of Verizon were provided with a number of payment options keeping in mind the social distancing norms. Digital kiosks were provided at the stores for the customers to make the payments through cash or by card, thereby ensuring social distancing norms at the stores.

2. Discuss the retail digitalization strategy. Evaluate the ‘Touchless Retail’ strategy of Verizon. A. a) Digital transformation is encompassing every industry and sphere in finance, banking, education, manufacturing, mass media, retail, etc. Digital transformation is undertaken by companies to enhance their services and to offer facilities in order to enhance the level of satisfaction of their customers. An article in the ‘International Journal of Retail and Distribution Management’ titled “The Digitalization of Retailing: An Exploratory Framework” by Johan Hagberg, Malin Sundstrom, and Niklas Egels-Zanden, mentioned that, digitalization was one of the most significant on-going transformations of contemporary society and encompassed many elements of business and everyday life. This transformation was important for the retail sector, which both affected and was affected by this development. Retailers provided customers with various digital products and services that were adapted to the use of digital technologies and were simultaneously affected by the new forms of consumption associated with these digital technologies. Although e-commerce is part of digitalization, the impact of digitalization extends far beyond e-commerce and includes the transformation of physical products into digital services, consumer recommendations in social media, and the incorporation of digital devices into the purchasing process. Mobile devices are being increasingly used in the retail setting. Mobile devices provide additional functions such as barcode scanning, location-based services, and near field communication. Thus, digitalization refers both to a transformation from analogue to digital and to the facilitation of new forms of value creation.

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Verizon – Adapting to a Contactless World

b) The ‘Touchless Retail’ strategy of Verizon comprised three categories: Accessing the store, Physical elements, and Digital elements. The My Verizon app was used in all the three categories for a complete and satisfying shopping experience. •

Accessing the Store: This category involved the pre-visit preparation. The customer had to schedule an appointment for troubleshooting issues or in-store pickup by using the My Verizon app. An online appointments system was utilized for booking appointments for store visits. Upon arrival of within 75 feet of the store, the customers received an alert on their mobiles through the My Verizon app. The app guided the customers on the check-in process and gave information on the waiting period required to ensure social distancing. The customers were informed about the new store timings, requirements of face masks, and guidelines to be followed at the store, and also had to affirm that they were free from the symptoms of Covid-19

The Physical Elements: Due to the Covid-19 pandemic, this category comprised the Social Distance Markers which were strategically placed throughout the store, in adherence to the six-foot social distance guidelines. On-floor Inventory and Demo reduction comprised reduced inventory on the shop floor to ensure cleanliness and the demo devices were reduced by 15 percent and accessories by 50 percent. Sanitizing Stations containing sanitizers were placed both in front of the store and in high traffic areas. The sanitizing stations were provided with 8oz and two oz sanitizer bottles along with risers, bins, and trash cans. Partitions of varying sizes were placed between the representatives and the customers. The in-store furniture was reduced in areas such as customer seating, wireless workshop, and children’s zone. Employees were provided with masks and gloves

The Digital Elements: This category comprised the Preferred Mobile check-in process which was available through the My Verizon app. With the Preferred Digital buy and checkout, customers could use their mobiles to sign the terms and conditions and payment accept terms. The Verizon Pass had a seamless and simple account verification process through the My Verizon app. The employees guided the customers by linking their tablets with the customers’ mobile with the help of a cobrowsing system. Cash payments were done at the bill payment kiosks with minimum physical interaction; a QR code was generated which had to be scanned at the machine placed in the kiosk. It then allowed the customer to insert the cash, thereby minimizing physical interaction between the customer and the store personnel. In Touchless Cash Payments, the customers were able to make payments using cards. Verizon had launched a consumer credit card for its wireless customers partnering with Synchrony and used the Visa payment network. The card served the dual purpose of doling out rewards for Verizon’s customers while at the same time restricting person-to-person contact and ensuring social distancing.

3. Examine the impact of digital transformation in retail due to the Covid-19 pandemic. Discuss the retail digital transformation trends for post Covid-19 times. A. a) The impact of Covid-19 was different for different retailers and depended on the countries, customer mixes, and categories affected by it. The four key areas that were affected by Covid-19 were workforce, pricing, fulfillment and last-mile execution, and transparency. Retailers had to use technologies to find new ways to increase revenue and generate new innovative business models. The new digital transformation was set to influence the services provided by the company, its culture, workflow, and management. 4


Verizon – Adapting to a Contactless World

The benefits of digital transformation in retail were Easier Connection, Smoother Operations, More Convenience, and Better Customer Experience. •

Easier Connection: Digital transformation enabled customers and retailers to connect and communicate more easily through websites, mobile apps, social media accounts, and chatbots. o

The customers of Verizon were able to use the Verizon mobile app to pre-schedule an appointment for purchase or troubleshooting issues. The customers also received instructions on their mobile apps on store timings, guidelines to be followed at the stores, and waiting period time.

Smoother Operations: Implementing new technologies such as cloud computing will improve operations both within the organization and outside and lead to reduced time spent on sharing information with the customers. o

o

Verizon had launched a consumer credit card for its wireless customers partnering with Synchrony and used the Visa payment network. The card served the dual purpose of doling out rewards for Verizon’s customers while at the same time restricting person-to-person contact and ensuring social distancing. The Preferred Mobile check-in process was available through the My Verizon app. With the Preferred Digital buy and checkout, customers could use their mobiles to sign the terms and conditions and payment accept terms. The Verizon Pass had a seamless and simple account verification process through the My Verizon app. The employees guided the customers by linking their tablets with the customers’ mobile with the help of a co-browsing system.

More Convenience: The implementation of AI tools enables the customer to transact without the help of cashiers, using cashless transactions or the cash payments kiosks. o In Touchless Cash Payments, the customers were able to make payments using cards. Cash payments were done at the bill payment kiosks with minimum physical interaction; a QR code was generated which was to be scanned at the machine placed in the kiosk. It then allowed the customer to insert the cash, thereby minimizing physical interaction between the customer and the store personnel

Better Customer Experience: Digital tools make the job of employees a lot easier, paving the way for quicker and more efficient customer service. The customer has a pleasant experience and the business becomes better and more prosperous. o

The My Verizon app was used for a complete shopping experience. Everything right from the store appointment to information regarding the store guidelines and timings, responsibilities as a customer, safety guidelines to prevent the spread of Covid-19, payment modes, location of sanitizers, touchless cash payments, and digital buy and checkout were provided in the My Verizon app.

b) The process of digital transformation was not a short-term initiative and was to be continued in the future as well, depending on the constant change in technologies and better innovations. The trends for the post Covid-19 times were the utilization of newer technologies for better customer experience. Some of the top and trending technologies were Mobile Applications, Augmented Reality, and Virtual Reality. •

Mobile Applications: Mobile Applications serve as the connector between the customer and the retailer. The customers can check up on the products, watch the demos, read the reviews, and contact customer care for any related issues.

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Verizon – Adapting to a Contactless World

Augmented Reality: Augmented Reality is a digital transformation tool in which the customer can view and try out the products from the comfort of their homes.

Virtual Reality: Virtual Reality has great potential in the retail industry as the customers can view the products online at the stores and check the features without even stepping out from their homes. Customer experience will be greatly enhanced with this digital transformation tool.

Suggested Readings and References:

1.

Hagberg, Johan. Sundström, Malin. Egels-Zandén, Niklas. “The digitalization of retailing: an exploratory framework,” International Journal of Retail & Distribution Management 44(7):694-712, July 2016, https://www.researchgate.net

2.

Reinartz, Werner. Wiegand, Nico. Imschloss. Monika. “The impact of digital transformation on the retailing value chain”, International Journal of Research in Marketing, Volume 36, Issue 3, Pages 350-366, September 2019, https://www.sciencedirect.com

3.

Gentle, Kevin. “Bricks to Pixels – A Framework for Digitizing Retail Experiences”, http://www.madjor.com

4.

Anand, Vijay. Gupta, Arpna. “Retail Digital Transformation - A Leap to Next Gen Retail”, https://www.altran.com

5.

“Understanding COVID-19’s Impact on Retail’s Digital Transformation”, April 6, 2020, https://www.intellectsoft.net

6.

Gregus, Michal. Wiefel, Marc. Digitalization: The impact on traditional retail and the future model of multichannel, International Journal of Scientific and Research Publications, Volume 5, Issue 3, March 2015, http://www.ijsrp.org

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IBS Center for Management Research

BSTR/6 12

Teaching Note:

Case 9 - Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis This teaching note was written by Smita Ray, under the direction of Sanjib Dutta, IBS Hyderabad.

www.icmrindia.org


BSTR/6 12

Case 9 - Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis TEACHING NOTE ABSTRACT The case “Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis” talks about how the Canada-based multinational banking and financial services company, Scotiabank, navigated through the COVID-19 crisis. The case starts out with a brief history of Scotiabank. It then describes the company’s business strategy, which included the launch of innovative products by using digital technologies. The case touches upon the services launched by Scotiabank to ensure that customers had a stress-free banking experience and allow employees to support customers continuously during the COVID-19 pandemic. The case also describes the various financial products launched by Scotiabank to help customers overcome financial uncertainty. It also highlights how the bank focussed on improving both its branch experience and user experience on its mobile banking application.

TEACHING OBJECTIVES This case is designed to enable the students to: •

Understand how companies create a better customer experience using digital technologies

Understand the strategies adopted by banks to combat COVID-19

Understand how technology solutions are key to banks’ strategies in their fight against the COVID-19 crisis

TARGET AUDIENCE This case is intended for use in teaching the subjects, “Strategic Management”, “Business Environment”, and “Banking Operations” in the MBA program. Program

MBA/MS

Course

Section of the Course •

Business Planning

Strategic Management

Strategic Planning

Business Environment

Business Continuity Plan

Technology Strategy

Banking Operations

External Business Environment

Digital Banking 1


Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis

IMMEDIATE ISSUES •

Banking during COVID-19

Business strategy during COVID-19

Customer and employee support using technology

BASIC ISSUES •

Managing a crisis

Use of technology to navigate through a crisis

Business Continuity Planning during a crisis

TEACHING APPROACH AND STRATEGY The students can be advised to refer to the suggested readings to get a brief idea about the topics. Before starting the discussion, the concepts of Strategic Management, the difference between traditional banking and digital banking, and the role of digital technology in banking operations can be described. The case moderator can initiate the discussion by asking the students to give examples of companies that have adopted different strategies to navigate through the COVID-19 crisis. The instructor can divide the students into different groups and ask each group to prepare the answers to one of the questions given here. After the entire discussion, the instructor can conclude the case by summarizing the views of all the groups regarding how banks are using technology to ensure work does not get disrupted and customers get the services even during a crisis.

PROPOSED SESSION PLAN Topics

Appropriate Time for Discussion

Introduction

10 minutes

Question 1

15 minutes

Question 2

15 minutes

Question 3

15 minutes

Conclusion

5 minutes

Total Session Time

60 Minutes

QUESTIONS FOR DISCUSSION 1. In light of the COVID-19 pandemic, discuss the challenges Scotiabank faced from the external business environment. How did it manage to navigate through the challenges? 2. What steps did Scotiabank take to ensure that it remained customer centric during the COVID19 crisis? 3. How did Scotiabank ensure that the financial security of its customers was taken care of during the COVID-19 crisis? What role did technology play?

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Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis

ANALYSIS 1. In light of the COVID-19 pandemic, discuss the challenges Scotiabank faced from the external business environment. How did it manage to navigate through the challenges? A. Scotiabank offered a range of products and services including personal and commercial banking, wealth management, and corporate and investment banking. Over the years, the bank used digital technologies like Artificial Intelligence (AI), Machine Learning (ML), and Smart Automation to serve its customers better. That also helped Scotiabank to control online frauds in banking activities. During the COVID-19 pandemic, Scotiabank experienced significant challenges. By the end of June 2020, more than 16.5 million people in the US had become unemployed and had filed for unemployment insurance. That put pressure on the bank. Another challenge was fluctuation in the equity market. Even though the Federal Reserve gave the assurance of ‘unlimited’ quantitative easing (QE) and other measures to build confidence in the market, but the increase in the number of COVID cases and the slowdown in the US economy posed many challenges to the bank. One of the biggest challenges lay in providing continuous support to customers and employees to ensure uninterrupted banking. The bank also faced challenges in the form of deferred loan payments. Scotiabank took the following measures to meet these challenges: •

Deferrals of Loan Payments: When Scotiabank noticed that customers were facing some problems in repaying loans due to the COVID-19 crisis and lockdown, it took the help of its Smart Automation technology to create the facility for the branch network to submit Mortgage, Credit Card, and Line of Credit deferrals. Also, in March 2020, Scotiabank launched its Customer Assistance Program (CAP) to help customers address financial challenges during the period of the COVID-19 pandemic. Customers were also given relief on loan payments by up to six months. This covered loan payments for mortgages, personal loans, credit cards, and lines of credit. Under this program, Loan Fees and penalties for late payments were waived and credit card interest rates were lowered. No processing fee was applied to loans extended for working capital support for businesses affected by COVID-19.

1

Facilitating Direct Deposits: As a solution to issues related to direct deposits, Scotiabank launched the direct deposit facility for customers in April 2020. That allowed customers to enrol for direct deposits to get their Canada Emergency Response Benefit payments. With the help of its Smart Automation technology, the bank delivered customer-centric solutions within 3 days. It enabled customers to make enrolments of their direct deposit through Scotia Online and mobile and branch channels. Through this process, Scotiabank sent more than 200,000 retail direct deposits to the Canada Revenue Agency (CRA). The first two days of its launch saw over 4000 businesses being enrolled for direct deposits. By the end of June 2020, more than 2.5 million Canadians had enrolled through their financial institution for the CRA direct deposit. That provided relief to them and helped them manage the financial stress caused by COVID 19.

Mortgage Deferral Process: To make the mortgage deferral process faster, various teams at Scotiabank including the Scotiabank Smart Automation COE, Operations, Analytics, and IT&S, came together. These teams and Branch Customer Experience team jointly made the Mortgage Deferral process easier and more convenient. With the help of ‘bots 1, the bank processed a customer request within 5 days. Through bots, Scotiabank processed more than 120,000 requests within the first week of launch.

A bot refers to a software application that is programmed to do certain tasks. Bots are automated, and they run according to their instructions without a human user needing to start them up. Bots often imitate or replace a human user's behaviour. They do repetitive tasks much faster than human users could. 3


Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis

2. What steps did Scotiabank take to ensure that it remained customer centric during the COVID19 crisis? A. Denise Lee Yohn, in the article, “6 Ways to Build a Customer-Centric Culture” (See Suggested Readings and References), said being customer-centric (also known as being clientcentric) is a business strategy that’s based on putting the customer first in order to provide a positive experience and build a long-term relationship with him/her. To make its business customer-centric during the COVID-19 crisis, Scotiabank adopted the following strategies with the help of digital technology: •

Response to Customer Needs: Customer empathy is the ability to identify a customer’s emotional need, understand the reasons behind that need, and respond to it effectively and appropriately. During the COVID-19 pandemic restrictions, Scotiabank responded with empathy to customer needs by creating a robotic virtual workforce to complete the Setup and Funding of the new loan – Canada Emergency Business Account (CEBA) – accounts with the help of its Smart Automation technology.

Facilitate Direct Interaction with Customers: Companies need to develop ways for employees to interact with customers directly, even where “back office” functions are concerned. As every employee impacts the customer experience in some way, even if indirectly, an employee can benefit from interacting with customers to understand them better. To ensure proper communication, the bank shared the updates on Covid-19 with its employees on a regular basis. Similarly, it encouraged its customers to contact their relationship manager directly for any update regarding their bank account. The bank also provided onsite medical staff for its operations and customer contact centers to support the employees in case of any medical issues. All these were made possible by the digital technologies it used. In addition to that it made arrangements for employee calls with nurses and the chief medical officer, so that their queries related to COVID-19 could be addressed.

Link Organization Culture to Customer Outcomes: Organizations should ensure that they establish and track the link between culture and customer impact. Scotiabank launched business continuity plans (BCPs) and tested them on a regular basis to ensure continuity of business. It nominated employees to critical functions and allowed them to work from its BCP sites or from home. Scotiabank also allowed 60% of its employees to work from home. That ensured minimal business disruption while mitigating the risk for its employees. It also reconfigured work spaces and installed plexiglass screens at its branches.

Launch Products to Meet Customer Requirements: Scotiabank focused on the requirements of senior citizens. The bank launched a new information hub called ‘Bank Your Way’ for seniors. The information hub helped customers to learn the basics of digital banking. It allowed them to check their balance and account history, pay bills, transfer money between accounts, and send and receive money through e-Transfers using Scotia OnLine or the Scotiabank mobile app. It provided information about a wide variety of investment tools, including Scotia iTRADE. The bank established priority status in its call centers for seniors, moving them to the front of the queue. It also launched online forms for payment deferrals for mortgages, auto loans, credit cards, and lines of credit. That would help customers, their families, and their communities to fulfil their everyday banking needs.

3. How did Scotiabank ensure that the financial security of its customers was taken care of during the COVID-19 crisis? What role did technology play? A. Along with the precautionary measures taken to meet the challenges of COVID19, Scotiabank also took some steps to ensure the financial security of its customers during the COVID-19 pandemic. These were:

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Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis

Use of Advanced Technologies: To ensure more financial security, Scotiabank enhanced its digital banking offerings and introduced new efficient Automated Teller Machines (ATMs) and Intelligent Deposit Machines that allowed customers immediate access to their deposits. The bank also introduced new transaction and security alerts, and added credit card controls. That resulted in growth in its online and mobile banking offerings.

Enhancement of Loans: To provide support to small businesses and corporate clients, the bank provided additional loans of over US$ 45 billion. By the end of May 2020, the International Banking segment of Scotiabank had processed over 2 million CAP applications on loans totalling US$ 20 billion. Its digital capabilities in the Pacific Alliance resulted in approximately 80% of its CAP applications being enrolled via digital Omnichannel tools.

Augmenting Branch and User Experience: In order to improve both its branch experience and the user experiences on its mobile banking application, Scotiabank opened its new state-of-the-art branch at Scotiabank Centre to offer the best in class service to its customers. By end of May 2020, more than 140,000 customers had adopted the bank’s digital banking solutions. That showed an increase of digital transactions by 50% compared to the previous year. The bank was also expecting strong growth in its digital subsidiary Tangerine and online discount brokerage iTrade.

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Scotiabank: Helping Customers and Employees Navigate through the COVID-19 Crisis

Suggested Readings and References:

1.

Steven MacDonald, “How to Create a Customer-Centric Strategy for Your Business,” www.superoffice.com, July 22, 2020.

2.

“Scotiabank Unveils Digital Banking Information Hub for Older Customers,” www.finextra.com, June 2, 2020.

3.

“Scotiabank Simplifies Digital Banking with a New Resource for Seniors -- Bank Your Way,” www.marketwatch.com, June 1, 2020.

4.

Ephraim Vecina, “Scotiabank Addresses threat Deferrals Pose to Institutional, Borrower Stability,” www.mortgagebrokernews.ca, May 28, 2020.

5.

“CGI partners with Scotiabank on Intelligent Process Automation Proof of Concept for Trade Finance,” www.finextra.com, October 31, 2018.

6.

Elliot Maras, “Scotiabank Digital Transformation Emphasizes 'One-bank' Customer Experience,” www.atmmarketplace.com, October 19, 2018.

7.

Denise Lee Yohn, “6 Ways to Build a Customer-Centric Culture,” www.hbr.org, October 2, 2018.

8.

“Customer-centricity Explained – what it Means to be Customer-centric” www.iscoop.eu.

9.

“Scotiabank Defers Payments for Customers Affected by COVID-19,” www.looptt. com.

10.

“At times of Social Distancing and Lockdowns, Scotiabank Gets Closer to the Customers,” www.cache.techmahindra.com.

11.

“Mario Correa, Chief Economist of Scotiabank in Mexico Discusses the Challenges Facing SMEs in Mexico as a Result of COVID -19,” www.thebusinessyear.com.

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CASE 10 The Storm of Governance Reform at the American Red Cross

Author’s Teaching Note: By Jill Brown I.CASE ABSTRACT This case describes the challenges faced by the ARC Board of Governors in 2006-2007 as it prepared to revamp the governance structure of this federally chartered not-for-profit organization. The decision to overhaul the ARC governance structure was prompted by a U.S. Senate Finance Committee investigation into the ARC Board following concerns over Hurricane Katrina relief efforts, as well as concerns regarding board processes, including CEO retention and board composition. The result was a slate of recommendations from an Independent Governance Advisory Panel regarding how to overhaul the Board. This case is set in the Fall/Winter, 2006 when the ARC Chairman must decide how many of the recommendations to endorse. II. CASE ISSUES AND SUBJECTS Governance Social Responsibility Board Composition Stakeholders Boards of Director Term Limits

CEO Turnover Government Oversight Not-For-Profits Importance of Mission

III. CASE QUESTIONS AND GUIDE 1. Leading up to 2007, many criticized the ARC for poor corporate governance. What information in the case demonstrates poor governance? The first step to understanding governance failure is to get a clear understanding of the system and the media attention to the ARC that spawned a re-evaluation of governance practices. The instructor might first begin by asking what students remember about the ARC in Hurricane Katrina. The gist of the case is not about Hurricane Katrina per se; it involves ARC governance issues that became obvious in relation to Hurricane Katrina. Therefore, the instructor should focus the students on the media attention to the ARC and the central governance issues in the case, beginning with the function of the board in a not-for-profit organization. Key points might include: 1. Definition of Governance. Governance in a not-for-profit organization is defined as, “the board’s legal authority to exercise power and authority over an organization on behalf of the community served.”i The board is the first mechanism to ensure that the community interests are served; however, organizational members support this authority in conjunction with state and federal public officials. With this in mind, students will understand that “poor governance” for a notfor-profit would mean the failure of the Board to serve the community well. This was a central issue in the Katrina case and subsequent firing of CEO Evans. Additionally, the case describes problems in the lack of board participation, and “blurred lines” between management and the Board. Senator Grassley highlighted executive turnover and the ineffectual board structure as examples of poor communication between the Board, the Chairman, and the 10-1 ©2024 Pearson Education, Ltd.


CASE 10 The Storm of Governance Reform at the American Red Cross CEO. Additionally, political appointees to the Board appeared to shirk their duties. 2. Importance of Mission. (In a not-for-profit organization.) Students should see that “poor governance” means that the ARC Board failed to lead the organization in its mission of, “...preventing and alleviating human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.” 3. The Board. Students should talk about the media scrutiny that is mentioned in the case, as well as the high-level of scrutiny that the ARC received as a federally chartered organization, most notably from the U.S. Senate Finance Committee. This may segue into a discussion of the members of the Board, highlighted in Appendix A in the case. Students should notice the size of the board, and the wide variety of experiences that members of the Board of Governors bring to the organization— most of which are in for-profit organizations. The recommended governance issues are board-centric. Categories of governance mechanisms include: board composition and structure (average board size, board tenure), board selection, role of the CEO, role of board oversight, director voting rights, Chairman selection, CEO selection, and CEO recruitment. Teams might use information from IM Table 1, which provides a comparison of the characteristics of the ARC Board to that of a typical for-profit, publicly traded firm, as well as other not-for-profits. Both Senator Grassley and Chairman McElveen-Hunter made comparisons to for-profit organizations in the case, and recommendations for the ARC included the development of more for-profit-like governance mechanisms. These categories overlap to categories of recommended board changes, including director term limits, CEO duality, average CEO tenure, and board selection. After reading the case and reviewing this analysis, the students should be able to identify the following governance issues: -The ARC board size was too large -Board members did not have enough not-for-profit experience -The ARC Chairman had too much power as the “principal” officer with sole power to nominate the CEO -The Board did not have enough meetings per year -CEO turnover was unusually quick (i.e. CEO tenure was unusually short) -The Board selection process was political -Management was too involved—lack of Board oversight of ARC chapters The identification of these issues might lead to discussions regarding the two main governance issues that Senator Grassley highlighted in the case: 1) CEO turnover and 2) the relationship between Chairman McElveen-Hunter, the CEO, and the Board. 1. CEO turnover. Separate from performance issues, CEO turnover is problematic in governance. The CEO selection process is laborious and takes time away from the other duties and obligations of a board. Additionally, the pool of qualified CEOs is relatively small. Therefore, it is important for any organization to have a continuity of leadership. Information in the case, including comments from governance experts and the media, allude to this. Additionally, information in the IM Table 1 provides comparison information, 10-2 ©2024 Pearson Education, Ltd.


CASE 10 The Storm of Governance Reform at the American Red Cross which confirms that the four-year tenure of CEO Evans, in particular, was very short. Students should notice the lower average CEO tenure at the ARC, in comparison to both for-profit and general not-for-profits, which creates an opportunity for a theoretical discussion on CEO tenure, as well as the opportunity to identify this as a true governance problem. Lower CEO tenure (i.e. high turnover) is often an indication of power issues between the CEO and the Chairman of the board. Senator Grassley implied this in his letter to McElveen-Hunter. Additionally, several of the Panel recommendations gave the CEO more decision-making authority relative to the Chairman. 2. The relationship between the Chairman, the CEO, and the Board. Corporate governance involves putting mechanisms in place to protect stakeholder interests. In order to do this, the Chairman, CEO and the ARC Board must have a relationship that fosters the open exchange of information and good decision-making processes. In the case, Senator Grassley implies that these elements are missing. This is a good opportunity to discuss agency issues, which involve issues of information asymmetry and decision processes. Agency issues are important for understanding the foundation of governance in both not-for-profit and for-profit organizations. Both for-profit and not-for-profit boards have fiduciary responsibilities (duty of care and a duty of loyalty) to their stakeholders. However, forprofit boards broadly protect their shareholders while not-for-profit boards protect their donors and clients. Both types of boards have to manage agency costs that include self-opportunism, shirking, and moral hazard when managers operate in their own self-interests, instead of representing their stakeholders. Instructors might begin by asking the students whether the case indicated that there were elements of agency costs at the ARC. Students should point out that Senator Grassley said that federally appointed board members were shirking their duties by avoiding meetings and sending substitutes in their place. Additionally, Senator Grassley indicated that there were potential conflicts of interest for several board members, and he implied a general lack of transparency when the ARC sent documents to his office labeled, “confidential.” Shirking, conflicts of interest and lack of transparency are all indicative of agency issues that must be monitored and controlled by the ARC Board, as part of good governance. Additionally, these concepts link to issues covered in the corporate governance chapters in the recommended texts. Students may then ask how a not-for-profit board can incentivize managers to behave. The Instructor should point out that actual incentive contracts are rarely used because of tax code constraints and the difficulty in measuring outcomes. However, not-for-profit organizations focus on incentivizing managers to provide care and uphold the trust that has been granted to organizations like the ARC. Corporate culture and volunteerism play a big role in enforcing good behaviors. Astute students will point out the conflict of interest in having Chairman McElveen-Hunter reviewing recommendations and then endorsing (or not endorsing) the recommendations to the Board will limit her job responsibilities, relative to her responsibilities pre-Katrina. 10-3 ©2024 Pearson Education, Ltd.


CASE 10 The Storm of Governance Reform at the American Red Cross Q2: Who are the stakeholders involved in the ARC case? How do these stakeholders differ from those of for-profit organizations? What are the implications of the stakeholder analysis for the decision facing Chairman McElveen-Hunter? Stakeholders. Students might begin to answer these questions by being asked to define the “customers” of the ARC. Beyond the donors whose monies must be managed by the ARC Board, the Board is also accountable to other stakeholders. However, unlike for-profit organizations, shareholders are not the dominant stakeholder. The first step in this portion of the case is to have the students draw a stakeholder map. The second step is to take that mapping of stakeholders and then have students divide the stakeholders into categories to discuss which stakeholders are primary and which are secondary. Primary stakeholders are those who have some direct interest or stake in the organization. Secondary stakeholders, in contrast, are public or special interest groups that do not have a direct stake in the organization. Students will quickly identify that for not-for-profits like the ARC, communities are primary stakeholders and core to the not-for-profit mission. In this case, the President of the United States, the federal government, and donors are also primary stakeholders that the Board must consider in its duties and obligations. All others stakeholders, like other not-for-profits, the media, and government regulatory agencies are secondary. While an organization’s responsibilities are not limited to the primary stakeholders, the fiduciary duties of the Board begin with its duties towards the primary stakeholders. Additionally, students should identify which stakeholders are core, strategic and environmental; this breaks down the primary/secondary categories to assess who the Board must address, beyond those with whom it has a fiduciary obligation. To determine this students should ask, what are each stakeholder’s interests? Core stakeholders are essential to the survival of the organization, strategic stakeholders are vital to the strengths and opportunities of the organization, while environmental stakeholders capture all others. Students should identify that the federal government (and the President of the United States as its leader) is a core stakeholder and essential to the survival of the ARC under its charter, in addition to the communities and volunteers, whom the ARC serves. Strategic stakeholders include the U.S. Senate Finance Committee, as a regulator in charge of oversight. Other stakeholders include the ARC employees, who wrote letters to the Committee; the Panel, which provided governance suggestions; and other NGOs that provide relief services. Environmental stakeholders would capture all others. While students may differ regarding their categorization of stakeholders, it is helpful to have them articulate their opinions on the nature of stakeholders’ stakes. It also supports the important work that the ARC Board does on behalf of its stakeholders. Q3. Which, if any, recommendations should Chairman McElveen-Hunter put forward for adoption by the ARC Board? To this point, students have learned that effective governance at the notfor-profit ARC involves creating an atmosphere of shared vision where donors and the governments are primary stakeholders and volunteers are the backbone of the organization as definitive stakeholders. The governance experts identified some inherent weaknesses in the composition, structure, and 10-4 ©2024 Pearson Education, Ltd.


CASE 10 The Storm of Governance Reform at the American Red Cross relationships of the ARC Board. Their recommendations were designed to provide more oversight and responsibility into the hands of a smaller, stronger board. Students should point out that Chairman McElveen-Hunter has no choice but to put to vote the suggested changes by the Panel, even though it reduces her status from “principal officer” of the organization and allows the CEO to have voting status and representation on the Board. Aside from the pressure from the U.S. Senate Finance Committee to make changes, the suggested changes address essential governance mechanisms that are important to both not-forprofit and for-profit organizations. Many of the recommendations of the Governance Panel mirror mandates for boards of directors of for-profit organizations under the Sarbanes-Oxley Act of 2002 (SOX)1. SOX requirements are available at http://www.sec.gov/about/laws/soa2002.pdf. However, one key SOX mandate is noticeably absent from the ARC’s expert recommendations. This is the issue of potential conflicts of interest, which the ARC faces as a conduit for federal agencies. Despite a revised board structure, the President of the United States still has final say in appointing the Chairman and various ARC Board members. Students may miss this issue at first, but the proposed changes in Case Table 1 under “composition and size” show that the President of the United States would still appoint eight members. Additionally, CEO turnover was addressed with proposed changes to the CEO selection process, as well as stripping away the designation of the Chairman as “principal officer.” Students might ask themselves, what should the relationship between the CEO and the Chairman of the Board be like? Are the proposed changes enough?

EPILOGUE The American National Red Cross Governance Modernization Act of 2007 was signed into law on May 11, 2007, and the ARC Board accepted all of the proposed changes. However, even after CEO Evans resigned and governance reforms were put in place, controversies over CEO succession continued. When the ARC announced the appointment of Internal Revenue Service chief Mark Everson to replace Evans as its newest President and CEO, one media blog wrote, “the revolving door to the CEO’s office at the ARC has spun yet again.”ii (Rafferty, 2007). After less than two years as president and CEO, the Board fired Everson after learning that he had engaged in a personal relationship with a female subordinate. Following another interim director, Gail J. McGovern joined the ARC as President and CEO on April 8, 2008. A former professor of Marketing at Harvard Business School and former President of Fidelity Personal Investments, she faced a daunting task. In addition to overseeing responses to several high-profile disasters, McGovern had to deal with a $209 million deficit. In her keynote address, she stated, “The fact is, this economy is presenting many challenges for not-for-profits. But it’s also providing the impetus for the ARC and other not-for-profits to make needed and sometimes overdue changes. Simply put, there’s a greater acceptance to change in a crisis.”iii By 2010, McGovern had made significant changes in the

1 Sarbanes-Oxley (2002) - SEC.gov

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CASE 10 The Storm of Governance Reform at the American Red Cross organization, including massive layoffs and restructuring and the ARC was once again financially positive. The new ARC Board seemed to be working, and five years after Hurricane Katrina, the ARC released a report called, “Bringing Help, Bringing Hope.” The theme of the report was that the ARC was better prepared for future disasters. As CEO McGovern began her third year at the ARC, she reiterated the theme of “rebuilding community” with “strong families, strong communities.”iv This theme seemed to apply, as well, to the ARC Board of Directors as it revisited its commitment to effective governance. BoardSource, p. 15.

i

iiRafferty,

R.J. 2007. "Will New Red Cross CEO Help or Harm Confidence in Disaster Agency?" May 31, 2007 AmericaJR website. Accessed May 2011 at http://americajr.com/news/red-crossceo.html iii

"Red Cross Leader Describes First-Year Triumphs, Challenges" ARC announcement dated July 21, 2009. Accessed May 2011 at http://redcross.org.edgesuitestaging.net/portal/site/en/menuitem.94aae335470e233f6cf911df43181aa0/?vgnextoi d=f3f2c20008d92210VgnVCM10000089f0870aRCRD "Bringing Help, Bringing Hope" A five-year report following Hurricane Katrina. Accessed May 2011 at http://www.scribd.com/doc/36458115/Katrina-5Year iv

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Case 11 - LAST COMPANY STANDING: A CASE OF SMALL BUSINESS SUSTAINABILITY Prepared by Bentley Associate Professor Jill Brown (jbrown@bentley.edu)

This case is based on a true story, with permission from the company owner. The company name and location has been changed for anonymity. Any reproduction of this article requires the permission of the author.

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Case 11 - LAST COMPANY STANDING: A CASE OF SMALL BUSINESS SUSTAINABILITY Introduction Small business owner Kevin White scratched his head as he debated his next move in ongoing discussions with the State’s Department of Natural Resources, the Environmental Protection Division (EPD) and its Hazardous Waste Management Branch. His company, Cooker Industries, had just filed its fourth semi-annual progress report for a voluntary remediation program for cleaning up and monitoring hazardous waste attributable to the company's site. However, the costs of remediation were draining the company of cash and increasing its debt. Kevin was not sure that the company could keep it up much longer and stay in business. "How did it I get into this situation?" Kevin thought to himself. "I am a smart man, with decades of experience in this industry, and yet I am facing an impossible situation! When I bought the company 25 years ago, I had no idea I was sitting on a ticking hazmat site." Kevin thought about all of his options. "Should I ask for more bank debt for the clean-up? Should I sue the former owners of the company who stuck me with this problem? Should I try to negotiate with the State for financial help? Should I try to sell the company, even as I go through remediation? Or should I just work for a few more years and shut the doors?" At the age of 78, Kevin had thought he would be able to retire by now, and he had had several offers for the company over the years...but maybe those options were no longer viable. What should Kevin do? Company background Cooker Industries, Inc. operated originally in New York City as a manufacturer of nickel, silver and copper utensils, and stainless steel sinks and kettles. In 1972, its owner, Mr. Natoli, moved the company to the south to escape increasing pressures from labor unions and a growing litigious business environment. He purchased a 75,000 square foot facility situated on 10.54 acres of land in a rural location in the southeastern section of the United States. Surrounded by other manufacturing companies, including several fertilizer and chemical companies, the company was located on the "industrial parkway" of a town of approximately 6,000 residents. The company sold primarily industrial stainless steel braising pans, sinks and kettles to the government and military, which worked well with Mr. Natoli’s background in the kitchen utensils business. By 1989 sales were approaching $3 million. In 1990, Mr. Natoli decided he wanted to retire. He listed the company with several brokers, and he quickly sold the business to Kevin and an equity partner for a total purchase price of $5 million. Both Kevin and his partner had prior experience in the food service industry, manufacturing stainless steel shelving that was used in many industrial kitchens. Both also had engineering back grounds from Ivy League schools, as well as several patents in the steel shelving area. With $200,000 cash down from each partner, the pledging of personal and plant property, and majority financing from a small bank located in Kevin’s hometown in the northeast, the two purchased the company and began manufacturing the insulated kettles that were the hallmark of Cooker Industries (see Figure 1). After three years, Kevin's partner decided that he was not interested in being a small business owner. He was at a different career point in his career than Kevin, with two small children (Kevin was 25 years older, with kids out of college). Additionally, he was trying to commute to the plant from the northeast, 2


and his family was not happy. He negotiated a buyout of his equity with Kevin, and went to work with a large pharmaceutical company as the Director of Sales. Kevin acknowledged that part of the reason for his partner’s departure also had to do with Kevin’s leadership style and strategic plans. Kevin was interested in growing the business with new products, while his partner wanted to leverage the existing product lines into new customer areas, including hotel chains and cruise ships. Kevin was more interested in entrepreneurial new designs, and he could be stubbornly aggressive when pitching ideas. After his partner left, Kevin immediately began to lay plans to expand the business into commercial sales with new products--redefining the company as an institutional commercial kitchen equipment manufacturer. The departure of his partner allowed him to forge into different segments without getting approval. He spent hours designing and tinkering in the plant, and coming up with new ideas for expansion. Company Products and Segments Kevin’s expansion plans appeared to work well at first. Since 1990, the company has provided institutional foodservice equipment for sale to prisons (federal, state, county), the military (navy aircraft carriers, for example), schools, hotels, cruise ships, health care facilities--nationally across the United States. The largest customer in this group is the prison group, with over 60% of Cooker sales from this customer segment. The largest product segment of sales is in the kettle business (40%), long-established under the former owner. However, in 1993, Kevin introduced a new product, the BIGGcooker (“BIGG”), tagged as a "whole new concept in cooking", which provided a multi-function stainless steel cooker that worked as a steamer, skillet, griddle, fryer, kettle and combi-oven--capable of running on steam, gas or electric (see Figure 1). In 1995, sales of the BIGG took off, facilitating a 13.7% growth in sales from 19952001 (see Table 1), and contributing to steady sales since then. The BIGG is largely seen by others in the industry as a tough item to compete against. While almost all of Kevin's items are patented (and Kevin himself has over 65 patents for equipment in the industry), the BIGG's 20-year patent was considered one that needed ongoing patent protection for its clever innovation and hard-to-copy design. Additionally, Cooker custom-engineers many of its products like the BIGG to fit customer design preferences, with Kevin's engineering expertise and skilled welding personnel. Cooker competes with other commercial kitchen equipment manufacturers, including large publicly traded companies, who compete against Cooker in their niche areas of kettles and chafing dishes (the latter, a small segment for Cooker, at less than 10%). Small businesses like Cooker, while not having the economies of scale associated with the large companies, can compete against these manufacturing competitors because institutional food service equipment is not sold directly to the consumers. Rather, networks of dealers are intermediaries to evaluate orders put out to bid and "fit" the orders to local building codes and installation issues. While larger manufacturers have financial leverage with the dealer networks, and can often offer big discounts if dealers purchase entire kitchen outfits, the smaller companies like Cooker compete in the aftermarket when companies just need to purchase one or two kettles. Cooker has manufacturer representatives that market products to the dealers, as well as special interest groups (like school boards or prison review boards) to promote company products. Yet, the dealer network makes it tough to get any significant sales growth, especially in relation to the large 3


manufacturers who keep getting larger with industry consolidation. At times, Kevin was able to circumvent the dealer network and sell directly to institutions like the military, with which he had a longstanding relationship. However, these sales were the exception to the established dealer network. Competitive Advantage Despite all of the industry challenges, Kevin White's dream of owning his own company was the culmination of 25 years of experience as an engineer and salesperson. Kevin was excited to be an entrepreneur, tinkering with designs, jumping out onto the shop floor, and creating new products. Cooker's reputation for designing great products was inexorably linked to the capabilities of Kevin himself. For example, as soon as he bought the company in 1989, he worked closely with welders to develop exterior stainless seam welded casings to offer insulated 60+ gallon kettles that were truly unique--designed to enclose insulation for better temperature retention and offering a truly unique product for food service. Topped with his exciting new BIGG cooker, Kevin was optimistic from the beginning that he could bring Cooker to a sales size of at least $10 million. Kevin's dreams of developing innovative food service equipment seemed to be going along well at first. Despite some rough patches after buying out his partner, he hired a new plant manager in 1995 to speed up production processes and review work/flow issues on the plant floor. New equipment was purchased from cash flow of operations (see Table 1). While Kevin had a reputation for being a "hothead" with his employees, the hiring of his plant manager allowed him to focus on innovation and hired support staff to deal with internal operations. By early 2000, the company was on track to continue to grow, with plenty of cash in operations. Kevin also became a big community supporter, sponsoring Little League teams, participating in the Chamber of Commerce meetings and becoming friends with other local business owners. The town was struggling financially (typical of rural southeastern towns) and Cooker Industries, which employed over 50 local tradesmen, was considered one of the largest employers. Estimated per capita income in the town in 2012 was $13,658, with median household income of $23,708. In 2014, the county's unemployment rate was 9.2% compared to national average of 6.6%. Environmental Issues Stage One Unbeknownst to Kevin, however, the company was in trouble. It is unclear how long Cooker had been under investigation by the State Environmental Protection Division, but sometime in the mid-1990s, Cooker was notified that it was being evaluated for possible inclusion as a Superfund site--a polluted location (usually abandoned or "uncontrolled") requiring a long-term response to clean up hazardous material contaminations. Initially, the issue appeared to be related to some county investigations of manufacturers of agricultural pesticides. Unbeknownst to Kevin, the site had once been used to manufacture fertilizer for a small period in the early 1950s prior to being converted to a manufacturer of commercial grade kitchenware. This had not been disclosed to Kevin when he purchased the company in 1989. In fact, the prior owner never acknowledged this fact, or disclosed it in any purchase agreement. As far as Kevin knew, as noted on the purchase agreement, the facility had been converted from its former use as a "warehouse". Similarly, the bank that financed the initial purchase, and the title 4


company that provided title insurance did not surface any environmental issues with the property. Kevin had contacted the State prior to the purchase, and similarly, there were no records of environmental issues. Kevin's new plant manager immediately began working with the State EPD and its local office. The company contracted with an environmental engineering company to do an assessment and a "waste treatability study" (see Table 2). Groundwater monitoring stations were set up and a plan was identified to drop off weekly ground water samples from monitoring stations that were set up around the property (total cost to Cooker for this service = approximately $50,000 paid out of cash). Initial monitoring found small amounts of trichloroethene that exceeded state limits. Kevin’s plant manager suspected that this was most likely left over from a cleaning process that was popular in the 1970's to remove lubricating oils after manufacturing utensils. He immediately contracted with an engineering company to inject chemicals to disperse and accelerate the breakdown. The company continued to monitor the sites and worked with local EPD officials to monitor the ground water. Some remediation occurred, as Cooker took the advice of the engineering company to dispose of old containers that were found on the property---again, most likely from the plant’s prior use, this time in the fertilizer business. Removal of two buried drums was completed by Cooker Industries in 1999 at a total cost of $17,000. The biggest environmental concern was that the plant was located .89 miles from groundwater wells where there was the potential for groundwater contamination. Ironically, if the plant had been located over a mile from the wells, Cooker would not have been required to do anything, and would never have been flagged by the State EPD because it would have been beyond the “contamination zone”. However, almost as soon as the State EPD began investigating, they disappeared. Beginning in 2001, there were no more calls to the Cooker office for reports, and no visits from the State EPD. There was no more talk of Superfund status. Although Cooker remained a "hazardous waste small quantity generator"(SQG), according to the State--defined as a company with less than 1000 kilograms of hazardous waste during any calendar month and accumulating less than 6000 kg hazardous waste at any time---all appeared to be well. For the next several years, the company monitored and reported to a local EPD office without any problems. They stopped doing so when the 3-year monitoring period was completed. Crisis and Top Management Team Changes In 2001, at the age of 63, Kevin was involved in a serious accident. He experienced a traumatic brain injury (TBI), which required that he be placed in a medically induced coma for four weeks at a head trauma center out of state. The operations of the plant were left to the plant manager and two administrative personnel. However, the inertia of company sales was remarkable. Sales in 2002 were the highest that they had ever been. The BIGG continued to sell well. Plant operations were streamlined and efficient, and Kevin's new line of chafing dishes was being prototyped. Kevin gradually made it back to running his company. In 2003, he came back to the business full-time; however, personnel turnover reached an all time high. Both the plant manager and director of human resources left after disputes with Kevin, who seemed more aggressive and combative since his accident. 5


From 2003-2009, the number of employees gradually decreased from 50 to 35. Sales growth tapered off, for several reasons. 1) The initial market excitement of the BIGG tapered off, and as a durable good with a long shelf life, there were no replacement sales yet, 2) Kevin and his manufacturer's representatives were having a tough time selling direct to institutions outside of the dealer network. Kevin refocused on the company's mainstay product lines, the kettles and the BIGG. Chafing dishes were sidelined as Kevin continued to hone his core products. By 2010, the company was not growing, but sales were stable, and Cooker's products were still considered amongst the highest quality in the industry. Kevin was approached by several companies that were interested in purchasing the company--primarily for its patented insulated kettle and the BIGG, which was still under patent coverage. Kevin prepared a prospectus and set an offering price of $5 million, based on a plant value of $750,000, and 2010 sales of $4.8 million. Environmental Stage 2 In 2010, just as Kevin was preparing his prospectus, two things occurred that caused the environmental issues to resurface. First, the State overhauled its EPD Division and created a “Hazardous Site Inventory (HSI)” to identify sites where there has been a known or suspected release of a regulated substance in the environment. Prior to the HSI, the State evaluated sites based on the national U.S. Environmental Protection Agency (EPA) Superfund database. Now they were going to identify the hazardous materials sites at the state level and offer a “voluntary remediation program” for clean up under the direction of the State EPD. Second, Kevin had several people that were interested in buying the company, and these individuals were much savvier than Kevin’s original financing bank had been—they, and their lenders, required proof of environmental safety. They contacted the State office and found that Cooker Industries was flagged on the HIS site. However, the buyers were willing to move forward with negotiations if Kevin completed the state’s voluntary remediation program. Such a program was designed to encourage voluntary, timely and costeffective clean-up. It was not subsidized…but for a fee of $5,000 the State would review compliance reports and monitor the progress towards effective clean-up. The State would suggest state-approved contractors and send inspectors to the site on occasion for a fee of $75/hour, per inspector. At the end of the program (to be determined by the State), the State would sign-off on a document saying that future owners would not be liable for any future environmental problems that might emerge. Kevin immediately contracted with another engineering company, recommended by the State, to assist with the voluntary remediation program. After an initial assessment, the engineering company determined that the clean-up could be done over a 3-5 year program at a cost of approximately $250,000. However, the State required Kevin to put that amount in an escrow account to be held until the completion of the project—those monies could not be used for the clean-up itself, but would be kept as insurance that the project could be completed. When the remediation was done, Cooker Industries would be removed from the HSI list. Liability Protection….a Missed Opportunity

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Unfortunately for Kevin, he had missed a unique opportunity to get some financial help with his cleanup during the period of time when he was recovering from his head injury, when communications from the EPD had stopped. On January 11, 2002, President George W. Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act. Under the Brownfields Law, the federal EPA provided financial assistance to eligible applicants through four competitive grant programs: assessment grants, revolving loan fund grants, cleanup grants, and job training grants. The Act was consistent with an overall policy trend to addressing environmental issues with a multi-jurisdictional focus. “Brownfields” were typically associated with properties in urban areas that were being used for “low intensity” use or no use at all because of the liability of a prospective purchase of properties. However, States were left with a great deal of room in setting their own land use policies in regard to brownfields. In the State where Cooker Industries was located, the legislature had supported the national legislation with the State Hazardous Site Reuse and Redevelopment Act (a.k.a. “State Brownfields Law”). Sites listed on the HSI list were automatically eligible. As such, Cooker Industries would have been eligible for benefits afforded to purchasers of contaminated properties and their lenders. In its 2005 session, the State legislature expanded its coverage and granted a grace period that, for the first and only time, retroactively permitted sites to be entered into the program. However, the retroactive grace period ended on January 1, 2006. Kevin had missed the opportunity. In fact, Kevin never knew that this benefit was available to him. What to do? Remediation began in 2013—a year later than Kevin had planned, but unfortunately, in early 2012 the plant was hit by a tornado. It took almost a year to collect the insurance monies for the renovations— the damage was restricted to the office area but the cost was over $720,000 for repairs. The potential buyers that approached Kevin in 2010 went away, frustrated by the delay. Nevertheless, Kevin felt he could move ahead to address the environmental problems. He approached a local bank for a loan for the $250,000 to be placed in escrow. Then, he cashed in some of his retirement money to begin funding the clean-up. The total costs for clean-up were still unknown; however, the engineering company would try to work within the State’s estimation. Hopefully, within 3-5 years, Cooker Industries would no longer face HSI listing after completing the voluntary remediation program, and future buyers would be absolved of any liability should environmental problems surface again.

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Questions to Consider: 1. Who is responsible for environmental problems that surface in a situation like this? Who should pay? 2. What are the risks and benefits that Kevin must consider when deciding what to do next? 3. Who are the stakeholders involved? Who are the most salient? 4. How does this environmental scenario differ for small versus large business? Can you think of a comparable large company experience with environmental remediation? 5. Does the state’s remediation program make sense? Who wins? Who loses? 6. How is this scenario typical of issues that entrepreneurs might face? 7. What should Kevin do? Suggestions for moving forward?

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Table 1- Cooker Industry Financials Year End Results

1995

2002*

2012

Net Sales

$4,808,951

$5,469,200

$4,588,856

Cash Balance

$52, 012

$1,292,087

$56,000

Current Assets

$1,534,949

$2,029,604

$1,812,400

Total Assets

$2,066,927

$2,261,401

$2,500,350

Current Liabilities

$653,775

$664,244

$633,370

Total Debt & Leases

$1,075,129

$153,019

$712,400

Shareholder Equity

$453,895

$1,505,490

$1,100,000

Debt To Equity

2.37

0.10

.64

*2002 Items To Note: 1.

2.

3. 4.

In 1998 $450,000 was spent using operating cash flow to upgrade a 1,000 ton double action Clearing hydraulic press. Upgrade included new hydraulics, PLC control, and refurbishment of all cylinders and shafts. Press is used to form all shells for kettle products New equipment purchases include: Strippit CNC punch press, 10 foot bed hydraulic shear, GEKA iron worker, plate roller, annealing furnace with 6 foot opening, a 120 gallon electropolishing process, and numerous TIG welding machines. All capital spending activities with the exception of the Strippit and annealing furnace were purchased using operating cash flow. Reduction in long term debt and strong cash position was the result of significant improvements in manufacturing and plant operations.

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Table 2- List of “Regulated” Substances Investigated-- Cooker Industries Property (2000) Substance Name Dichloroethane Trichlorobenzene Aldrin Barium Beta-Benzenehexachloride Chlorobenzene Chromium Cumene DDE

GW X x

Delta-Benzenebexachloride Dichloromethane Endrin Heptachlor Lead DDT DDD Vinyl chloride* Toxaphene Trichloroethane Toulene Dieldrin Ethylbenzene Tetrachloroethane Xylenes

x x x

x

x

x x x x x x x x

Soil

X X X X X X X X X X X X X X X X X X X X X

Source: State HSI Inventory Report *Flagged for “known release in groundwater exceeding the reportable quantity”—although also noted not to affect anybody in the groundwater (GW) zone.

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Instructors/Judges Manual Summary This is a case about the challenges of a small business and the problems that can arise when environmental problems are inherited. Students will appreciate the issues of public policy, competitive advantage, innovation, strategic management and sustainability that come into play in the case. Students should identify the central issue…whether Cooker Industries can survive following significant cash outlay for remediation. The case exemplifies the paradox that small businesses face and the tensions inherent in sustainability cases –the short-term economic costs of remediation (a.k.a. “cleanup”) relative to the long-term sustainability goals (and long-term value) for the company. Additionally, there are ethics issues of accountability and responsibility. Kevin did not create these environmental issues, yet he is responsible for them as the owner of the property. The upside is that he has an opportunity to create a better local environment and greater long-term value for the company while supporting an impoverished local community. The downside is that it comes at considerable cost to Kevin, as the sole proprietor looking to retire. Issues There are several issues that are highlighted in the case, and which students should note as they try to answer the questions. 1. Information asymmetry. As is typical of entrepreneurs, Kevin’s focus from the beginning was creating a legacy for himself and his company in a familiar industry, where he had a lot of experience. However, as he focused on creating and selling new products, he was unaware of federal and state regulatory and policy changes that ultimately affected his company. He relied on a small, select group of employees to monitor for regulatory compliance, but nobody appeared to be proactive in identifying issues related to this area. While students might see this as unusual, it is more typical than atypical for small business entrepreneurs, who often operate with a small group of employees, small budgets, and a focus on sales growth. However, broader issues like regulatory compliance contribute to the high failure rates of small businesses. 2. Strategic Leadership and the Entrepreneur. In accordance with point #1, Kevin is a prototypical entrepreneur. Creative, visionary, risktaking….and the case suggests that he could be difficult to interact with. Students can parallel Kevin’s traits with those of other entrepreneurs like Jeff Bezos from Amazon. Entrepreneurs often experience failure and therefore they need to be resilient. Kevin’s setbacks include partner turnover, employee turnover, personal injury, and the extraordinary event of a tornado.

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The idea that he would need to forego short-term profits for long-term value may be something that he can adapt to as well. 3. Accountability and Policy Precedent Students might realize that the situation of inherited Hazmat issues parallels the “last man standing” arguments surrounding the fallout of the commercial and residential mortgage market, where individuals ended up with upside down mortgages due to problems that were not necessarily their fault—they were not complicit, but they paid the price for broader macroenvironmental failures (i.e. the financial market failures). Similarly, Kevin is paying the price for prior poor business practices. Just like the commercial mortgage meltdown, where the U.S. government tried to help out the “victims” of poor mortgage practices with bailouts and alternative financing schemes, the U.S. government offered to help small businesses with environmental remediation under President Bush’s Brownfields act. However, the communication of such remediation appeared to be elusive to small businesses in rural counties. Therefore, this case also highlights the challenges that federal and state agencies face in effectively communicate policy changes to relevant stakeholders. Answers to Questions 1. Who is responsible for environmental problems that surface in a situation like this? Who should pay the cost? Students will first identify all relevant stakeholders for the “responsibility”—a duty, obligation The original owners of the fertilizer company in 1950 Mr. Natoli (who may or may not have been aware of the problems) Kevin White Employees Family members of Kevin’s (who might inherit problems) The local community Federal and state government (watchdogs of companies) The bank who financed the purchase of Cooker for Kevin Kevin’s original partner Future owners of the property The “cost” issue refers to the accountability—a willingness to accept responsibility Ultimately, Kevin has to pay the cost as the primary stakeholder who purchased the company and therefore assumed the “willingness”. He might be able to lobby for help from state or U.S. regulators with reference back to the Bush Brownfields help. Or he could wait for another, similar policy change under new administration. After the fact, he could try to litigate for remuneration from the previous owner, but without evidence that Mr. Natoli knew about environmental problems this might be difficult. He could 12


also go back to the bank who financed the company purchase. They took out a mortgage on the property, and were therefore ultimately responsible for its environmental clearance. 2. What are the risks and benefits that Kevin must consider when deciding what to do next? Risks: Short-term cash flow may not be enough to sustain clean-up Financing might not be available for Kevin to remediate Potential buyers might not be patient enough to wait for remediation Other environmental issues could surface Remediation might not translate into higher company sale price Benefits: Remediation is the only way to offer long-term value for the company Reputation of the company would benefit—at community and industry levels Remediation might translate into higher company sale price Kevin could retire with a clean conscience that he had done “the right thing” 3. Who are the stakeholders involved? Who are the most salient? See #1 above. The most salient stakeholders are the local community (affected by groundwater and soil contamination), the owner and employees of the business, and future owners. Secondary stakeholders are the others. 4. How does this environmental scenario differ for small versus large business? Can you think of a comparable large company experience with environmental remediation? Larger companies do not have the information asymmetry and challenges with the entrepreneur mentality identified in “Issues #1 and #2” above. Large businesses have compliance offices and lawyers on retainer to identify environmental issues and be proactive, instead of reactive, to regulatory changes. Large businesses also have the “deep pockets” with cash flow and multiple financing options for remediation. Students might have heard about the General Electric Hudson River clean-up as an alternative story with a much different scenario—where GE effectively negotiated with the EPA about the extent of their clean-up for dredging of the PCB-contaminated river sediments (available on the epa website at http://www.epa.gov/hudson/ ) 5. Does the state’s remediation program make sense? Who wins? Who loses?

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This is an interesting element to the case. Students will pick up on the fact that the state requires a $5,000 fee, the setting aside of money for escrow, and the right to choose state contractors for clean-up. Beyond that, the State does little to help (and the contract has provisions for additional fees for monitoring by state representatives, with no fixed project end). It is a money-maker for the state and ensures that state-approved contractors are used. Winners are state contractors, the state, the local community, future owners of the property and Cooker. Losers are non-state approved contractors and Cooker, who sacrifices cash flow and future retirement. However, Cooker is a potential loser if 1) the company could have done the remediation with independent contractors at a lower price, and 2) the company could have sold the business, or parts of the business without remediation. 6. How is this scenario typical of issues that entrepreneurs might face? See Issues above. Entrepreneurs, particularly small business entrepreneurs, are often so eager to begin their new ventures that due diligence may be circumvented—although in this case, Kevin originally had the benefit of a partner’s advice, and the local bank, who took a mortgage on the property with (arguably) a lack of attention to detail. They do not have the cash flow or support personnel to ensure that 7. What should Kevin do? Suggestions for moving forward? Financials—students will comment that although company sales are not growing they are stable. If they really do their homework, they will find that despite less cash in 2012, the debt/equity ratio is lower than industry averages. Students cannot see that Kevin has saved up several million dollars for retirement from the success of the company over the last 10 years, although the case alludes to his dilution of retirement monies for the initial remediation. With stable sales, several notable high-quality products and a very lean employee base, Kevin would probably qualify for bank financing for the clean-up, with a personal guarantee of his primary residence and perhaps additional guarantees and pledges. Students might suggest that he get financing for the clean-up, with a goal of selling the company by 2016, when remediation should be complete. Alternatively, students might suggest that Kevin “harvest” the company—a strategy that involves selling off parts of the company, separate from the physical plant. The BIGG patent is available for licensing or sale, as well as patents on the kettles and chafing dishes—although many expire in the next few years. If the products are the driver, and the plant is the liability, then it might make sense to sell parts of the business, and close the doors. Kevin would not receive as much money….perhaps less than $1 million because the equipment, like the hydraulic press noted at $450,000 at 1998, cannot be easily moved from the plant.

14


The trials and tribulations of Cooker Industries, while tough, are typical of entrepreneurs. Bottom line, Cooker has the means to pay for the cleanup. While it takes away from Kevin’s retirement, and/or potential sale value if he finances the cleanup, he should be able to recoup those monies in the higher future sale price of the business. It is not necessarily “fair” or “just” with the information asymmetries and challenges of entrepreneurship. However, Kevin is both accountable and responsible as the owner of the company to the most salient stakeholders—the community.

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Case 12 - DICK’S SPORTING GOODS - Teaching Note

Key Points for Class Discussion 1. The Bold Decision to Stop Selling Assault Rifles Dick’s made a bold decision on the 28th February 2018 to discontinue all sales of assaultstyle rifles and accessories, following the Parkland school shootings in Florida. Although this ethical stance shielded the firm from negative public outlook and legal issues, the firm risked the loss of loyal customers, with hunting gear alone making up $1 billion of revenue in 2017.

2. In response to the Parkland school shootings in February, 2018, Dick’s Sporting Goods decided to take an important and principled stance regarding gun sales. On February 28, 2018, Dick’s’ CEO Edward Stack issued a public statement: “even as strong supporters of the Second Amendment, we feel now is the time to have meaningful discussion about common-sense reform with the intent of finding a solution,” then implemented policies that immediately halted all sales of assault-style rifles and their accessories (bump stocks, high capacity magazines) and increased the age to purchase a firearm to twenty-one in all Dick’s Sporting Goods stores. While the company took a courageous stance, it also had a vested interest in the aftermath of the shooting as the shooter had legally purchased a gun at a Dick’s store, though that gun was not used in the shooting. 3. When Sports Authority went bankrupt in 2016, it created panic among other sporting goods retailers, especially its direct competitor, Dick’s . Dick’s had been the forerunner, then became the surviving member, of a dying industry: traditional brick and mortar sporting goods retailers. Sports Authority’s closing created an opportunity for Dick’s to increase its market share by luring SA’s displaced clientele.i The sporting goods industry had traditionally relied on selling a wide range of high performing, well established brands of sports and outdoor apparel and equipment. To avoid the same fate as Sports Authority, Dick’s needed to reevaluate its entire sales strategy. The company recognized that it needed to redefine its vendor relationships and streamline its product lines to offer the brands consumers most wanted to lure the customers the bankrupt retailers left behind. To differentiate itself from its competitors, Dick’s reconsidered its product mix. In early 2017, the company dropped 20% of its brand offerings to optimize its inventory for increased sales, dropping low performing brands and building up topselling, high performing brands like Nike and Adidas.ii

4. To compete with online retailers, Dick’s needed to ramp up its relatively weak, late-to-the-party eCommerce efforts to compete with the market saturation of the large online retailers. Operating in a stagnant retail industry, Dick’s’ survival started to look more and more dependent on how well it adapted to the online world.


Class Discussion Questions: 1. How many students support Dick’s Sporting Goods decision to stop selling assault style weapons and accessories? 2. How many students are against this decision? Ask students to defend their positions. 3. Should companies take a political stance with their business model? 4. Should Dick’s Sporting Goods remain a brick and mortar company or should they transition to 100% E-Commerce? 5. What new products or services could Dick’s add to their stores to attract new customers? 6. Would you buy Dick’s Sporting Goods stock as an investment? I. Current Situation A. Current Performance 1. History a. Founded in 1948 by 18 year old Richard “Dick” Stack with $300 he borrowed from his grandmother b. Dick’s son and other siblings purchased the company in 1984 and turned it into a nationwide sporting goods chain 2. Economic Performance a. In 2017, sales grew at 8.44% over 2016 b. Internet retailing gaining momentum with an average growth of 15.05% between 2013-2017 versus Dick’s whose online sales growth surpassed the industry at a rate of 21.64% to reach over $1 billion c. In 2017, Dick’s net income stood at $323 million, up by 12.5% from 2016 d. No long-term debt 3. Current Situation a. Headquartered in Pittsburgh, PA b. Industry’s major player with the largest market share of 17% c. 716 stores nationwide; 40,500 employees including part timers d. Owns proprietary eCommerce platform integrated with its store network B. Strategic Posture 1. Mission a. To be the #1 sports and fitness specialty omni-channel retailer b. The mission statement is appropriate as it clearly defines which industry Dick’s is in 2. Vision a. To serve and inspire athletes and outdoor enthusiasts to achieve their personal best through the relentless improvement of everything we do


3.

4.

5.

6.

7.

b. Omni-channel retailing Objectives a. Maximize growth and profit b. Carry a full range of authentic, leading brand products within each category of sporting goods c. Deliver high-quality customer experience across all platforms d. Premium brand building and customer loyalty e. Product differentiation Strategies a. Product differentiation through a wide range of merchandise, and extensive in-store support services - “store within a store” concept b. Expansion through concept stores and acquisitions o Combo store formats such as Field and Stream o Acquisition of Golfsmith International Holdings, and other sports management tech companies Marketing (omni-channel development) a. Combination of online and offline seamless shopping experience focused on customer satisfaction b. Push notifications and other enhanced tech features of mobile devices c. Brand partnerships and community involvement Growth through differentiated product offering a. Higher profit margins from private brand development such as Calia by Carrie Underwood Policies a. Continuous improvement and innovation b. Customer centricity 24/7

II. Corporate Governance A. Board of Directors 1. 10 directors - 3 internal, 7 external 2. Chairman Edward Stack is the biggest shareholder individual, the rest is N/A 3. Publicly traded a. Common stock publicly traded under the symbol DKS on NYSE b. Two types of stock: Common Stock (listed) and Class B (non-listed) c. Common stock one vote per share; Class B 10 votes per share 4. Diverse background in retail, financial services, technology, manufacturing, pharmaceuticals, healthcare, entertainment industries. Some directors with global business experience. 5. Servitude length ranges from one year to 34 years. Only one director with less than 3 years of experience. 6. N/A: Insufficient information about their involvement


B. Top Management 1. CEO: Edward W.Stack 2. 16 executives in total a. Diverse background in retail, financial services, accounting, legal, and pharmaceuticals industries b. No international experience c. Minimal diversity, 3 out of 16 executives female 3. Top management has been responsible for the corporation’s performance for the past few years. Only 1 executive has less than 3 years of experience 4. It is assumed that the company established a strategic approach to strategic management as it is a leader in a highly fragmented industry 5. High level of involvement since it is a family owned company and Edward Stack is in charge of management and the board himself 6. N/A: Insufficient information about interaction 7. Yes: The decision stop selling all assault rifles and increase the age to purchase firearms to twenty one was made in a socially responsible manner 8. N/A: Insufficient information regarding stock options 9. Yes III. External Environment: Opportunities and Threats (SWOT) A. Societal Environment 1. Environmental Forces a. Economic o Many disruptive competitors such as Lululemon, Fabletic o General downturn in the economy and consumer confidence (T) o Increasingly global marketplace (O) o International expansion (O) o Exchange rate risks, political instability, foreign taxes/tariffs (T) o Wage increase (O/T) b. Technological o Increasing need for digital service capabilities o Viable e-commerce platform (O/T) o Cybersecurity (T) o Boom in online shopping (O) o Ever increasing use of smartphones and the internet (O) c. Political-Legal o Data privacy laws (T) o Sale of firearms and ammunition laws (T) o Awareness about other upcoming (pending) laws and regulations (T) o Exposure to compliance to these laws and other litigation risks (T)


o Foreign trade laws (T) d. Socio-Cultural o Women leading sales surge in athletic wear (O) o Millenials, Gen Zers major customer segment (O/T) o Societal shift towards healthy lifestyle (O) o Increasing use of social media (O) e. Need for staying relevant, up-to-date with fashion trends (O/T) f. Rising niche markets o Customer preference shifting towards highly customized products 2. N/A: Dick’s is strictly in the United States B. Task Environment (Industry) 1. Threat of new entrants - High a. Rise of all-inclusive retailers such as Amazon and Target b. Increasing pressure from specialty athleisure stores 2. Bargaining power of buyers - Medium a. Private labels offer product differentiation advantage o Chances to switch suppliers very low b. Third party apparel/sportswear can be found easily at alternative suppliers c. Technology enables customers to compare prices at their fingertips 3. Threat of substitute product or services - Medium a. Entertainment industry o Low switching costs o Netflix, Hulu, Disney 4. Bargaining power of suppliers - Low/Medium a. Brand partnerships- Medium o Allow access to exclusive deals and products b. Private labels - Low c. Contracts with vendors made on a short-term basis, able to cut down ties anytime due to any reason 5. Rivalry among competing firms - High a. Highly fragmented industry o Online competitors, large format stores, specialty stores, mass merchants, internet-based retailers, direct-sell retailers b. Slow industry growth due to high saturation o Possible price wars 6. The relative power of unions, governments, special interest groups, etc. a. Sports team lockouts, strikes (O/T) b. Sports superstar scandals (T) c. Edward W. Stack and his relatives control a majority of the combined voting power (O/T)


d. Eastern region government regulations (T) e. Trade tariffs and foreign government regulations (O/T) C. Summary of External Factors (EFAS Table) See Exhibit 1 IV. Internal Environment - Strengths and Weaknesses (SWOT) A. Corporate Structure 1. Dick’s is a publicly traded corporation that is centralized a. Dick’s has a CEO and 16 executives, therefore the decision-making authority is centralized around one group b. Organized based on functions, with departments like Marketing, Logistics, and Finance. Some departments (Sales and Logistics) further divided by geographies 2. The structure is understood by everyone in the corporation. All departments are clearly named on the careers website and the top decision-makers of the executive team are well known 3. Strategy: Build customer loyalty by carrying high-quality products and have great customer service a. Product department to ensure quality b. No department or executive is explicitly responsible for customer satisfaction c. Should have resources dedicated to customer service 4. Standard corporate structure that closely resembles the structure of corporations of the same type. No departments out of the usual or executives with unusual titles. For example, the major departments at Dick’s are Operations, Merchandising, Marketing, Finance, HR and Supply Chain B. Corporate Culture 1. The culture at Dick’s is centered around a love for sports. The website states that Dick’s hires people who are passionate and committed to sports. a. Mission Statement: “Our Mission is to be recognized by our customers as the #1 sports and fitness specialty omni-channel retailer that serves and inspires athletes and outdoor enthusiasts to achieve their personal best through the relentless improvement of everything we do.” b. Company values were not formally posted on the company website c. Surveys of company employees show low motivation by the mission, vision, and values.1 2. The focus on sports in culture is in line with the mission of being the #1 sporting goods retailer. Commitment to excellence → great customer service. Could emphasize service and care as values. 1 https://www.comparably.com/companies/dick-s-sporting-goods/mission


3. Culture fosters excellence → can be interpreted as a commitment to productivity & quality of performance. Culture is not helpful for adaptability of changing conditions. No corporate offices outside the US so internationalization not a priority. 4. N/A 5. Dick’s does not operate stores outside the US.

C. Corporate Resources 1. Marketing a. The current marketing objectives are to develop private labels, omnichannel solutions, and increase customer loyalty i. Objectives inferred from the mission statement and marketing projects that have been completed successfully: o Scorecard loyalty program ii. Marketing objectives are consistent with the mission statement o A strong private brand builds customer loyalty and helps Dick’s become a one-stop-shop for sports equipment o Omni-channel solutions are stated directly in the mission statement o Increased customer loyalty is necessary for market dominance which is Dick’s stated mission b. Products: Always researching the right products to sell (Ex: Crossfit). Price: Price-matching program on its website and private labels. Place: ecommerce efforts. Promotions: Standard compared to the industry. Does not analyze its market position outside the US. Products that Dick’s sells are in the “maturity” stage of the product life cycle. i. Trends: o High price competition o Growth of athleisure in women’s apparel o Growth of e-commerce o Introduction of athlete and influencer endorsements o Bonus Events such as the Fitbit challenge ii. Impact of Trends: o Price Competition: Puts pressure on Dick’s margins but is not likely to go away due to growth of new competitors like Amazon and Fabletics o Athleisure: Higher sales of women’s athletic apparel. Dick’s has not taken advantage of this trend as much as its other competitors


o Growth of e-commerce: New entrants in the market and growth in sales for Dick’s if they manage to create an appealing e-commerce platform iii. Difficult for Dick’s to compete on price by price matching while also offering top quality and customer service without sacrificing margins o R&D requires large investments in e-commerce which would improve customer service o Having the lowest price on major brands while also facing large fixed costs for R&D cannot last indefinitely iv. Marketing competitive advantages: o Building a private label→ price perception and differentiation o Fostering loyalty through fitness-based rewards programs. Gamification and high engagement c. Variety of competitors, all of which approach the sporting goods market from a different angle i. Walmart and Target emphasize low prices while sacrificing assortment and quality ii. Academy Sports & Outdoors focuses on firearms and outdoor activity equipment with the marketing strategy of undercutting Dick’s on price iii. Bass Pro Shop’s strength is the shopping experience; they encourage equipment testing in-store and organize live events iv. Recreational Equipment Inc. (REI) stands out with its membership program which strengthens customer loyalty, a program Dick’s doesn’t offer d. Marketing managers are using concepts in product life lifecycle, market segmentation, market research, and product portfolios e. N/A- Dick’s does not operate internationally f. The marketing manager is in charge of: i. Developing the marketing strategy→ defining core competencies and competitive advantages. ii. Overall responsibility for brand management and corporate identity→ guided by Functional Level Strategy. iii. Creates differentiation elements→ Business Level Strategy. 2. Finance a. Mission and Financial Strategy i. Mission statement:“to be the #1 sports and fitness specialty omnichannel retailer”


ii.

iii.

Dick’s is a market leader at 17% market share, followed by Academy Sports and Bass Pro Shops with market shares of approximately 10%. The rest of the industry is highly fragmented with the remaining players in this space comprising 5% or less of market share (IBISWorld. Industry, Major Companies. 1 May 2017) Price Competition o Dick’s offers the highest quality sports products at competitive prices. Income statements as of the last 2 fiscal years, shows a gross profit margin of approximately 29-30% (See exhibit 4) o However, based on competitive financial data published by IBIS World, the gross profit margin of the industry in 2018 was approximately 36.8%. Dick’s lower profit margin confirms their mission to be price competitive

b. Financial Analysis Fiscal year ending 2017

Key Ratios

Fiscal year ending 2016

Explanation

Current Ratio

1.41

1.43

Gross Profit Margin

28.97%

29.86%

Gross profit slightly declined as year over year revenue grew slightly slower (8%) than cost of goods sold (10%)

ROE (%)

16.66%

14.89%

ROE increased to 16.67% in 2017 driven primarily by 12.5% increase in net income

Net Profit Margins (%)

3.77%

3.63%

Net profit margins increased ~3.7% year over year driven primarily by declining operating expenses

Current ratio remains stable (inventory ~40% of total assets)

Financial Trends o Dick's is growing at a slower pace than the growth in the COGS (8.4% vs 9.8%) o SG&A as a percent of revenue increased modestly to $1.9B; however, as a % of net revenues, SG&A expenses decreased from 23.7% of net sales to 23.1% of net sales o Interest expense on the historical income statement of Dick's remains very small given the capital structure of the company is heavily focused on equity financing (D/E ratio under 5%) (See exhibit 5) o Cash on the balance sheet declined from $164M to $101M in February 2018, primarily driven by cash outflows from


financing activities of $324M (share repurchase program) and investing activities outflows of $485M (acquisitionactivity related) (SEC filings source) o Over the last 12 months, Dick's stock price has experienced a capital gains yield of ~19%, from $27.62 in October 2017 to $32.89 as of October 2018

c. Competitive Analysis

$8.59B

Academy Sports & Outdoors $4.8B

$367M 40,500 797

$114.5M 23,000 150

Dick's Net sales Operating income (IBIS World) Employees Number of stores 3.

Brass Pro Shops, Inc

REI

$4.5B

$2.5B

$363.5M NA 100

$187.6M NA 140

Research and Development (R&D) a. E-commerce and technological fulfillment networks o Clearly stated through project and leadership dedicated to e-commerce and supply chain o Consistent with the mission of being an omni-channel retailer and with the strategy to better compete with competitors like Amazon o Future performance is dependent on the successful development of e-commerce and mitigating threats like power outages, computer failures, viruses or other malicious computer programs, and denial-of-service attacks o N/A o If done right, R&D will enable the company to offer a differentiated customer service with faster shipping and a superior interface for online and mobile shopping b. Increased sales from new selling channels such as online and mobile shopping which are both on the rise with its target customer c. N/A d. The emergence of smartphones has opened a new avenue for Dick’s to interact with its customer. With phones now taking more attention of


customers and enabling shopping from anywhere and anytime, Dick’s has gained a new sales channel but also a wider array of competitors. e. Dick’s R&D expenses included in SG&A which makes it incomparable with that of its competitors. o R&D spending as % of 2017 sales: Amazon - 12.7%, Walmart - SG&A 21.2%, Dick’s - SG&A 23.6% f. N/A: No countries outside the US g. The R&D manager analyzes the external environment to use new technology to take advantage of opportunities in the market and determine whether competitors’ new technology is threatening Dick’s business. The manager uses core competencies and develops technology continuously to improve customer service and enhance Dick’s competitive advantage of being an expert retailer for sporting equipment. 4. Operations and Logistics a. Operations tied to sales and service, manufacturing outsourced for private label or managed by national brands. The service goal is to maintain expertise and great customer service. Other operations goals are to cut ties with 20% of its vendors to streamline the business, redefine its vendor relationships. Improve “stores-within-a-store,” each of which focuses on a specialized interest by training employees working in each section to be experts o Clearly stated, reinforced through training and definition of vendors o Consistent with the company strategy, developing a comparative advantage with the in-store experience and assortment of brands b. Operations are defined by all activities related to sales, and done by the 716 stores and online sales channel. No international operations. • N/A: Not product oriented • Service provided: Sale of specialized sporting equipment o Big box stores with a store-within-store concept o Highly specialized staff made up of professional athletes o Increasing costs due to higher lease payments o Low automation (no self-checkout or any other automated services) o High investment in distribution: 5 new distribution centers o Intermittent sales to varied clients c. Service facilities (stores) vulnerable to: o Bad weather → lower sales o Cost increases of leases


o Higher labor cost from unionization in logistics o Supplier limited resources-sending less desired merchandise d. N/A: Professionals/staff ratio not known e. N/A: Logistics and distribution cost not discussed f. N/A: Store inventory management, personnel scheduling not discussed g. N/A: No international operations h. Operations manager provides: skills and capabilities and competitive advantage for Dick’s 5. Human Resource Management (HRM) a. N/A: Our case and outside research did not have sufficient information 6. Information Systems (IS) a. Dick’s has become far more IT oriented in recent years in an effort to keep up with their mission. Clearly stated objectives: o To stay relevant and use techniques to attract millennials more effectively o To effectively transition from an entirely brick-and-mortar company to a more omni-channel company o Imperative that Dicks e-commerce platform was advanced and holistic enough to attract new customers while retaining existing customers o Objectives are consistent with mission and customer focus b. Strategy: Programs • 2016 introduction of a free youth sports suite of online servicesTeam Sports HQ (S) o Became the official tech provider for Little League o Platform provided invaluable digital capabilities o Three distinct capabilities: 1. Free league management services 2. FanWear shops 3. Listing of donations and sponsorship • Dick’s partnered with and acquired other technology to advance its IT platform (Dick’s Team Sports HQ) (S) o Team Sports HQ was powered by Blue Sombrero, which provided online registration and web design o Affinity Sports provided league registration software o Included recently acquired GameChanger app- providing over 200,000 teams with access to game stories and a system for tracking scores and stats


Named the Official National Data Center Provider and Official Technology Provider for Pop Warner teams (S) o Strategic partnership with the biggest youth football, cheer, and dance organization in the country • IT Initiatives • Clearly laid out IT initiatives and the performance proves them to be successful (S) o Consistent with the corporation’s mission, objectives, strategies, policies, as well as with the internal and external environments. (S) o Proven successful with IT initiatives and programs as well as offering internet access, Team Sports HQ, a mobile app, and website to its customers. (S) • Management understood risks in shifting to a more digital platform o Challenges: interruptions, delays, or downtime could occur o Threats: power outage, computer failure, viruses, or other malicious attacks • Must invest more heavily than they previously have on R&D in order to compete with major retailers o Must build up e-commerce and technology fulfillment networks • Security Threats o Not yet experienced any o Potential violation of privacy and other laws or standards o Potential lead to loss in customer confidence o Potential for negative public perception of the company o Potential for system breach and information theft • N/A: Insufficient information on databases, automation, or IS management mentioned. No trend analysis • N/A: Insufficient information to analyze trend impact • N/A: Insufficient information to analyze trend impact on strategic decisions • N/A: Insufficient information regarding IS competitive advantage c. Performance implies company’s IS infrastructure and data is advanced d. N/A: Internal IT and databases not mentioned e. N/A: No global presence f. N/A: No mention of IS management roles D. Summary of Internal Factors a. See Exhibit 2


V. Analysis of Strategic Factors (SWOT) A. Situational Analysis: See SFAS Chart B. Review of the Mission and Objectives - No changes needed VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. Objectives a. Expand to new countries with similar cultures and economies (North America, Europe) b. Be agile to certain economic, political, technological changes 2. Alternative Strategies a. Differentiation - Part of current strategy i. Pros: 1. Earn higher margins on private label products 2. Continue and increase partnerships with sports/arts/music celebrities 3. Pricing of private brands significantly lower than rivals 4. Continue partnerships with cheaper manufacturers in China and other developing countries ii. Cons: 1. Waste of resources if newly created private brands do not gain traction 2. Rising manufacturing/labor/transport costs and lack of quality assurance in China 3. Competitors pursuing the same strategy b. Stability i. Pros: 1. Improve its current customer loyalty programs 2. Maintain its status as industry leader 3. Family legacy lives on as long with the current CEO/succession of a family member takes place ii. Cons: 1. Competitors may rise up, especially tech giants such as Amazon 2. No growth 3. Strategic uncertainties may surface if incumbent CEO resigns c. Growth: Need to increase growth and earnings i. Pros: 1. Maximize profit and revenues


2. Continued investment in ecommerce platform will help acquire more customers 3. Better employee benefits 4. Growth through M&A activities 5. Expand internationally through replication of current operational strategies in countries with similar values 6. Invest more in R&D activities to achieve operational efficiency ii. Cons: 1. Operational complexity will emerge that might lead to future uncertainties 2. Additional investments require more capital resources, interest expenses will go up in case of debt financing B. Recommended Strategy 1. Growth/Stability a. Sustain its current position as a market leader b. Expand internationally to Canada, Europe in the short to medium term c. Expand to Asia Pacific, South America in the very long term as it requires lots of research and development d. Be vigilant to technological advancements 2. No significant internal problems a. Uncertainties will come up if Edward Stack resigns/leaves/let go b. No structural change needed c. The company will need to hire new employees and establish new country divisions if its expands to other countries 3. External environment issues a. Be aware of pending government regulations on gun sales and fire ammunitions b. Customer’s taste towards more customization and niche markets 4. Financial recommendations: a. Figure 1 in the case, COGS is growing at a much faster rate than revenues. Dick should place more focus on inventory cost control measures that will enhance product profitability overtime. b. Company has a lot of depreciable assets ($1.7 million of PPE), therefore should consider replacing depreciable assets that have been fully depreciated to capture additional depreciation expense on their income statement. VII. Implementation A. Organizational structure 1. New structure needed in case of expansion abroad (localization vs standardization strategy)


B. Programs 1. Continue its R&D activities and investment into its ecommerce platform 2. Marketing: More targeted advertising towards niche/specialty segment customers C. Feasibility and Timetables (financial) 1. Feasibility (financial) a. The firm will have to take up either equity/debt financing if it decides to proceed with global expansion or more M&A activities b. Further investments (interest expenses) will hurt profitability in the short term 2. Pro-forma budgets a. Assessment not possible as no acquisition/investment decision has been made 3. Priorities and Timetables a. Strategic philosophy currently an “Analyzer” b. Future decisions to grow and expand will require detailed schedule and tons of research 4. Necessary Standard Operating Procedures a. Current operating procedures are working well b. Needs constant review and update as the online business grows VIII. Evaluation & Control A. Information System 1. Current IS system is capable of supporting the company’s operations but needs to be continuously improved. a. Online sales account for over 12% of its revenue and continues to grow b. Further investments in fulfillment and IS system needed to support its growing online sales B. Control Measures 1. Standards of measure a. No details on control measures mentioned in the case or other publicly available sources b. A full set of control measure or expansion guidelines need to be developed along with an acquisition/expansion decision for it to be successfully executed C. Reward systems a. Compensation data not available in the case b. N/A: Corrective action information not available


APPENDIX Exhibit 1: EFAS External Factor Analysis Summary External factors

Weight

Rating

Weighted Score

Comments

Increasingly global marketplace

0.15

1.0

0.15

No strategic action taken yet

Women leading sales surge in athletic wear

0.05

4.5

0.225

Well addressed (private brand product development)

Societal shift towards healthy lifestyle

0.05

4.5

0.225

Well prepared and aware

Increasing use of social media 0.1

3.5

0.35

Adopted influencer marketing method to keep up with this trend

Use of e-commerce platform

0.2

5.0

1.0

A lot of investment is going into improving its ecommerce platform usability and features

Cybersecurity

0.15

4.0

0.6

No online breaches yet (makes us assume that it is well protected from attacks)

Federal/State laws on data privacy/firearms

0.05

5.0

0.25

Inn good compliance with changing laws and regulations

Sports team lockouts strikes/scandals

0.05

3.5

0.175

No clear protocol in case this actually happens

Opportunities

Threats


Increasing competition and market saturation

0.15

4.0

0.6

Well aware

Edward W. Stack controlling majority voting power

0.05

1.0

0.05

Major risk as the company expands overseas

Total

1.0

3.8

Exhibit 2: IFAS Internal Factor Analysis Summary Internal factors

Weight

Rating

Weighted Score

Comments

Specialized staff

0.05

5.0

0.25

Market leader in expert staff

In-store experience

0.25

4.0

1

Store-in-store doing well, low usage of technology to enhance experience

Private label

0.075

3.5

0.2625

Still developing PL

E-commerce platform

0.1

4.0

0.4

Well rated mobile app, late to the game

Low debt

0.025

5.0

0.125

Better positioned than competitors

Adaptability

0.2

2.0

0.4

Traditional structure compared to online competitors

Automation

0.1

3.0

0.3

Enough resources to invest, no expert staff

Price perception

0.15

5.0

0.75

High investment in changing perception

Strengths

Weaknesses


Exposure to suppliers 0.025 (Nike, Adidas…)

3.5

0.0875

Largest market share gives some power, most of sales still coming from major brands

Labor cost

0.025

2.0

0.05

Strong labor market

Total

1.0

3.625

Exhibit 3: Strategic Factors Analysis Summary External factors

Weight

Rating

Weighted Score

Comments

Utilizing Social Media

0.15

3.0

0.45

Not an industry leader

Increasingly global marketplace

0.3

0.0

0.0

Not a global retailer

Cybersecurity

0.2

4.0

0.8

Could always improve, but there has never been a data breach

Increasing competition and market saturation

0.15

3.0

0.45

Competing with private brands and streamlining product selection but competition is growing at a rapid pace

E-commerce platform

0.3

5.0

1.5

Online sales growth above industry average

In-store experience

0.2

4.5

0.9

Expert employees

0.3

3.0

0.9

Not a leader in industry innovation

Opportunities

Threats

Strengths

Weaknesses Adaptability


Price perception

0.15

Total

1.75

4.0

0.6

High investment in changing perception

5.6

Exhibit 4: Common size income statement Fiscal year ending 2017 $8,590,472

CommonSize 100.0%

Fiscal year ending 2017 $7,921,981

CommonSize 100.0%

$6,101,412 $2,489,060

71.0% 29.0%

$5,556,198 $2,365,783

70.1% 29.9%

Selling, general, and administrative expenses Pre-opening expenses

$1,982,363 $29,123

23.1% 0.3%

$1,875,643 $40,286

23.7% 0.5%

Income from Operations

$477,574

5.6%

$449,854

5.7%

Interest expense Other income

$8,047 ($31,810)

0.1% -0.4%

$5,856 ($14,424)

0.1% -0.2%

Income before income taxes

$501,337

5.8%

$458,422

5.8%

Provision for income taxes

$177,892

2.1%

$171,026

2.2%

Net income

$323,445

3.8%

$287,396

3.6%

Net Sales Cost of goods sold, including occupancy and distribution costs Gross profit

Exhibit 5: Financial Ratios Fiscal year Other Financial Ratios ending 2017 1. Liquidity Ratios Current Ratio Quick (Acid Test) Ratio Inventory to Net Working Capital

1.41 0.21 2.94

Fiscal year ending 2016 1.43 0.26 2.74


Cash Ratio

0.07

0.12

2. Profitability Ratios (%) Net Profit Margin Gross Profit Margin Return on Equity (ROE) Earnings per share

3.77% 28.97% 16.66% $3.02

3.63% 29.86% 14.89% $2.59

3. Activity Ratios Inventory Turnover Days of Inventory Net Working Capital Turnover Asset Turnover Fixed Asset Turnover Average Collection Period Accounts Receivable Turnover Accounts Payable Period Days of Cash

3.57 102.36 14.78 2.04 5.12 2.55 142.92 7.24 18.09

3.39 107.65 13.24 1.95 5.20 3.46 105.35 7.35 31.16

4. Leverage Ratios Debt to Asset Ratio Debt to Equity Ratio Times Interest Earned Current Liabilities to Equity

1.55% 3.36% 59.3 71.03%

0.13% 0.28% 76.8 70.02%

5. Investment-Related Ratios Price/Earnings Ratio

10.60

12.92

i Thomas, Lauren. “Dick’s Sporting Goods Could Be a 'Survivor' like Best Buy: Wells Fargo.” CNBC,

CNBC, 3 Jan. 2018. ii Staff, CSA. “Analysis: Dick’s Sporting Goods Shake-Up.” Chainstoreage, CSA, 29 Mar. 2018.


Case 13 - UNILEVER: Making Sustainable Living Commonplace I.

Current Situation A. Performance ● History ○ Founded in 1930 by the merger of the Dutch margarine producer Margarine Unilever and the British soap maker Lever Brothers ● Economic Performance ○ Market capitalization increased from €93.9 billion to €113.4 billion (2015) ○ Sales growth of 4.1% (2015) ○ Net profit fell to €5.3 billion (2015) ○ Operating profit fell by 6% from €8.0 billion to €7.5 billion (2015) ○ A charge of €350 million for non-core items (2015) ○ Core earnings per share rose to €1.82, an increase of 12.4% (2015) ● Rankings and Accolades ○ Top 50 World’s Most Admired Company (2013) ○ #1 Food Products Industry leader on the Dow Jones Sustainability Index (2015) ○ Score of 100 of Corporate Equality Index ○ Achieved the highest environmental score of 5 in the FTSE4Good Index (2015) ○ #1 of Global Corporate Sustainability Leaders in the GlobeScan/Sustainability annual survey (5th year running) ○ #1 sustainable food and beverage company on Oxfam’s Behind the Brands Scorecard ○ One of the “Top Companies” for LGBT Equality (2012) ○ #3 of LinkedIn’s Most Indemand Employers (2013) ○ Received Gold Class distinction award (2015) B. Strategic Posture 1. Mission a. To be a viable, profitable international fast moving consumer goods company while making sustainable living commonplace 2. Objectives a. To deliver long-term, profitable, and responsible growth with a focus on margin improvements, portfolio management, growth of market share through innovation, and efficient distribution capabilities b. Make sustainable living commonplace globally


3.

4.

c. Achieve a zero non-hazardous waste across the value chain d. To be carbon positive by 2030 Strategies a. Focus on profitable, responsible, competitive and consistent growth b. Double the size of its business i. Push long-term growth through investments in categories and brands that currently drive growth c. Reduce environmental footprint i. Four “R” approach of reducing, reusing, recovering, or recycling d. Increase positive social impact in its market e. Build trust with consumers and create a stronger business for shareholders with low risks f. Grow sales and lower costs while at the same time fulfilling its mission to make sustainable living ubiquitous g. Equal representation of men and women in management role i. Increase the active participation of women in the economy h. Build a large portfolio brand reputation i. Acquired skin care line to its personal care products ii. Focused some of its foods brands in a new Baking, Cooking, and Spreads business i. Implement the Sustainable Living Plan (USLP) Policies a. Empower 5 million women across its value chain by 2020 i. Promoting rights, skills, and opportunities for women b. Develop 12 Guiding Principles c. Invest in innovation and digital marketing d. Centralize operations using “UltraLogistik” control tower

II. Corporate Governance A. Board of Directors 1.13 members: a. 2 internal and 11 external 1. Dr. Marjin Dekkers Chairman, Non-Executive Director (Apr 2016) 2. Ann Fudge Vice-Chairman, Non-Executive Director (May 2009) 3. Paul Polman Chief Executive Officer, Executive Director (Jan 2009) 4. Graeme Pitkethly Chief Financial Officer, Executive Director (Apr 2016) 5. Nils Andersen Non-Executive Director (Jul 2015) 6. Laura Cha Non-Executive Director (May 2013) 7. Vittorio Colao Non-Executive Director (May 2009)


8. Judith Hartmann 9. Mary Ma 10. Strive Masiyiwa 11. Youngme Moon 12. John Rishton 13. Feike Sijbesma

Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director

(Apr 2015) (May 2013) (Apr 2016) (Apr 2016) (May 2013) (May 2014)

2. This information is not stated in the case. But according to the Unilever annual report in 2015, Executive Directors are able to choose whether they invest in PLC or NV shares or a 50/50 mix. 3. a. Unilever stocks are publicly traded b. Unilever has two shares NV and PLC which have the same voting rights and privileges. Unilever NV shares are listed on Euronext Amsterdam and as New York registry shares on the New York Stock Exchange. Unilever PLC shares are listed on the London Stock exchange and as American Depository Receipts on the New York Stock Exchange. 4. a. The board consist of directors that have appropriate balanced in skills, experience, independence and knowledge of Unilever that enables them to discharge their duties and responsibilities effectively. The board members are multicultural and have different backgrounds and expertise. Also, over one-third of Unilever’s board are women. b. The corporation has international operations, the board members have international experience. 5. The CEO has been serving for over 8 years. The chairman was appointed April 2016. On the average, the board members have been serving for 3 ½ years. 6. a. The Board of directors are ultimately responsible for the management, general affairs, direction, performance and long-term success of Unilever. B. The board actively participates and suggest future directions for Unilever. They are also members of Unilever’s different committees. B. Top Management 1.


Paul Polman Chief Executive Officer (Jan 2009) Graeme Pitkethly Chief Financial Officer (Apr 2016) David Blanchard Chief R&D Officer (Apr 2014) Marc Engel Chief Supply Chain Officer (Jan 2016) Kevin Havelock President, Refreshment (Sep 2011) Alan Jope President, Personal Care (Sep 2014) Kees Kruythoff President, North America (Sep 2011) Leena Nair Chief HR Officer (Mar 2016) Nitin Paranjpe President, Home Care (Oct 2013) Judith Amanda Sourry Knox President, Foods (Oct 2015) Ritva Sotamaa Chief Legal Officer (Jan 2013) Keith Weed Chief Marketing & Communications (Jan 2010) Jan Zijderveld President, Europe (Jan 2011) 2. a. Unilever’s top management have deep industry knowledge, have diverse skills and backgrounds, and are well known in their field of expertise. b. The corporation has international operations, therefore the top management has international experience. 3. a. Paul Polman has been CEO since January 2009. b. Most of Unilever’s top management have been responsible for the corporation’s performance for the past 3 years or more. c. Almost all leaders worked from internal Unilever or other Unilever brands. 4. Yes, Unilever developed the twelve “Guiding Principles” to align its vision of respecting its commitments to its employees, consumers, and the environment. 5. The top management is involved in the implementation, evaluation and control of Unilever’s strategic management process. 6. The board sets clear targets for the top management, then top management uses a mentoring style in interacting with lower level managers. 7. Unilever’s strategic decisions are made ethically, the company uses a Sustainable Living Plan (USLP) that guides its approach to business and how to


meet consumer demands for brands designed responsibly in a world of finite resources. 8. Unilever’s stock options allow managers to invest up to 60% of their annual bonus in shares in Unilever and to receive a corresponding award of performancerelated shares. The performance metrics are underlying sales growth, operating cash flow and core operating margin improvement. This gives a strong incentive for employees to stay and motivates them to increase the company’s performance. 9. The top management is actively seeking cooperation with other companies to implement sustainable, long-term business strategies and to drive systemic change that cope with future challenges. III. External Environment (EFAS refer Exhibit 1) A. Societal Environment 1. Economy a. Increasingly global marketplace (O) i. Emerging Economies (O/T) ii. Role of women (O) iii. Regions dependent on oil exports (T) b. Saturated Markets - Low Growth (T) c. Global Control Tower Networks (O) d. “Green” Movement (O) e. Natural Disasters (T) 2. Technology a. Global Control Tower Networks (O) i. IT Systems (O) 3. Political - Legal a. Politically unstable countries (T) i. Government corruption (T) ii. Refugee Crisis (T) iii. Unstable currencies (T) b. Local, National, and International Business Laws (T) i. Governing health, safety, labor, and tax/trade agreements (T) 4. Socio-Cultural a. Emerging Economies (O) i. Role of Women (O) b. “Green” Movement (O) c. Animal Testing (T) B. Task Environment


1. Threat of New Entrants: Low a. Operating in one hundred and ninety countries, with over four hundred brands in its portfolio across many different industries, Unilever has insulated their overall business against a threat of new entrants. 2. Bargaining Power of Buyers: Low a. No apparent issues with bargaining power of buyers. 3. Threat of Substitute Products: Moderate a. Competing products that may be favored over Unilever products due to social concerns with animal testing of products. Competition also used alternative pricing and marketing techniques to win over market share in various industries. 4. Bargaining Power of Suppliers: Low a. Unilever supply chain/manufacturing 5. Rivalry Among Competing Firms: Low a. Unilever’s largest competitors were Procter and Gamble and Nestle that competed in head to head in many industry categories. Local competitors also competed in regional markets 6. Power of Other Stakeholders: High a. Government corruption is an issue in some countries Unilever dealt with such as Brazil b. War/Refugee crisis among counties in the Middle East and Europe c. Differentiating legal practices locally, nationally, and internationally.


Exhibit 1 - External Factor Analysis Summary (EFAS) External Strategic Factors

Weight Rating Weighted Score

Comments

Emerging Economies

.2

5

1

58% of Unilever’s profits came from emerging economies.

“Green” Movement

.1

4

.4

Goal to make sustainable living ubiquitous through responsible growth and positive social impact while by doubling its sales and halving its global environmental footprint by 2020.

Global Control Tower Networks

.1

3

.3

Utilizing new external technologies available to centralize its operations using global “UltraLogistik” control towers to improve customer service, cut costs and reduce CO2 emissions.

.2

5

1

Countries such as Brazil and Russia, where Unilever has strong market share under their portfolio, were facing political instability that posed threats against Unilever’s business operations and sales. Greece also faced political and

Opportunities

Threats Politically and Economically unstable countries and governments


economic challenges exacerbated by the migration of refugees fleeing war and economic hardship in the Middle East, and Europe faced increasing challenges from the UK’s voter-endorsed exit from the European Union. Slowing Growth Emerging Markets

.1

4

.4

In 2014 and 2015, Unilever experienced a slowdown in emerging markets such as China that pulled down their overall performance. There is a fear that the decelerated growth in China would be compounded by slowing volume growth in other emerging markets such as Brazil, Russia, India, and South Africa.

Natural Disasters .1

2

.2

Natural disasters posed a threat to Unilever’s overall business operations, as Unilever operates in one hundred and ninety countries all over the world.

Animal Testing

.1

2

.2

Unilever faces the emerging challenge from its competitors with its regard to its position on Animal Testing. This was an important issue with consumers, to which competitors are leveraging the situation against Unilever.

Local, National, and International Business Laws

.1

2

Operating in one hundred and ninety countries worldwide, Unilever has gotten into legal troubles due to the variety and complex legal system between local, national, and international laws they must abide by.


IV. Internal Environment (IFAS refer Exhibit 2) A. Corporate Structure 1. Centralized Management with subsidiaries worldwide 2. Organized Geographically 3. Similar multinational corporations operate the same way B. Corporate Culture 1. Values (S) a. Sustainability b. Integrity c. Make positive impact on society d. Improve the lives of customers, partners, employees, and shareholders e. Keep highest standards of corporate behavior towards the third parties we work with C. Corporate Resources 1. Marketing a. Current Performance: ● With more than 400 brands in its portfolio, Unilever products were sold in 190 countries in 2015 ● Marketing expenditure is about €8 billion a year. Moreover, marketing investment increased by more than €800 million in 2015 b. Objectives: ● Create new products through customers insight ● Strengthen brand image of being social and environmental responsible ● Attracting new customers with new distribution channels c. Strategies: ● Utilizing alternative pricing and advertising techniques ● Growing the number of sustainable living brands, such as Dove and Knorr, that deliver strong social and environmental benefits (S) ● Invest in digital marketing to promote e-commerce that drive sales through all channels 2. Finance a. Current Performance:


● In 2015, Unilever increased its combined market capitalization from €93.9 billion to €113.4 billion, and its shares gained for 8 % for fiscal 2014 (S) ● Unilever, built its financial strategy to switch their business from linear value chain to circular for sustainable growth(S) ● The financial mission, objectives, strategy, and policy are perfectly fit to make the sustainable and responsible growth of the business(S) b. Objectives: ● To identify areas of potential growth of the business through cost saving and future profit programs between 2010 and 2020 ● Profitable growth c. Strategies: ● Increase sales growth ● Increase free cash flow ● Meet consumers demand by Investing in HR, Supply Chain, Marketing and IT infrastructure

a) Key Ratios Key Ratios

2013

2014

2015

2016

Explanation

Current Ratio

0.70

0.63

0.64

0.67

Current Ratio = CA/CL Low CR shows that Unilever is not generating enough cash to meet its shortterm obligations the last for years. Unilever has to borrow short-term debt to pay its current obligations which is costly for company.

ROI

10%

12%

10%

10%

ROI = NP after taxes/Total Assets Stable ROI trend within last four years makes Unilever potentially attractive for investors.


ROE

32%

41%

32%

33%

ROE = NP after taxes/Shareholder Equity Stable ROE shows us overall the shareholders' equity works well to generate in average 35 % annual net profit and has an excellent opportunity to attract investors in the future.

Net Profit Margins (%)

10%

11%

9%

10%

NPM = NI/Revenue Company's Net Income decreased in amount for 1 billion annually for the last two years because of the low revenue. However, NPM remains to be the same with 10 % of average. However, investment in R&D should help to the company to increase its Net Income in the future.

3. Research and Development a. Current Performance: ● Annually investment in R&D in average $1.2 billion in R&D creates a competitive advantage(S) b. Objectives: ● Geographical expansion of its global brand through innovation in R&D (S) ● Create stronger brand c. Strategies: ● Increase the role of R&D in company (S) ● Create innovative marketing approach 4. Operations and Logistics a. Current Performance: ● In January 2015 Unilever announced that over 240 factories had achieved zero waste to landfill status(S) b. Objectives: ● To be carbon positive in operations by 2030 ● Ultimately yielding zero waste across the value chain c. Strategies:


● Prioritize at continually reducing waste and embracing circular models in manufacturing operations to achieve zero waste status both at current sites and all future sites ● Centralizing operations by using a network of global “UltraLogistik” control towers to improve customer service, cut costs and reduce CO2 emissions (S) d. Competitive Advantages: ● Unilever effectively leveraged the strengths of a dynamic multinational organization while balancing the unique needs and heritage of its local markets of operation(S) ● Global presence creates benefits of scale to operations by driving down costs (S) ● The continued effort on the four “R” approach not only provided a strong business case for sustainability, but also contributed to costbenefits of €200 million and created hundreds of jobs(S) 5. Human Resources Management a. Current Performance: ● More than 172,000 employees working in 190 countries under a huge portfolio of 400 brands (S/W) ● As of January 2016, 43% of Unilever’s managers were women(S) b. Objectives: ● To encourage equal representation of men and women in management roles ● To promote high-potential female talent in the corporation ● To develop skills of its workers in local economies worldwide c. Strategies: ● Focusing on the importance of women in driving growth within the company ● Invested in local economies worldwide to develop the skills of workers d. Competitive Advantage and Rewards: ● In 2013, Unilever was recognized as a Top 50 World’s Most Admired Company ● According to the data from Corporate Equality Index, Unilever has perfect score of 100 in its ranking of workplace equality each year ● In 2013 Unilever ranked #3 up from #5 in 2012 just after Google and Apple on the LinkedIn’s Most InDemand Employers 6. Information System Current Performance:

● Increased investment in e-commerce to drive sales in all channels.(S)


● Increased investment and expertise in IT systems to ensure system availability, reduce operational complexity, speed up operations, and improve operational efficiency across the globe.(S) ● Use a global network called “UltraLogistik” to control operations and improve performances.

Exhibit 2 - Internal Factor Analysis Summary – IFAS Internal Factors

Weight

Rating

Weighted Score

Comments

Corporate culture and values

0.05

5

0.25 The corporate culture is strong and values are clearly stated. Unilever focus at being sustainable and making positive impact on society.

Global presence and economies of scale

0.1

5

High brand awareness

0.03

4

0.5 Unilever effectively leveraged the strengths of a dynamic multinational organization while balancing the unique needs and heritage of its 0.12 local markets of operation. Global presence creates benefits of scale to operations by driving down costs.

Workplace equality

0.1

5

0.5 Unilever encourages equal representation of men and women in management roles. It promotes high-potential female talent in the corporation and has perfect score of 100 in its ranking of workplace equality each year.

Sustainable and cost efficient

0.05

5

0.25 Unilever prioritizes at continually reducing waste and embracing circular models in manufacturing operations to achieve zero waste status. The continued effort on four “R” approach not only provided a strong business case for sustainability, but also contributed to

Strengths


cost-benefits of €200 million and created hundreds of jobs. Clear Financial Strategy

0.05

4

0.2 Based on the case company’s financial strategy aligned very well creating a competitive advantage for a long run.

Stable ROI over last four years (10 %-12%)

0.05

5

0.25 Stable ROI over four years makes the company attractive for investors.

Growth in market capitalization

0.02

4

0.08

Investment in R&D

0.05

4

0.2

0.03

3

0.09 The global network “UltraLogistik” centralized company’s operational management.

0.1

3

0.05

2

0.1

4

0.4 This will affect the cost and efficiencies in operation. And influence the corporation's financial performances.

0.05

3

0.15

($1.2 billion per year)

Global Network

Access to more resources in the capital market.

R&D creates for Unilever opportunity to come up with new product and improve brand image.

Weaknesses

Brand and product cannibalization

Huge marketing expenditure

Operational complexity

0.3 This can dilute the Unilever brand image as a whole. The brands and products in their portfolio may compete with each other in the same markets.

This may affect the revenues. They need to 0.1 manage the return on marketing expenditures. Also use more innovative and cost efficient channels for their marketing campaigns.


Low Current Ratio

Low Current Ratio creates a need to borrow short-term debt which is costly for the company.

0.1

3

0.3

Long-term debt burden

Emerging markets poor sales performance

0.05

3

Animal testing

0.02

2

For 2016 financial year Unilever has $11.7 billion long-term liability and $41.6 billion total debt. The debts are costly for the company to maintain and creates an additional threat to 0.15 business. This affects the revenues directly, since 58% of profits come from emerging markets.Unilever needs to develop new product line to grasp market share in new 0.04 market segments. This influences brand image and affects market share, since other competitors are making progress by offering “cruelty free” alternatives.

Total Weight Score

1

3.88

V. Analysis Strategic Factors A. Situational Analysis

Exhibit 3 - Strategic Factor Analysis Summary (SFAS) Key Strategic Factors

Weigh t

Ratin g

Global presence and economies of scale

0.1

5

0.5

X

X

X

Global presence creates benefits of scale to operations by driving down costs. Unilever will continue leverage the strengths of being a dynamic multinational organization.

0.05

5

0.25

X

X

X

Part of company’s objectives. Will be sustained in the future.

Workplace equality

Weigh Duration ted Score Short Medium Long

Comments


Sustainable and cost efficient

0.15

5

0.75

X

X

X

Part of company’s mission. Will be sustained in the future.


Long-term concern, given its global presence. However, Unilever is continuing working on operational efficiency

0.1

4

0.4

X

X

0.1

3

0.3

X

X

X

0.1

3

0.3

X

X

X

Operational complexity

Brand and product cannibalization

A long-term concern. Debts are costly for the company to maintain and creates an additional threat to business.

Long-term debt burden

0.15

5

0.75

X

X

0.05

4

0.2

X

X

0.1

5

0.5

X

X

Emerging Economies

“Green” Movement

Politically and Economically Unstable Countries and Governments

Slowing Growth in Emerging Markets

Will remain a threat, until clear differentiation achieved in brands and product lines.

X

Expand market share in emerging countries until market saturated.

Part of company’s value. Unilever aims at doubling its sales and halving its global environmental footprint by 2020.

A long term concern, situation is constantly changing and unpredictable. Countries such as Brazil and Russia, where Unilever has strong market share, were facing political instability that posed threats against Unilever’s business operations and sales.

0.1

4

0.4

X

X

Remaining a threat, because the decelerated growth in China would be compounded by


slowing volume growth in other emerging markets such as Brazil, Russia, India, and South Africa. However, also an opportunity for company to think about expanding product lines and penetrating target markets.


Total Score

1

4.35

Exhibit 4 – A. Financial Ratios Analysis 1. Liquidity

2013

2014

2015

2016

Current Ratio

0.70

0.63

0.64

0.67

Quick Ratio

0.51

0.66

0.67

0.72

Inventory to net WC

-0.74

-0.56

-0.59

-0.63

Cash Ratio

0.17

0.13

0.14

0.18

2. Profitability

2013

2014

2015

2016

Net Profit Margin

10%

11%

9%

10%

Gross profit margin

44%

44%

45%

46%

ROI

10%

12%

10%

10%

ROE

32%

41%

32%

33%

EPS

$2.21

$2.37

$1.90

$2.01

3. Activity

2013

2014

2015

2016

Inventory turnover

12.26

12.80

12.51

12.93

Days of inventory

53

51

54

52

NWC turnover

-9.1

-7.2

-7.4

-8.2

Asset turnover

1.06

1.10

1.04

0.98

Fixed asset turnover

2.78

2.79

2.67

2.60

Average collection period

35.3

34.2

32.3

32.6

Account receivable turnover

10.3

10.7

11.3

11.2

Account payable period

52.9

52.5

55.9

57.1

Days of cash

17.1

14.8

15.5

22.6

4. Ratio Analysis

2013

2014

2015

2016

Debt to asset ratio

67%

70%

69%

70%


Debt to equity

214%

248%

234%

242%

Long-term debt to capital structure

52%

51%

63%

68%

Time interest earned

10.3

11

8.9

9.1

Coverage of fixed charges

N/A

N/A

N/A

N/A

Current liability to equity

121%

144%

129%

126%

5. Others

2013

2014

2015

2016

Price/earnings ratio

17.438

18.594

22.938

21.059

Dividend payout ratio

63%

61%

69%

69%

Dividend yield on common stock

36%

34%

30%

32%

B. Review of Mission and Objectives: No changes required VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. Current objectives 2. Alternative strategies i. Cost Leadership - Part of current strategy 1. Pros: a. Would boost sales b. Would gain market share c. Higher margin for the sales d. Would have money to cover high spending on marketing 2. Cons: a. Might influence the quality b. Might damage brand image since the expansion into premium market c. Might reduce revenue if sales didn’t catch up with the difference ii. Differentiation - Somewhat employed 1. Pros: a. Product seen as more responsible than most alternatives b. May charge a premium price c. Would increase brand loyalty 2. Cons: a. Costly to be more responsible


b. Technology disruption can alter or element your differentiation completely iii. Stability - Part of current strategy 1. Pros: a. Would gain a competitive advantage over industry rivals b. Achieve economies of scale c. Low employee turnover 2. Cons: a. Might suffer like “the boiling frog” (i.e. The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death.) b. Customer taste might change c. No growth and lose market share d. Employee demotivation iv. Growth - Part of current strategy 1. Pros: a. Enjoys economies of scale b. Larger customer base c. Deep market share 2. Cons: a. May be a shortage of cash to meet expansion costs b. employees might under higher unbearable pressure c. Less control of the operation management v. Retrenchment - Not Currently Employed 1. Pros: a. Reduce costs b. Improve efficiency c. Improve competitiveness d. Reduce reliance on the market 2. Cons: a. Decline growth b. Reduce profits c. Unable to meet customer needs B. Recommended Strategy 1. Continue to invest in R&D and set up innovation center. 2. The company needs to maintain its gross profit margin. 3. The company should differentiate its product in order to gain market share in emerging markets.


4. Gain more market share in existing economies to mitigate economic risks in emerging markets. 5. Diversify Unilever's business through acquisition. VII. Implementation A. Organizational Structure: 1. Restructuring is not necessary 2. Current structure is able to support the recommended strategy B. Programs 1. New innovation center i. Product innovation can increase Unilever’s product attractiveness that capitalizes on changing consumer preferences ii. An opportunity to boost business performance iii. Provides a strong competitive platform against major competitors and private label brands. 2. Marketing: Localizing marketing strategies (advertising campaigns and channels) Unilever can grow business by increasing sales of its current product lines in emerging markets C. Feasibility 1. Feasibility The programs are feasible, Unilever is already investing huge on R&D. Also making marketing strategies more efficient is a financial gain, not a burden. 2. Pro-forma Budgets Budget assessment is not possible based on the data provided in case. 3. Priorities and Timetables Unilever is currently being reactive to the market. In the future, it needs to focus on what and how to introduce new brands and products to the market. D. Necessary Standard Operating Procedures 1. Current operation procedures are effective for the company 2. Unilever must use its strengths, such as economies of scale, for product innovation to address competition and the threat of imitation VIII. Evaluation and Control A. Current information system is capable of supporting the company’s activities currently. 1. Using a network of global “UltraLogistik” control towers to improve customer service, cut costs and reduce CO2 emissions, which, the company reported in 2015, had already fallen by 21% across 14 countries since 2010. 2. The information system is timely and updates will need to be executed in a timely fashion. B. Control measures in place to enforce conformance with strategic plan


1. Current standards and measures aligns with its objectives i. Limited discussion in the case 2. Suggested additional controls i. Apply risk factors to determine the scope and evidence required in the assessment of internal control ii. Monitor financial risks and operational risks C. Reward System Compensation data is not stated in the case.


Case 14 Google and the Right to be Forgotten Author’s Teaching Note by Cynthia E. Clark Case Synopsis: In July 2010, the Spanish Data Protection Agency ordered Google Spain and Google Inc. to remove the personal data of Mario Costeja Gonzalez from its index and preclude further access to it, ushering in the right to be forgotten in Europe. This right was not only in contrast to the freedom of speech in the U.S. but of Google’s own mission. Google Inc., was a technology company that built products and provides services to organize information. Founded in 1998 and headquartered in Mountain View, CA, Google’s mission was to organize the world’s information and make it universally accessible and useful. The case draws on publicly available data, including published interviews with Costeja, to explore the challenges facing the technology industry and global governments with regard to personal information and privacy. It challenges students to consider how businesses, governments, and society can better assure the integrity of both the global internet and personal privacy rights. Discussion Questions: 1. Do you believe an individual should have the right to be forgotten, that is, to remove information about themselves from the Internet? If so, should this right be limited, and if so, how? 2. How does public policy, with respect to individual privacy, differ in the the United States and Europe, and what explains these differences? 3. In what ways has technology made it more difficult for individuals to protect their privacy? 4. Do you think Google should be responsible for modifying its search results in response to individual requests? If so, what criteria should it use in doing so? Are there limits to the resources the company should be expected to expend to comply with such requests? 5. If you were a Google executive, how would you balance the privacy rights of the individual with the public’s interest to know and the right to distribute information? Discussion Questions & Answers: 1. Do you believe an individual should have the right to be forgotten, that is, to remove information about themselves from the Internet? If so, should this right be limited, and if so, how? Yes, individuals should have the right to be forgotten: • • •

Personal data is personal and one should be able to control it. Personal information can be wrong or outdated. Personal data may have been uploaded by someone 14-1 .

No, individuals should not have the right to be forgotten: •

Personal information is most often entered by the person themselves, voluntarily. People should be more careful about what they share so that removal is


Case 14 Google and the Right to be Forgotten •

else. Data is mined without consumers’ knowledge or consent.

• •

unnecessary. Personal information is often already in the public domain. Rights to privacy differ depending on geography, so it’s hard to effectively police given the internet is global.

The right to be forgotten can be understood as peoples’ right to request that information be removed from the Internet, or other repositories because it violated their privacy or was no longer relevant. In Europe, limitations to the right to be forgotten stemmed mainly from the global nature of the Internet. For example, the case states that Google was only required to apply removals to European domains, such as Google.fr or Google.co.uk, but not Google.com, even when accessed in Europe. Although over 95 percent of all queries originating in Europe used European domains, users could still access information that had been removed via the Google.com site. Other limitations include the four primary criteria for evaluating delisting requests as proposed by the Google-invited advisory council detailed at the end of the case. 2. How does public policy with respect to individual privacy differ in the United States and Europe, and what explains these differences? Fundamental differences in legal philosophy made this right less likely to become widely supported in the United States than in Europe. In Spain and the twenty-eight member states, the right to privacy has become a Constitutional right. In the U.S. this was not the case. According to Jeffrey Rosen, professor of law at George Washington University, the First Amendment’s codification of the right to free speech would make a right to be forgotten virtually impossible, not only to create but to enforce. Such a right differs with one’s geography. In the European Union and its member states (such as Spain) laws addressed the right to privacy and, by extension, the right to be forgotten (see the European Data Protection Directive 95/46, article 3(1)). In the United States, where Google had its headquarters, no such universal right existed. However, consumers’ right to privacy had begun to be recognized in certain instances (e.g., the right to delete certain negative information about a person’s credit). The case notes that in the United States, the constitutional protection for free speech would conflict with a right to be forgotten because such a right imposes an obligation for someone else to forget. While many might want this right to exist, making it a law is far more complicated. 14-2 .


Case 14 Google and the Right to be Forgotten 3. In what ways has technology made it more difficult for individuals to protect their privacy? Technology is ubiquitous, and consumers often do not know when, how, and if a company is using their data. As the case describes, the ease with which information could be shared, stored, and retrieved through online search—as only one example—raised issues of both privacy and freedom of expression. Also, when opening a bank account, joining a social networking website, or booking a flight online, a consumer would voluntarily disclose vital personal information, such as name, address, and credit card numbers. Others easily mine this data without consumers’ knowledge or consent. The technology behind the internet made discovering someone or something very easy—and immediate—,rendering removal of any information difficult, and likely only temporary, once it had already been out in the public domain. Also, the removal from one technology platform did not make it disappear somewhere else. Furthermore, removal meant less accessibility of the information to the general public because searches for that information would not return a link to the source site. Therefore, a person could still find information, since only the link to the information had been removed, not the information itself. 4. Do you think Google should be responsible for modifying its search results in response to individual requests? If so, what criteria should it use in doing so? Are there limits to the resources the company should be expected expend to comply with such requests? Yes, Google should be responsible for modifying its search request in response to individual requests: • Market share: Google is the largest and most commonly used technology platform for the internet. • Large scale consequences: being “googled” can make or break a reputation. • Google was transparent about its process. • Google was merely following the law.

No, Google should not be responsible for modifying its search results in response to individual requests: • Google is a public company and not a government entity. • Google has other stakeholders it must respond to other than consumers. • There is no appeal process or governance of Google’s procedures. • Google has a conflict of interest in removing information that is part of a popular search.

The case introduces some of the controversies in assigning this

responsibility to Google. Much of this controversy centered 14-3 .


Case 14 Google and the Right to be Forgotten on whether a private company based search engine should remain the appropriate arbiter of what information is forgotten versus any other deciding body (e.g. the government or a panel of independent privacy experts). Students will likely quote Jimmy Wales, one of the advisory council members in saying: “I completely oppose the legal situation in which a commercial company is forced to become the judge of our most fundamental rights of expression and privacy, without allowing any appropriate procedure for appeal by publishers whose work in being suppressed.” On the other hand, Google is attempting to be transparent about its process. It provides a tally of some of the requests—over two million requests as of March 2015. Students may mention a number of criteria that the advisory council report suggested using when deciding what information to remove. These include: • •

Consider the data subject’s role in public life. Did the individuals have a clear role in public life (CEOs, politicians, sports stars)? Consider the type of information involved. Information that would normally be considered private (such as financial information, details of a person’s sex life, or identification numbers) would weigh towards delisting. Information that would normally be considered to be in the public interest (such as data relevant to political discourse, citizen engagement, or governance) would normally weigh against delisting. Google removed content that glorified the Nazi party, illegal in Germany, and content that insulted religion (e.g. illegal in India). Consider the source of the information. Here, the report suggested that journalistic writing or government publications would normally not be delisted. Google frequently removed information for legal reasons—either valid notification from the copyright holder under the Digital Millennium Copyright Act (DMCA) or via a court order. Consider the effect of time, given that as circumstances change, and the relevance of information might fade. Thus, the passage of time might favor delisting.

Information about Google’s removal process was also available online at http://www.google.com/transparencyreport/removals/copyright/domains/?r=all-time Google had put in place a team of people to address removals and students should consider whether this expense and resource allocation should be borne by the company or another party or parties—the European Union, individuals, governments—given that it is an EU law imposed on a U.S. firm. The limits to the resources Google is willing to pay directly relates to one of the text’s axioms—that when one has a right, it’s necessary to consider who bears the responsibility for that right. Even with Google’s vast wealth, there should be a limit to the responsibility it bears for this law. The responsibility thus far has been borne solely by Google. 14-4 .


Case 14 Google and the Right to be Forgotten If you were a Google executive, how would you balance the privacy rights of the individual with the public’s interest to know and the right to distribute information? Students will provide a wide range of answers to this question. Chapters 11 and 14 discuss privacy rights and students should be encouraged to use this information. In March 2015, President Barack Obama attempted to create a privacy act that defined “personal data” in a way that would directly address some of the issues faced in the Costeja case. Likewise, the committee offered some useful criteria. For example, whether the data subject experienced harm from such accessibility to the information was especially relevant to this balancing act. Students could evaluate the other criteria (role in public life, source of information, recency of information, etc.). Students may offer a range of opinions in response to this question. Savvy students will likely bring up the idea that although this is a right, whose responsibility is it to protect (government, the individual, the source of the information, the search engine)? When discussing rights, it would be useful to bring in the ethics discussion of the four methods of ethical reasoning (chapter 4). For example, students could evaluate privacy rights on the basis of virtues, utilitarianism, rights, and justice. Also, an important aspect for students to notice is that Google likely has a conflict of interest. It makes more ad revenue off of popular searches—which may, in fact, be those that are argued to bear a right to be forgotten. Epilogue: In March 2015, President Barack Obama issued an Administration Discussion Draft called the Consumer Privacy Bill of Rights Act of 2015. Its purpose was to establish baseline protections for individual privacy in the commercial arena and to foster timely, flexible implementations of these protections through enforceable codes of conduct developed by diverse stakeholders. This draft made an attempt to define “personal data” which was at the center of the Costeja case. As of October 2015, little progress had been made in moving this draft forward in the legislative process.1 Various parties—in both the U.S., where Google was headquartered and Europe, where the law applied—criticized the ruling. In response, the EU has released a fact sheet to address what it considers myths about the right to be forgotten (see: http://ec.europa.eu/justice/newsroom/dataprotection/news/140918_en.htm). The number of takedown requests continued to grow. Google has complied with the ruling, but only for European domain names and not Google.com, as the case notes. In June 2015, the French data protection regulator, the Commission Nationale de l’Informatique et des Libertés, or CNIL, issued a formal order to Google to begin applying 1 https://www.whitehouse.gov/sites/default/files/omb/legislative/letters/cpbr-act-of-2015-

discussion-draft.pdf 14-5 .


Case 14 Google and the Right to be Forgotten the right to be forgotten removals to all domain names of the search engine globally, including Google.com, not just those that are aimed at Europe, such as google.fr. Google maintains that it doesn’t believe the French regulator has the authority to expand the scope of the rule. In July 2015, Google’s formal appeal to the CNIL stated that applying the right beyond Europe could open the door to more authoritarian governments attempting to apply Internet censorship rules beyond their borders. In late September 2015, CNIL rejected Google’s appeal setting up what could be a long legal battle between the two.

14-6 .


Case 15 : Gender Pay Equity -Teaching Note According to the Institute for Women’s Policy Research, women make up almost half of the U.S. workforce. In addition, they are the sole or co-breadwinner in half of American families with children, and they receive more college and undergraduate degrees than men. Yet on average in 2020, full-time, year-round working women earned 82 cents for every dollar earned by men according to the Bureau of Labor Statistics. March 24th is Equal Pay Day, a symbolic day that represents the number of extra days women, on average, must work to earn what men, on average, earned the year before. And for mothers and many women of color, this date falls much later in the year. According to the National Women’s Law Center, during the Covid19 pandemic women’s jobs were 1.8 times more vulnerable than men’s jobs. As a result, firms continue to face challenges to their efforts regarding gender pay equity from regulators, shareholders, the media, the general public and customers alike. The tech industry, in particular, has come under increasing scrutiny over its pay practices. In January 2017, the U.S. Department of Labor (DOL) filed suit against Google over the tech company’s failure to turn over the compensation data requested by the DOL. Google is a federal contractor, which means it must allow the DOL to inspect and copy records about its compliance with equal opportunity laws. As part of a compliance review, the DOL requested employee compensation data from Google, and while the company did turn over many documents, it did not fully comply with the request. Based on the documents it did supply, the DOL claims that Google has “systemic compensation disparities against women.” Google disagrees with this conclusion and in a blog post stated that it conducts rigorous analyses of its pay practices and claims it has closed the gender pay gap globally among its workforce. The same year, Google was also in the news for the “Google Memo,” written by former Google software engineer James Damore. Among the many topics in his memo, Damore rationalized much of the pay gap at Google, and in the tech industry more broadly, using gender stereotypes based on bias and unproven science, such as women do not take high stress jobs because they are too anxious.

1


Discussion Questions 1. How do the laws in Massachusetts, California, and New York differ from the federal law (i.e. the Equal Pay Act)? 2. Why pass a law banning asking about salary history? How does that help reduce the gender pay gap? 3. Given that 98 countries are not legally required to pay women the same as men, according to PBS, how can managers approach this issue from both an equity and ethical standpoint when working in global enterprises?

Critical Thinking

1. Evaluate the idea of equal pay for equal work in this case according to federal law. What is the work and the goal of that work? Is there equal work for men’s and women’s teams? How does the success of the team factor in, or not, to the notion of equal work? 2. What will be the impact on U.S. Women’s Soccer and female professional sports in general? U.S. Men’s Soccer and tournament play in Europe? 3. Can you think of other industries and jobs where this case might impact gender pay disparities?

2


Case 16 - Managing Diversity At Toyota – Teaching Note

Discussion Questions: 1. What makes a company a top-rated company for diversity (see below)? 2. Did Toyota’s commitment to diversity attract new car buyers? 3. Did Toyota’s commitment to diversity take away from profits? 4. Did Toyota’s commitment to diversity and inclusion result in happier and more productive employees? 5. Do you think the public knows about Toyota’s commitment to Diversity and Women? Should they have done a better job at Public Relations? 6. Knowing more about Toyota, would you be more inclined to buy a Toyota vehicle?

Diversity: The Backbone of Toyota’s Business Philosophy In 2001, the company decided to be a leader in corporate diversity. It launched the Toyota Diversity Strategy – a ten year, multi-billion dollar sustainable commitment to participation by people of color in Toyota. The strategy outlined its processes and programs to achieve its diversity goals. Analysts supported Toyota’s initiatives as they felt that in the 21st century the importance of diversity was increasing. The number of people of color in the US—especially Hispanics and Asians—was exploding. In 2007, one-third of the population in the US comprised of people of color. It was estimated that by 2050, half the population of the US would comprise people of color. It was observed that the optimal use of human resource diversity had become a key factor in increasing a company’s competitiveness in the changing labor market scenario, which in turn had been affected by the globalization of business and social advances of women. For Toyota, diversity was not just a social responsibility but a business imperative as it believed that its strategic diversity plan reflected well on its business culture

1


“Toyota has a staunch and solid commitment to diversity. Our company mission is to incorporate diversity and inclusion into all aspects of our business.”1 Hudson Williams, Corporate Diversity Manager, Toyota Motor North America. “Toyota made diversity into the Billion Dollar Roundtable, which is very prestigious,” he says. “It has built diversity into the whole company. It isn’t just a program. The entire culture, supports it.2 Federico Peña, Former Secretary Transportation and member of Toyota’s Diversity Advisory Board

Diversity and Equal Opportunity There was a steady increase in the percentage of female employees over the years. With the rising number of female employees, it became imperative to provide a more conducive environment that addressed their concerns. It appeared that the number of female employees taking child rearing leave had been increasing since 1998. In 2002, Toyota set its sights on women’s participation, reviewing its arrangement with regard to female employees, and taking steps to put a better environment in place to promote the creation of an environment more conducive to participation by motivated female employees. Toyota’s three-pronged effort involved enabling women to work and raise children at the same time, assisting in women’s career building, and reforming the work environment and employee awareness. In introduced flexible working arrangements and constructed child-care facilities at the business site. With the objective of assisting women’s career building, Toyota held the Career Design Forum in November 2002 for about 400 female employees. The purpose was to help the women build a network within the company and to give them the motivation to create their own career visions independently and actively. In March 2003, the ‘Toyota Child Care Bubu Land’, an on-site childcare facility (in Toyota City, Head Office area), was opened so that all employees, regardless of gender, who wished to continue working while raising children could do so without worrying about their children. The facility had many useful features, which included having a resident nurse on the staff and staying open until 10:30 pm. By March 2003, Toyota had approximately 5,800 female employees, accounting for 9% of the total workforce.

Looking Ahead In 2006, Toyota ranked number 29 among Diversity Inc.’s Top 50 Companies for Diversity. It was inducted into the Billion Dollar Roundtable, in recognition of over $1 billion in annual spending with certified suppliers owned by women and people of

2


color. It was also awarded the ‘Corporation of the Year’ award from the National Minority Supplier Development Council (NMSDC) and ‘Distinguished Supplier Diversity Award’ from the Minority Business Development Agency (MBDA). Toyota was named among the Best Companies for Diversity by Black Enterprise, to be included in the July 2006 issue of the magazine. As part of the Best Companies for Diversity, Black Enterprise also recognized Toyota among its 10 Best Companies in marketing Diversity for efforts including advertising, promotions, community outreach, and scholarships. In addition, Toyota was named among the 10 Best Companies in Supplier Diversity for its spending and relationships with suppliers owned by women and people of color. In 2006, people of color represented 30% of Toyota’s employment.

Discussion Question 1: Here are some of the reasons why Toyota is rated a top company for diversity: (https://pressroom.toyota.com/top-reasons-why-toyota-leading-companydiversity/) 1. It’s part of the cultural fabric – Respect for People and Continuous Improvement are the two pillars that make up the foundation of the company and have since its inception more than 100 years ago.

2. Commitment to team member development and D+I education – Dynamic inhouse programs develop team members to their fullest capabilities, while educating them to foster a culture of inclusion.

3. Learning from others to incorporate best practices – An external Diversity Advisory Board made up of diverse leaders was created to share knowledge and build accountability processes for insight, guidance and diversity of thought.

4. Diverse executive leadership – Consecutive year-over-year growth in diverse Black, Latino and Asian leaders.

5. LGBTQ+ inclusive culture – Toyota has received 12 consecutive perfect scores on Human Rights Corporate Equality Index.

3


6. Values the importance of a diverse workforce – Continued focus on diversity as part of the recruitment process, to ensure diverse candidate pools are being reached.

7. Robust veterans program – Recruit and support veterans by helping them translate their military skills to civilian work.

8. Job creation through supplier diversity – 40,000 jobs created across the U.S. through Toyota’s Opportunity Exchange, helping build strong relationships among minority- and women-owned suppliers.

9. Supporting an inclusive culture while strengthening the business – Over 85 team member-led Employee Resource Groups across North America, (known as Business Partnering Groups) connect, learn, and advance business through inclusion, engagement, and marketplace connection.

4


CASE 17 HARLEY DAVIDSON: AN OVERRELIANCE ON AGING BABY BOOMERS I. CASE ABSTRACT At Harley Davidson, customers not only purchased a motorcycle, they bought the “rebel” lifestyle Harley signified. This rebel image took a long time to develop and constituted a major competitive advantage for Harley. Nothing promised the same excitement as being on the open road on a Harley, its engine roaring, the wind whipping, the great open spaces of America just down the road. Harley Davidson specifically targeted a narrowly defined market of middle-aged males with disposable income. However, as US baby boomers got older, the company recognized that it had to look to new markets and demographics to expand sales. Company Background In 1903 William S. Harley and Arthur Davidson produced the first Harley Davidson motorcycle in a 15’ x 10’ wooden shed with the words ‘HarleyDavidson Motor Company’ etched into the door. The warehouse was located in Milwaukee, Wisconsin, the company’s headquarters to this day. They were soon joined by Arthur’s brother Walter, and by 1910, the company had begun to establish itself, using its current “bar and shield” logo for the first time, which it trademarked with the US Patent Office in 1911. In 1981, Harley Davidson, Inc. purchased the Harley Davidson Motorcycle Company from AMF Incorporated via a management buyout and incorporated, then went public in 1986. Over all these years Harley Davidson had made a name for itself as the most well-known producer of heavyweight motorcycles in the North American market; and, though its international sales were not significant until the late 1990s, the company quickly became the most renowned brand in the world. Harley Davidson, Inc., a publicly traded company listed on the New York Stock Exchange as “HOG,” divided its operations in two segments: Motorcycles & Related Products, and Financial Services. The Motorcycle & Related Products segment designed, manufactured, and sold wholesale heavyweight motorcycles, motorcycle parts, accessories, and general Harley Davidson merchandise to retail customers through a network of independent dealers in North America, Europe, Middle East, Africa, Asia Pacific, and Latin America (Exhibit 1). The Financial Services segment, known as Harley-Davidson Financial Services (“HDFS”), provided wholesale and retail financing as well as insurance related services. HDFS customers were primarily end-users from the Harley Davidson retail stores, drawn from its networks primarily in the United States and Canada. Decision Date: 2014

FY Sales: $4.2 billion FY Net Income: $568 million

II. CASE SUBJECTS AND ISSUES Aging Baby Boomers Strategy Formulation

First Mover Advantage Competitive Advantage 17-1 ©2024 Pearson Education, Ltd.


CASE 17 HARLEY DAVIDSON: AN OVERRELIANCE ON AGING BABY BOOMERS

Corporate Restructuring Core Competencies Marketing Strategy

Brand Image Foreign Competition Competitive Strategy

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss Harley’s increasing foreign competition. 2. To discuss Harley’s business level strategy. 3. To discuss the competitive landscape of the motorcycle industry. 4. To discuss the challenges surrounding aging baby boomers. 5. To discuss Corporate Restructuring. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS

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CASE 17 HARLEY DAVIDSON: AN OVERRELIANCE ON AGING BABY BOOMERS

1. How will Harley Davidson appeal to younger buyers? 2. Can Harley maintain its American Icon status? 3. How can Harley reduce the resistance to riding motorcycles because they are perceived to be unsafe? 4. Should Harley try to reduce the loud sound of its bikes? 5. Was Harley’s restructuring plan a success? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT

I.CURRENT SITUATION A. CURRENT PERFORMANCE History: • • •

Founded in Milwaukee, Wisconsin in 1903 by William S. Harley and Arthur Davidson. Sold to AMF Inc. (a leisure and industrial conglomerate) in 1969, which invested in increasing production instead of R&D, driving the company to the brink of bankruptcy. Bought back, via management takeover, in 1981 to rebuild brand.

Economic Performance: • •

• • •

Listed on NYSE as “HOG” revenues rose dramatically in the late 1990s. After a stellar last five years, the stock is down 10 percent this year. As we were preparing this document, the company issued a recall for 126,000 motorcycles over a problem with the clutch that could cause crashes. The stock price on October, 4, 2013 was $65.30, a year later it was $59.37. Revenues have begun to fall over the last few years, after steady net income growth from 2009. Market Share is being reduced 55.26 percent in Q3 2013 to 54.9 in Q4 2013 Harley-Davidson (H-D) has 30 percent of the overall motorcycle market and over half of all US heavyweight bikes (+651cc). Nevertheless, the overall heavyweight market, from which they have a high dependency on, is shrinking. Highly leveraged as result of failed acquisitions and restructuring issues:

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CASE 17 HARLEY DAVIDSON: AN OVERRELIANCE ON AGING BABY BOOMERS

• •

Financing arm was hit hard by the recession, as many buyers defaulted on their loans. Loan from Warren Buffet at 15 percent interest.

Rankings and Accolades: •

One of top 100 brands in the world. Recently ranked #96 in the World, ahead of brands such as Mastercard.1 B. STRATEGIC POSTURE

Mission: •

Design, manufacture, and sell premium motorcycles for the heavyweight market.

The mission statement has been appropriate for the years, but we believe it should be adjusted if H-D wants to remain relevant in the stock market. As we have discussed in class, the stock market in primarily concerned with earnings and growth. It is clear that the heavyweight market is in decline and customer preferences are changing toward smaller or sportier and fuelefficient forms of transportation. H-D’s mission should focus on quality across all motorcycle segments. Selling of the H-D brand and lifestyle is the core competency of the company and could be transitioned to support trendier bike styles. Objectives: • • • • • • •

Provide a quality and reliable product. Allow for highly customized and stylish products. Be on the cutting of edge of motorcycle technology. Create “customers for life”. Continuously develop and cultivate the brand or culture. Add 100-150 international dealers through 2014. Find ways to increase sales and profits and expand sales to market segments currently unexploited or underexploited (younger crowd and women).

Overall, these objectives support the current mission. Strategies: •

1

Traditionally, H-D targeted a narrowly defined market of middle-aged males with disposable income (2012 65 percent of sales were to white males over thirty-five), but we believe the new strategy needs to target younger buyers and female buyers with appealing products.

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• • • • • •

Build brand around the “rebel” lifestyle and positioning H-D as an American icon. Harley Owners Group developed to create one of the first “social brands.” Create comprehensive motorcycling experience through events, rides, and rallies. Merchandising (clothing/acessories). Seven models, each fully customizable to the customers wishes which supports the shift to target younger demographics. Strong focus on R&D, even during economic downturns. They invested, on average, $140 million a year back into the company. Continue to expand internationally and capture the growing market for motorcycles in developing nations.

Policies: Strong culture of Ethics based on five principles: • • • • •

Diversity and inclusion. Safety in the work environment (especially in foreign markets). Accurate advertising. Boost employee retention and morale. Environmental awareness (focused on cutting emissions by building fuel efficient engines).

All of these policies meet the standard for corporate behavior and support the clean, hardworking, American image that the company portrays. International Operations: H-D is approaching new markets in a different way than its home US market. It is manufacturing new lightweight street bikes to meet the demands of foreign markets, especially India and China. In an effort to keep prices competitive, H-D also assembles the bikes locally to avoid tariff fees and to reduce shipping costs. How H-D can sell its brand and lifestyle internationally is the biggest question for these international markets. It is hard to sell a dream of the open America road to someone who lives on the congested streets of India. Therefore, marketing should be adjusted accordingly. Conversely, the same strategies cannot be applied across all theaters of H-D’s operations. II. CORPORATE GOVERNANCE • • • •

A. BOARD OF DIRECTORS See Appendix A. Board consists of twelve members (two internal). Publicly traded in NYSE as HOG. Diverse work experiences representing several industries:

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Several members have experience in multinational corporations and other manufacturing firms (Boeing, Cummins). • Also several members have experience with strong brands and brand development (e.g., Levi’s, Kering ect.). Good mix of short and long tenured members ranging from start dates in 1991 to 2012 The H-D Stock Ownership Guidelines state that all directors must hold 5,000 shares of common stock and that members of the Senior Leadership Group must hold at least 2,500 to 30,000 shares of common stock. Voting Rights: the holders of Common Stock are entitled to one vote per share on all matters to be voted on by the Corporation’s shareholders. •

B. TOP MANAGEMENT CEO—Keith E. Wandell • CEO since 2009 and first “outsider” to be named CEO, since 1981. Eight Member Senior Management Team: • Somewhat diverse team • Appears as if the strategic direction is set from this top level. No information provided on how the executives interact with lower levels of management. • Executives have grown up in the company and do not necessarily show experience with international markets or with significant strategy shifts. • Most have long histories with the company. Only the CEO and one other executive have been with the company for less than three years. • The management team could benefit from some external help at this point in time, particularly as the company tries to enter international markets. • We believe the company needs a radical shift if it is to pivot its strategy and focus on capturing younger bikers and women, as well as new motorcycle segments. • The majority of the top management team has stock options.

III. EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS (SWOT) A. SOCIETAL ENVIRONMENT Economy: • • • •

Rising gas prices, increased demand for eco-friendly, and fuelefficient transportation may drive more consumers to efficient (smaller) motorcycles. (O) Demand for motorcycles is strong and projected to continue to rise over the next 5 years. (O) Overall economy still continues to recover, although at a slow pace. However, consumers still do not have full confidence that the economy is strong. (T) Predicted rising interest rates will affect financing options for motorcycles and could cause a reduction in sales. (T)

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Technology: • • •

Tech advances allow H-D to produce a plethora of innovations, like built in GPS, Cameras, and Airbag Systems. (O) Demand for this technology is driving the already high manufacturing prices up. (T) Competitors already have achieved technological parity. Difficult to innovate in this industry. (T)

Political—Legal: • • • •

Highly regulated industry. (T) Increasing EPA regulations. (T) National Highway Safety Administration regulations. (T) Consumers are required to get a special license to operate a motorcycle. Barrier to new customers. (T)

Sociocultural: •

Aging target market segment—baby boomers becoming concerned for their safety. (T) • Overall sense that motorcycles are “unsafe” as result of increased accidents and the regulations that were created in response. (T) • Safety requirements, such as helmets, reduce the “cool” factor of motorcycle culture. (T) • Trademark engine roar has become a potential liability, as people see it as annoying or not eco-friendly. (T) International Societal Environment: For the most part, these issues are generally the same in all markets. However, regulations are much more relaxed in many other nations, such as developing countries. H-D has chosen to maintain the high level of standards in its international markets, even though it may not be legally required. Also, environmentally concerned movements have yet to catch up in those countries. Furthermore, in other markets with high motorcycle registrations, such as China and India, small business owners use motorcycles to sell their goods, and individuals use them as their primarily means of transportation, not as a lifestyle choice. Consequently, these customers just want a cost-effective means of transportation, generally with small displacement engines. Heavyweight motorcycles, such as H-D’s bikes, are therefore less appealing in these latitudes. B. TASK ENVIRONMENT

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Several large multinational manufacturers dominate the global motorcycle market. •

Threat of New Entrants: LOW • Market is saturated. • Growth markets are there, but largely dominated by regional and foreign manufacturers who are focused on smaller bikes. • Biggest opportunity is in the small or street bike category, which H-D currently does not play a significant role. • High startup costs. Bargaining Power of Buyers: HIGH • Many cheaper options for smaller and lighter motorcycles that provide the same functionality. • Other firms easily beat H-D on price. • High brand loyalty with existing customers, but aging out of the market. Substitutes: HIGH • Cars, walking, public transportation, bicycles—some of these less costly and more convenient alternatives. Bikes are generally not used during the winter. • High competition—Oother firms, such as Ducati and KTM, could move into heavyweight premium segment. Bargaining power of Suppliers: HIGH • H-D uses quality raw materials in its manufacturing process and would be susceptible to any raw material cost changes. Rivalry Among Competing Firms: HIGH • Primary Competitors: Honda, Suzuki, Yamaha, Ducati, Kawasaki, BMW, and Polaris. • Honda is H-D’s biggest competitor in the US and it is also the worldwide market leader. • The rest of the firms compete in the international lightweight, sport or adventure motorcycle segments. Power of stakeholders: LOW • H-D has connections with several Police departments, which would be difficult for competitors to break into. The customer has the most immediate impact on H-D. Its current target customer is simply aging out of the motorcycle market and the potentially new customers have cheaper alternatives. The company is designed and built around selling “big and loud” bikes to the American baby boomer. This demographic shift is a huge threat to the corporation; therefore, H-D must look for ways to refocus its product offerings to meet the needs of younger buyers and international buyers. These two groups (the largest opportunities for market growth) are not attracted to H-D’s heavyweight bikes. C. SUMMARY OF EXTERNAL FACTORS

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External Factors

Weighted Weight Rating Score Comment

Opportunities Rising Gas Prices/Green Movement

0.05

5

0.25

H-D is committed to R&D, even in times of economic downturns.

Strong Overall Demand for Motorcycles, Especially Internationally

0.3

3

H-D is moving into International Markets aggressively and adjusting their product portfolio accordingly. H-D needs to adjust their marketing strategy and figure out how the American icon and dream can be sold on the 0.9 streets of India.

Technology Rapidly Advancing

0.1

5

0.5

H-D is committed to R&D even in times of economic downturns.

0 Threats

Overall Economy still Shaken

Rising Interest Rates

Tech Driving Already High Prices Up

0.05

0.05

0.05

2

3

3

0.1

H-D is highly leveraged and needs to improve its finances immediately to combat any future recessions

0.15

Internal Financing ARM can get creative here, but needs to be on guard as to not repeat the poor lending practices leading up to the Great Recession

0.15

H-D are premium motorcycles and are price accordingly. Will need to work harder to bring prices down in order to compete with smaller, cheaper bikes targeting youthful riders.

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Difficult Dedifferentiate on Technology

Highly Regulated Industry

Aging Target Market Ssegment

Rise in Culture of Safety

0.05

0.05

0.3

0.05

Size and Loudness of Bikes

0.1

Total scores

1

5

0.25

3

H-D follows regulations as best it can. Its investment in R&D allow for it to quickly respond to new 0.15 regulations

1

0.3

Not addressing this well enough. Need to completely refocus its marketing efforts on younger demographics. Try and reach the new “rebel” culture of today’s youth.

0.15

Innovating on safety as best they can, but motorcycles are inherently more dangerous than automobiles.

0.3

No real attempt to tone down the Harley “Roar” but they are designing smaller street bikes, especially in other markets like India.

3

3

H-D is committed to R&D, even in times of economic downturns.

2.75

IV. INTERNAL ENVIRONMENT: STRENGTHS AND WEAKNESSES (SWOT)

• • • • •

A. CORPORATE STRUCTURE: Operations divided in two segments: • Motorcycles & Related Products. • Financial Services (HDFS). Structure is clearly understood by everyone (implied by case). Competitors are more focused on lightweight, sport, and adventure bikes. Dealerships across geographies in North America, Europe, Middle East, Africa, Asia Pacific, and Latin America. By the end of 2012, Harley operated over 695 full service dealerships in the United States and seventy-three in Canada, and another 700 full dealerships in Europe, the Middle East, Asia, and Latin America. H-D also believed that flexible manufacturing processes and supply chains, combined with cost-effective and flexible labor agreements,

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• • • • • • • •

were critical to allowing the company to respond to customers in a cost effective manner. H-D fostered long-term, mutually beneficial relationships with its suppliers, gaining them direct access to technical and commercial resources for product design, development, and manufacturing initiatives. B. CORPORATE CULTURE Consistent with customer demographic, corporate culture reflects “Rebel” lifestyle, supported by events, rallies, and rides. Rallies are a crucial part of H-D’s culture. Basically, they want every motorcycle owner to wear a Harley vest, a Harley helmet, and Harley Boots. Embracing a culture of “personal responsibility and stewardship of quality in everything we do.” Restructuring 2009-2013: single line in York, PA facility, & internationally to reduce costs, and increase output. Restructuring its U.S. plants to drive efficiency, cost savings, and customer satisfaction. Strong Human Resources and Ethics Policies based on five main practices mentioned earlier. Employee retention concerns after restructuring plan, letting go of thousands of employees. Culture committed to research and development, collaborative international network, and pride of brand image.

C. CORPORATE RESOURCES Marketing Objectives (Price, Place, Product, Promotion): •

• • •

H-D is the domestic leader in the touring and custom motorcycles segment with approximately 50 percent market share. It offers prices ranging from competitive to 50 percent higher than those from the competition. The high-end motorcycles, which normally have big engines (+651cc), are not only their highest unit volume, but also carry a premium price tag. This product represents a high value proposition in the market because of their features, styling, and high resale value. In the lower price spectrum, H-D offers competitive prices on their smaller displacements motorcycles. H-D pretends to differentiate itself from competitors in quality, reliability, and styling. The company places their motorcycles through a dealer network strategically distributed all over the world. As of 2011, H-D had over 1,600 distributors in America, Asia Pacific, and Europe. There are three kinds of distributors: full-service dealerships and secondary retail outlets, which are authorized to sell and service motorcycles; and the alternative retail outlets, which sell licensed products. H-D’s main product is the design, manufacturing, and sale of motorcycles and related products, such as merchandise and brand

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licensing. As of 2011, H-D had twenty-eight different models in the market with prices ranging from $8,000 to $31,000, approximately. The company also provides financial services to the dealers and to the final customer. The financial services segment (HDFS) represented 12 percent of the revenue in 2011 and basically provides loans and insurance services, which is a significant competitive advantage. Promotion: H-D’s primarily goals in marketing are: • To increase their relationship and brand awareness with current customers through The Harley Owners Club (HOC); • To maintain and increase market share through dealer promotions and financing, events, magazine, H-D brand licensing, advertising, and cooperative programs; • To extend their initial target market from older males (40 years or older) to targeting a younger crowd (first riders) and women. The company also maintains two interesting marketing programs: • First, it has a 130,000 square foot museum to bolster relationships with past, current, and future customers; • Secondly, for those who don’t know how to drive a motorcycle, the company offers the “Rider’s Edge” program which teaches the skills necessary to ride a motorcycle.

Finance Objectives: •

• • •

• •

The main financial objective is to increase efficiency of operations by: • Consolidating suppliers, eliminating excess capacity, increasing asset utilization, reducing administrative costs, and exiting noncore businesses. As of year-end 2011, the company hasn’t recovered from the 2008 recession. Signs of concern are evident in the number of registrations in the US and in Europe (the only information provided). During 2011, in the US alone, the number of registrations is half of what it was in 2006 (before the recession). In Europe, the number fell 23 percent during the same period. In terms of liquidity, the company continues to struggle. For instance, the company’s ability to pay its short-term liabilities using its short-term assets was at a five-year low in 2011. The current ratio stands at 1.68, down from 2.02 the year before. The same conclusion surfaces when the inventories expense is deducted, also known as the quick ratio, which was 1.53 in 2011, down from 1.86 the year before. The cash ratio, which continues to be weak, a ratio that is normally evaluated by creditors before lending any money. It measures how well the company could repay its current liabilities in the very short-term. While this indicator improved from 2010 to 2011, it is still far from 1, which is what creditors would want. As presented on Exhibit 6, it is currently 0.62. In terms of profitability, the company’s efforts in consolidating operations to reduce costs have been paying off. The net profit margin, which shows how much after-tax profits are generated by each dollar of

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sales, improved from 4 percent to 13 percent in the years 2010 and 2011, respectively. The same is true for the return on investment, a measure of management’s efficiency in terms of returns on the assets are utilized. This indicator increased from 2 percent to 6 percent Despite, the recession and the harsh year the company had in 2009 ($55,116 in net loss), the gross profit margin has been consistent at around 34 percent. Exhibit 6: Selected Financial Ratios

The activity ratios show consistency with the company’s overall goal of reducing excess capacity. For instance, the days of inventory remained low at around 0.11 days, meaning the company is keeping its inventory at very low levels and basically producing once the orders arrive. Conversely, the company’s inventory turnover remains at a five-year low, at 11.15 times a year. For reference, this ratio was at 16.38 in 2007. Similarly, the asset turnover ratio dropped to less than half of what it was in 2007. This means that the utilization of all company’s assets went from 1.01 times to 0.48 times in 2011, and it is an indicator of how many sales are generated by each dollar of assets.

Research and Development Objectives: •

H-D is clearly focused on reducing costs and it’s time-to-market. If the company achieves these goals, it will be able to meet customer demands faster all while increasing operating efficiencies.

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• •

To achieve this goal the company’s structure is changing to become more “innovative friendly.” In other words it must focus on finding new ways of developing new products. As the current segment they serve (heavyweight motorcycles) keeps shrinking, they must find new ways of adapting to customer demand.

Operations and Logistics Objectives: • •

• •

• • • • • •

By the end of 2012, H-D had over 695 full service dealerships in the United States and seventy-three in Canada, and another 700 full dealerships in Europe, the Middle East, Asia, and Latin America. The availability of full dealerships was considered the best way to promote sales, as it allowed customers to come into a local shop, test drive a bike, look at options, and understand their financing options before actually making a purchase. H-D believed flexible manufacturing processes and supply chains combined with cost-effective and flexible labor agreements were critical to allowing the company to respond to customers in a cost effective manner. H-D fostered long-term, mutually beneficial relationships with its suppliers, gaining direct access to technical and commercial resources for product design, development, and manufacturing initiatives. Considered the availability of a line of motorcycle parts, accessories, and general merchandise and of financing through HDFS part of its competitive advantage. No competitors offered its own financing under the same company umbrella. One of H-D’s weaknesses from an operational standpoint was its inability to generate revenue streams from product lines other than motorcycles. Between 2009 and 2014, H-D undertook a number of different restructuring initiatives with the goal of streamlining operations and reducing production costs while maximizing efficiencies. Consolidated its motorcycle production into a single line at the company’s motorcycle manufacturing facility in York, Pennsylvania. Additionally, ratified a new, more flexible labor agreement at all of its U.S. manufacturing locations. In the first half of fiscal year 2013, the company began implementing “flexible” production capabilities at its York facility by adding flexible workers. Restructured operations internationally to reduce costs and maximize output, closing one of its major international manufacturing facilities in New Castalloy, Australia, a plant that manufactured the majority of the wheels for the company’s products. Instead, the company decided to source these components through existing suppliers, as more efficient and cost effective (Research and Markets).

Human Resources Management/Ethical Concerns: Current HR Management Strategy:

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• •

After a workforce restructuring in 2010-2011, Harley made it a priority to emphasize the importance of employee retention and attainment, increasing efforts to boost employee morale and encourage long-term employment. Objectives: ▪ To provide quality and reliable products Harley-Davidson needs to retain effective and dedicated employees. ▪ In addition to creating a “customers for life” image they are also looking to create an “employees for life” image. ▪ These dedicated employees are also devoted to continuous development through research and development of new products. Strategies: ▪ To expand globally, they are establishing new dealers and distribution centers throughout the world. ▪ Critical to maintain a reputation of diversity and inclusion in its workforce. Performance: ▪ No statistical data provided in regards to workforce composition. ▪ Restructuring effort during 2010-2011 was due to an excess in inventory as a result of management miscalculation in product demand which led to a workforce downsizing. • No mention to the effects of the downsizing. ▪ Harley is committed to brand quality and excellence by employing a test center to dream, conceptualize, and build prototype products. • Harley has the financial capital to invest in resources that other smaller firms would not be able to afford. ▪ No statistical data provided in regards to Harley’s competition HR policy practices. ▪ No information provided on employee performance evaluation processes. Diversity: ▪ The company understands to maintain a positive public image it promotes diversity and is unbiased in any way with regard to employment of any particular minority groups or causes. Work Place Safety: ▪ Harley leverages the same strict work environment safety standards in foreign expansion countries as it does in the United States. Work Place Conduct: ▪ No mention of specific work place conduct practices or policies. Human Resource Managers: ▪ No mention of the roles of HRM managers in the strategic management process.

Information Systems (IS): •

Current Information Systems Strategy:

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Very little provided as to how Harley utilizes Information Technology. • Only observable use of information technology was marketing statistics to identify historical customer data of their core product line and market share in the domestic and global market. Information Systems utilization evaluation: • Harley does not appear to utilize very heavily Information Systems technology as a competitive advantage. • Statistical analysis does reveal that historically its key demographic has been a Caucasian middle-age male. ▪ The data has also revealed that this previously profitable segment will decline with changing demographic desires: • Safety • Comfortably • Practicality • Affordability ▪ Little information gathered about other demographic areas or how certain marketing efforts lead to sales. • They have also determined some key geographical areas (like the Northeast United States) are under performing sales regions, but have little data to show what to do about capturing those markets. ▪ Only 15 percent of their budget is dedicated to traditional media outlets, where the remaining budget is used to facilitate customer events. • This may have been a good approach in the past, but there seems to be little to no investment in new methods of reaching out to potential customers. • Performance: ▪ Little information was provided with regard to how Harley’s competition is using Information Systems, but given that its two largest competitors (Honda and Kawasaki) are doing fairly well they will need to find additional ways to differentiate their brand if they want to continue to be an expensive global product. • Information Systems Management: ▪ No information provided regarding Harley’s information management team or how they store and utilize data. • Global Information Systems Presence: ▪ Harley does have an international online presence, but no information is available as to the effectiveness of these media outlets. SUMMARY OF INTERNAL FACTORS See Appendix B.

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I.

ANALYSIS OF STRATEGIC FACTORS A. SITUATIONAL ANALYSIS

• •

II.

See Appendix C. B. REVIEW OF MISSION AND OBJECTIVES The mission and objectives do not fully align to the strategic factors and problems. While Harley-Davidson invests in R&D, is committed to improvement, and has established a strong market presence, the risks posed by the inability to reach a younger market combined with a steep price, put the future financial health of the company in jeopardy. The mission should be adjusted to refocus on the future. Part of the objectives should be to properly meet revenue expectations while evolving the company for the future; effectively transitioning the company and its customers. The major effect on the firm internally is extensive. This shift is a fundamental change to the company and its culture. Effective change management will be crucial during this transition. The dynamic of the corporate culture may need to change with the mission and objectives change.

STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY A. STRATEGIC ALTERNATIVES • Current Objectives Evaluation • The following objectives of H-D can be met in the short-term with the current strategies being implemented: ▪ Quality and reliable products. ▪ Customizable and trending products. ▪ Innovative products. • In the long-term they will struggle to achieve these objectives: ▪ Create a brand for life image. ▪ Continuously develop and cultivate the brand. ▪ Expand dealerships and market share. • The objectives H-D has established are good goals to have as a healthy company, but are unsustainable given the underlying strategies that are so closely tied to their aging demographic. ▪ Middle aged white males with disposable income will eventually become senior citizens with a different set of lifestyle priorities. ▪ Rebel lifestyle competes directly with many current trends for safe and healthy living. ▪ Primary marketing efforts are achieved through event sponsorship. • This may continue to be effective if they can rally potential customers across other demographics to attend these events.

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Merchandising will continue to be profitable, so long as the brand image (which is directly tied to the core product) is maintained or evolved in correlation with current market trends. ▪ R&D is crucial right now for the success of the brand, but needs to include experimenting with new products to attract other demographics. • Harley-Davidson is a market leader in selling the oldest style product in their industry. ▪ Expanding internationally may help Harley-Davidson guide there new product offering by investigating opportunities unavailable in their primary US based market. • Perhaps if the rebel brand falls out of fashion in the US market they may be able to reallocate those resources to emerging markets that will possess those values. Alternative Strategy Evaluation: • Business Strategies ▪ Cost Leadership—Not implemented • Pros: • Increase sales globally. • Slightly increase sales domestically for a short period. • Cons: • Would significantly diminish brand value. • Very difficult to implement with current operational configuration. • Compete in a different market with high completion. • Forgo sales to more value oriented brands or products. ▪ Differentiation—Current strategy • Pros: • Maintain brand quality. • Maintain brand loyalty. • Justify higher price. • Continue to innovate. • Cons: • Additional costs. • Higher product expectations. • Difficult to execute. • Corporate Strategies ▪ Stability—Not currently employed • Pros: • Predicable earnings report. • Effective strategy for Harley-Davidson during a recession because their products are very discretionary.

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Cons: • Miss growth opportunities. • Forgo potential earnings. • Forgo market share. ▪ Growth—Latest and current strategy • Pros: • Increased profits and revenues. • Increased market share. • Improved ability to maintain continuity. • Increased employee moral. • Cons: • Increased short term costs. • Can cause companies to over leverage themselves. ▪ Retrenchment—Most recent strategy • Pros: • Allows for poorly performing businesses to recover. • Maintain brand. • Opportunity for new management or resources to recover and excel. • Cons: • Loss of market share. • Loss of company control with divestment. • Loss of human and capital resources. Functional Strategies ▪ Marketing strategy: • Market Development: • Capture a larger share of an existing market for current products through market saturation and market penetration. • Develop new uses or markets for current products. • Product Development: • Develop new products for existing markets. • Develop new products for new markets. ▪ Financial Strategy: • Examine implications of corporate and business level strategic options. • Potential to lower cost of funds. • Flexible ability to raise capital to accommodate business level strategies. ▪ Research and Development strategy • Different types of R&D • Basic. • Product. • Process.

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Choose between being a technological leader or follower. Operations Strategy: • How and where their products are manufactured or services are performed. • Level of vertical integration in the production process. • Development of physical resources. • Relationship with suppliers. Purchasing Strategy: • Obtaining the raw materials, parts, and supplies needed to perform the operations function. Logistics Strategy: • Flow of products into and out of the manufacturing process Human Resource Management Strategy: • Types of workforce: • Large number of low skilled employees who receive low pay. • Smaller number of skilled employees who receive relatively high pay and are cross-trained to participate in self-managing work teams. Information Technology Strategy: • Use of information technologies in other functional areas to create a competitive advantage over competitors.

B. RECOMMENDED STRATEGY • Predicted result of recommendations: • By differentiating its products to new demographics, using its core competencies as a quality iconic American brand sold in an extensive international network, Harley-Davidson should be in a good position to grow their market share with increased sales and profit. • Harley-Davidson needs to grow in the short-term by holding its current customer base (aging generation) while rebranding to the younger generation, who are Harley-Davidson’s customers of the future. • Harley-Davidson needs to move down-market. ▪ In challenging economic times, the premium priced products, such as Harley-Davidson motorcycles are left out. ▪ The younger generation with less discretionary income than Harley-Davidson’s traditional market can’t afford the steep prices—the younger generations interests and affordability level fall in the less expensive, trendier motorcycles. • Harley-Davidson should expand in international markets interested in the “Rebel Lifestyle”

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While the baby boomers are aging, other international markets may have interest in Harley-Davidson’s existing strategy. Harley-Davidson should expand its product line to include Cars. ▪ Investing in the automobile industry would give HarleyDavidson the appeal to those who want to “Rebel” lifestyle but are either too old to drive a motorcycle or have safety concerns. ▪ Harley’s brand image would decrease the barriers to entry in the automobile market. Business level: ▪ Short-Term—Differentiation: • Switching to low-cost at this time would put them into a highly competitive market that they do not currently have the infrastructure to compete. ▪ Long-Term—Differentiation: • Harley-Davidson should maintain its differentiation strategy in both the domestic and foreign markets. • Brand is built upon quality and image. Corporate level—Growth: ▪ Short-Term—Stability: • Decrease debt owed. • Reduce cost. • Enhance brand image. ▪ Long-Term—Growth: • Maintain an emphasis on quality and product improvements. • Increased expenditures on R&D, in conjunction with global dealer network expansion, should increase market share for demographic efficient products. Function level—Marketing Strategy: ▪ Need to reimage brand for a younger or racially broader demographic. ▪ Use information technology to determine product offering potential. Policy Changes: ▪ Harley-Davidson needs a new model to better evaluate how it engages in mergers and acquisitions. • Inorganic growth is difficult because of the company’s long history of quality built products with highly skilled workers. • International growth is difficult to do with a differentiation strategy based in a strong economic market. • Not all markets have the discretionary funds to purchase most of Harley-Davidson’s core products.

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Lower income markets do have a desire for price efficient products if the quality can compensate for the higher price.

III. IMPLEMENTATION In order to execute on the strategy recommendations above, the following programs should be leveraged: •

• •

• •

IV.

Surveying & Statistical Analysis (data science)—surveys of domestic and international markets should be done to understand where to invest (territory optimization) and what products to create—where is the market going. Based on the survey and data analysis Harley-Davidson should repurpose R&D spending to fulfill company objectives—rebranding to the younger generation, international growth, and investing in new product lines such as Cars. Based on the survey and data analysis Harley-Davidson should repurpose its marketing spend—proportionally to meet short & long-term objectives. If the analysis performed above indicates internal innovation and expansion is too difficult, Harley Davidson should implement a mergers & acquisitions team or program to evaluate the five-to-ten year strategy for the company and what products/mergers/acquisitions are needed for the company to transition and survive. Based on the survey and data analysis Harley-Davidson should move downmarket, releasing products that appeal to the younger demographic: • Car manufacturers such as Mercedes and Lincoln have demonstrated the ability to succeed in this model—giving the less wealthy market the luxury experience. In order to implement extensive change a Change Management Program should be implemented. If the company plans to change its mission and objective down the road, a Corporate Culture transformation needs to take place. • HR needs to target young, hungry, driven, and innovative employees to help rebrand the company to the market of the future—evolving the culture, consistent with the market, will help Harley-Davidson survive.

EVALUATION AND CONTROL •

Control measures to enforce conformance with strategic plan: • Case mentions Harley has made it a priority to emphasize the importance of employee retention and attainment, but does not elaborate on how Harley intends to incentivize its workforce.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide I. CASE ABSTRACT Uber, originally known as “UberCab,” was started by Travis Kalanick and Garrett Camp in San Francisco, California, in 2009. Its target audience was young, educated, tech-savvy urbanites, more likely to rent than own their own homes, who generally got around via public transportation, biking, or walking. The company grew rapidly and by 2015 it was providing carpooling services in 300 major cities in fifty-eight countries around the world.1 As Uber moved forward into new territories, however, it got entangled in many regulatory and legal hassles. The company had to figure out how to sustain its lead in the heavily regulated, controversial, competitive, and ever-changing taxi industry. Moreover, despite a landslide market share Uber was operating at a loss. How to lower costs and become profitable was another challenge for this young and aggressive company. Decision Date: 2014

FY Sales: $104 million FY Net Loss: $30 million

II. CASE SUBJECTS AND ISSUES Data Privacy Formulation Employee Labor Law Core Competencies Global Expansion Stages of Corporate Development

First Mover Advantage Strategy Competitive Advantage Marketing Promotions Social Responsibility Govt. Regulation Competitive Strategy

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide 1. To discuss Uber’s regulatory environment. 2. To discuss Uber’s challenges in Global Expansion. 3. To discuss the competitive landscape of the ride-hailing industry. 4. To discuss the challenges surrounding industry creation. 5. To discuss regulatory hurdles and government lobbying. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. How is ride-hailing different from taxis? 2. What was Uber’s pricing strategy? 3. How does Uber utilize marketing promotions to gain new customers? 4. Are Uber’s drivers employees or contractors? 5. Will ride-hailing eventually replace taxis? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT

I.

Current Situation A. Current Performance Background: Founded in San Francisco, California in 2009. Aug 2013, raised $258 million from Google Ventures. December 2014, Chinese Search Engine, Baidu, invested $1.2 billion, value at $66 billion. In 2015, Uber earned $1.5 billion in revenue, tripled 2014 revenue. Strategic alliance with Didi. B. Strategic Posture 1. Clearly stated 2. Mission: Making transportation “as reliable as running water” everywhere, for everyone.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide

II.

3. Objectives: ● Offer service to everyone, including luxury and affordable options. ● Remain cheap, fast, and efficient while trying new services. ● Transaction convenience—mobile payment globally. ● Growing revenue and earnings for shareholders. ● Merging intangible code and technology with the tangible world where customers live in. ● CEO Travis mentioned in an interview four Phases of Uber Objectives: (1) Create the world’s biggest taxi networks, connecting riders with safe, reliable, and convenient transportation providers at a variety of price-points in cities around the world. (2) Create the world’s biggest P2P logistics platform, allowing anyone to either request or provide physical delivery of a myriad of goods and services. (3) Shift from 100 percent human-driven logistics to 100 percent machine-driven logistics. Profit immensely. (4) World domination. 4. Strategies: ● Rapidly expand product offerings to utilize technology. ● Move things, not just people to improve convenience. ● Differentiation by being cheap and fast. ● Merging intangible code and technology with the tangible world its customers live in. ● Classifying its drivers as independent contractors. 5. Policies: ● Protecting community. ● Safety for all. ● Emphasis on convenience and affordability. ● Fight the laws against the taxi industry. 6. International: the core of Uber is to expand globally; their mission, objective, and strategies reflect their international operation. Corporate Governance A. Board of Directors 1. Eight members: ● Four internal and four external. 2. N/A 3. Privately held 4. Three external board member are successful lawyers.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide 5. Board members bring significant relationships with Google and Capital funds. Head of Global Operations is on board and has experience in international expansion. 6. High level of involvement. B. Top Management 1. CEO: Travis Kalanick 2. Nine executives; one international leadership positions, sixty country-based CEOs. a. Diverse background, main focus on product. Three product executives. 3. As a startup, top management is still very involved and responsible for the company’s performance over the past few years. 4. Uber has a clear plan for its strategic management. 5. Uber finished the environment scanning step in the strategic management process and is moving to strategy formulation. 6. N/A 7. Some strategic decisions are inconsiderate of privacy laws, sexism, and labor laws in different regions. 8. Executives held company stocks and are excited about the corporation IPO. 9. Structure around product, legal, and global expansion allows the company to cope with scaling challenges. III.

External Environment: Opportunities and Threats A. Societal Environment 1. a) Political-Legal environment ● Favorable changes in drunk driving laws which Uber can position itself as a “safe” alternative. (O) ● Differentiated political and governmental landscape in different markets Uber is in rendering political lobbying fruitless. For example, in Germany the government has not permitted Uber to operate to protect taxi drivers, viewing Uber as unfair competition. (T) ● Class action lawsuit from Uber drivers. If Uber loses, it is forced to treat the drivers as employees, not as independent contractor. The ramification is a significant increment in cost in the form of provision of auto and life insurances, employee benefit, and other expenses to the drivers. (T) ● Changes in privacy laws, especially in Europe, are making it more difficult for Uber to position itself in the markets using customer data. (T) b) Economic

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide ●

Rise of shared economy in the US, increasing the potential for people opting for ride-hailing services and carpooling instead of owning a car. (O) ● Differentiated income level among people has allowed Uber to develop various products based on differentiated pricing strategy such as Uber Black targeted for higher income people and Uberpool for eighteen–to–twenty-five-year-olds which are generally students. (O) ● Pervasiveness of online commerce has given rise to Delivery Industry. Uber can tap into this market as part of fulfilling the vision of “moving everything.” (O) ● With an impending deal between OPEC nation for cutting supply of crude oil, the subsequent rise in oil prices will hinder drivers to offer more rides unless there is an increase in the price of a Uber ride. (T) c) Social ● Rise of the millennial population, whose personality is generally defined by being fast and effective, preferring instant gratification, and share economy. (O) ● Adoption of “alcohol culture,” especially by millennial culture aids in contributing to Uber’s effort in positioning itself as a “safe” option. (O) ● Culture variation across Eastern European nations and Asian nations in using credit and debit card, which are the core factors in Uber’s operation. (T) ● Small road sizes in Asian nations, especially in cities. Uber may not be able to provide services like Uber SUV, or any Uber rides using Uber cars. (T) d) Technological ● Rise of satellite technology making GPS technology faster and accurate. (O) ● Pervasive use of smartphones around the world, making use of applications feasible. (O) ● High cost for Internet and lack of access to broadband internet in many parts of Southeast Asia, South Asia, and Africa, will slow expansion in these markets. (T) ● Rise of autonomous driving technology and possible cost savings in the future. (O) 2. Yes, these forces are differentiated across the globe. However, some forces are similar as well. For example, laws regarding taxi services, data privacy, and automobile related laws are varied across the globe. On the other hand, the general characteristics of the millennial population are similar.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide B. Task Environment 1. Industry a) Threat of new entrants: High ● No, proprietary resource that cannot be copied by the competitors. Lyft has the exact same core business model and application technology as Uber. (W) ● Uber created a proven model for carpooling and ridehailing using application and did not patent its technology fast enough removing barriers to entry, which is an investment in R&D for a proven model. (W) ● Rise of autonomous driving technology and companies perfecting that technology is a direct threat to Uber. ● Uber is the only ride-hailing service that has international access to market so far. Its sheer size will deter many local competitors to compete on a global scale. (S) b) Bargaining power of Buyers: High ● Low-to-nil switching cost for customers for using different ride-hailing services. If Uber’s surge pricing is off by a dollar, the customer has instant access to Lyft, Fasten, and others. (W) ● High price elastic market. Customers are sensitive to price offerings from different ride-hailing services. c) Threat of substitute products and services: High ● Availability of numerous ride services ranging from public transportation to cycling and walking. ● Entering in markets such as Denmark and Netherlands is difficult because of pervasive use of the bicycle for commute. ● Entering in Asian markets is difficult because of pervasive use of cheap public transportation. Impossible for Uber to compete with public transportation in terms of price in these markets. d) Bargaining power of suppliers: High ● Suppliers are people with cars. Uber does not own vehicles. e) Rivalry among competing firms: ● Intense price war between Uber and Lyft in highly populated cities in the US. ● Introduction of new startups such as Fasten and Grab. ● Introduction of international competition, such as Ola and Didi. ● Introduction of ride-hailing service, via application by taxi and limo industries. ● Intense rivalry with Google and Lyft in autonomous driving technology front.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide f) Relative power of unions, government, special interest groups etc.: High ● Despite significant investment to establish a relationship with governmental authorities, Uber is still prone to operational hindrance from groups mentioned above. For example, in Germany the taxi drivers union was able to block Uber’s entrance with the help of German government citing unfair competition. Similarly, the state of California has filed a lawsuit for criminal investigations alongside nationwide class action lawsuit. ● Indian women rights’ activists were able to lobby the government for halt in Uber’s operation in the entire nation raising concerns for women’s safety (the ban has been overturned recently). 2. The key factors in the immediate environment, and current and future threat, and opportunities are given below: a) Customers: Price sensitive (current threat). b) Competitors: No core differentiation and price war (current threat). c) Suppliers: Drivers are the suppliers and control the flow of supply side of business (current threat). Uber’s investment in autonomous driving can resolve this issue (opportunity). d) Creditors: N/A e) Labor unions: unions are strong, especially in Europe and Asia, and government might protect taxi drivers union like the German government did (future threat). f) Government: Strong relationship establishment via lobbying (opportunity to define laws favorable to Uber). g) Trade associations: N/A IV.

Internal Environment: Strengths and Weaknesses A. Corporate Structure 1. Decentralized Management or Management by Objective (S) a. The decision-making authority is decentralized to many units. Uber gives local community operation managers the autonomy to launch marketing campaigns. (S) b. Uber is organized on the basis of a combination of functions, projects, and geography. Community managers of different cities, local organizations, and partnerships are used. 2. The structure is clearly understood by everyone in the corporation. (S)

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide 3. The present structure consistent with current objectives, strategies, policies, and programs. Their objective of rapidly expanding product offerings to utilize technology is supported by the decentralized management. 4. N/A B. Corporate Culture 1. Well-defined corporate culture, where Uber strongly values and encourages a culture of customer service and respect for both the driver and passenger. 2. Uber’s culture is consistent with current objectives, strategies, policies, and programs. Protecting community and safety for all is part of Uber’s policies. 3. Uber’s culture of rapid global expansion addressed important issues. More specifically, Uber’s global infrastructure was an advantage over their competitors to adapt to new markets. (S/O) 4. N/A 5. Uber takes each nation’s culture into consideration in which they operate in a marketing perspective. C. Corporate Resources 1. Marketing a. Uber uses a variety of marketing strategies and programs to promote its services. Strategies included “First Rider Bonus Coupon,” referrals, word of mouth, and special promotions in new cities. i. Uber’s marketing objectives are implied, but the strategies and programs are clearly stated. Uber’s brand (in each city) is visible on social media accounts. ii. Consistent with mission, objectives, strategies, policies, and with internal and external environments. b. Uber is performing well in terms of analysis of market position and market mix in both domestic and international markets. Product offerings differ from city to city both domestically and internationally. E.g.: UberRush, UberSelect, and short-term services such as Uber ice cream, Uberboat, and Uberhealth i. Customization, globalization. Meeting the demand with a supply. ii. Promoted customer loyalty through brand, service, and product offerings. iii. Yes. Globalizing services on par with plans of strategic global expansion. iv. Yes. Promotion, price, product, and place are all strong in the marketing mix which allows for a competitive advantage. Word-of-mouth marketing is created through brand recognition, awareness,

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide and loyalty. Promotional efforts are common (e.g.: $30 off the first ride for new users). c. Yes. Uber uses a decentralized marketing strategy where they provide the local community managers the autonomy to promote campaigns adjusting to the conditions in which they operate. An example of this is Uber’s partnership with NFL’s Jaguars to allow Uber customers to purchase same-day tickets and coordinate their transportation on the app. (S) d. Uber’s marketing adjusts in each city and country they operate in where product portfolios and market segmentation would adapt according to the city in which they operate in. E.g.: Uberboat offered in select cities and partnering up with organizations that have a cultural significance, according to the city they are operating in. e. The case discusses different community managers that face the responsibility of the brand in each city they operate. f. Each team recognizes the different cultural significance, depending on the city where they operate, and would strategically partner with different organizations to create an integrated service. 2. Finance a) Financial objectives: ● Maintain growth in revenue in its +300 markets. ● Increase profitable markets from eighty to all 300 (to offset subsidies). ● Foster further growth-leading into an IPO. ● Increase product offerings and provide necessary funding for market expansion i. Clearly stated. ii. Consistent with its mission of reliable transportation everywhere. ● Growth and customer loyalty are building blocks to goals(expansion at the expense of current loss helps gain traction, market share, and sustaining leading market position). ● Push for greater revenues are to Uber’s strategy (waiting to reach appropriate size for market sustainability). b) Privately held company. No public financial statements available. Revenues tied inability to leverage product offerings (rapid revenue growth). Currently expensing for growth allowing for the market to properly mature and sustain itself (major growth but no earnings).

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide i. Uber is looking to grow exponentially to a point where the market can sustain itself. Uber is operating at a loss to gain traction and establish “global domination” status. ii. N/A iii. Investors believe in future profitability; however, changes in competitor behavior, the introduction of driverless technology, etc. could prolong profits. iv. Yes v. $8.21 billion in funding as of 2015 is a competitive advantage—allowing for continued expansion and growth while sustaining large losses. c) Lyft is also private. Uber’s revenues outshine traditional taxi industry. d) N/A e) 80/300 cities profitable. Funding to each city dependent upon regional needs and goals. f) Optimize funding to ensure global growth goals. Direct the company into a successful IPO. 3. Research and Development (R&D) a) Optimize supply/demand pricing algorithms, continually innovate tech platform (user experience on both ends),and leverage new innovations in autonomous technology to transform business model. i. Clearly stated i. Clearly aligned with corporate. iii. Technology plays a fundamental role in corporate performance (app and maps are among key differentiators). iv. Yes v. R&D gives the company competitive advantage (e.g.: surge pricing patented). Understanding market needs and meeting with supply (First mover). b) Growth and increased valuation. No profits as of yet. c) Competent in tech transfer (global platform used in all 300 operative cities, work-teams dispersed in multiple locations). Concurrent engineering, as R&D and launched improvement are constant. d) Technology discontinuity plays a large role. Utility and value come from the app and GPS (greatest strengths). Innovation needed to avoid tech disruptions (e.g.: autonomous cars R&D). Dependent upon cell-phone usage and popularity. e) GM invested $500 million into Lyft for autonomous vehicle R&D. Uber partnered with Carnegie Mellon to understand how to leverage the new technology.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide f) Yes. Product offerings slightly tailored in each country based on individual market needs. g) Appropriately locating resources into R&D initiatives that will aid in corporate’s overarching goals and objectives 4. Operations and Logistics a) Rapidly grow product offerings globally. Included UberX, UberXL, UberBlack, UberSUV, UberPOOL, UberTaxi, UberSelect, Uber for Business, and UberRUSH (UberEATS) to offer service for virtually every social and demographic group in the world. i. In addition, short-term service and seasonal services, such as Uber ice-cream, Uber kitten, Uber board, Uber Health to utilize uber existing network to meet immediate needs of customers. ii. This objectives is clearly stated but not significant enough to be implied from performances (main revenue from UberX). b)Uber global infrastructure was the main advantage over local the competition. Lessons learned from difficult countries will be applied to future gains. i. Factors to be considered in global operations include laws, affordable access to vehicles, mobile phones, and scarce gasoline. ii. Depends on local CEOs to tailor hiring policy and operations to maintain customer satisfaction. c) Uber service affects from ● Natural disasters: safety of drivers and guests, but can also present opportunities to operate while competition cannot (self-driving). ● Local strikes against Uber on salary, employee rights, and data privacy, sexism has been an ongoing issue, required capital to resolve. ● Constraint of smartphones, affordable vehicles, and gasoline and government nationalization depend on countries operated in are all risks for Uber. d) Operations much leaner than traditional taxi industry. 160,000 active drivers with no salaries and that do not own any cars. Adequate support staff to maintain a high level of customer service on the app. e) Low ETA in more populous regions (e.g.: cities). Fast service depends on the number of drivers in proximity to serve demand. Uber incentives drivers through bonuses for driving at locations or times that will have higher demand (to maintain efficiency).

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide i. Subsidizing drivers to increase supply aligns with the strategy of spend for growth now and reap the profitability later. ii. Created efficient operational system that consumers can rely on; however, it may not be sustainable. iii. Operations support strategic decisions. iv. Yes. Reliability, ETAs, and pricing structure involve efficient operations that are unmatched in the industry. f) Uber aggressively challenges outdated regulations. The company sometimes launched in new cities without approval from the local governments. (W/T) g) Operations and logistics adjusted to conditions in each country (e.g.: legal hurdles, country-specific regulations) For instance, paying cash is an option in Vietnam to accommodate low credit card usage. h) N/A 5. Human Resources Management (HRM) ● Classifying drivers as independent contractors is a crucial element in Uber’s business strategy (1) Uber’s current HRM strategies, policies, and programs are clearly stated. (S) (2) Yes, it is consistent. Because they are cutting costs by classifying the drivers as contractors, they are consistent with Uber’s objective of growing revenues. Also, the dual rating system is in line with the corporation’s objectives of ensuring Uber’s objective of connecting riders with safe, reliable, and convenient transportation. (S) ● Uber is currently facing a class-action lawsuit due to the corporation’s HRM in terms of improving the fit between individual employee and the job. Because the drivers are classified as independent contractors, they do not have reimbursements for business expenses and are not entitled to employee benefits. (W) (1) Aggressive behavior (seen with governments and competition as well). (2) Allowed for low costs, however, may not be the case if drivers become employees. Negative publicity revolving treatment of drivers has also caused a slight dent in reputation. (3) Growth and profit are key objectives and using drivers as contractors are a means to achieve this.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide (4) Low cost (contractors not entitled to employee benefits, no reimbursement on business expenses e.g.: gas, auto insurance). (5) Dual rating system ensures drivers are up to standard in terms of service. ● Lyft and cab companies encourage tipping. Uber stresses contractual agreements with drivers (entrepreneurial spirit). ● Yes, Uber uses appropriate concepts and techniques to evaluate and improve corporate performance. The rating system not only asks for a specific rating, but also asks what, specifically, that driver excelled at (quick pick up, clean car, fast reliable, friendly, and also leaves room to make any comments). Uber also quickly reaches back to customers with any issues that they had with recent trips to better improve HRM performance. ● N/A ● No, HRM does not adjust to the conditions in each country. All drivers are treated as independent contractors rather than employees. ● N/A Information Systems (IS) ● Uber uses a differentiation strategy to gain a competitive edge over their competitors via their IS strategies. (1) Uber’s current IS objectives are implied. (2) Yes, they are consistent with the corporation’s mission, objectives, strategies, and policies. For example, connecting drivers and customers faster via a simpler and more transparent mobile app. Additionally, after Uber purchased deCarta, it lined up with their strategy of lining up the right driver with the right customer to ensure a more accurate pickup location and time. (S) ● In general, Uber’s IS is performing well, where they have purchased deCarta mapping, which saved the company money. (S) (1) Gaining competitive advantage where possible and avoiding dependency relationships where possible (purchased deCarta to avoid dependency on Google Maps and also have a mapping system that is unparalleled in the industry (2) Previously, Uber has been criticized for its data privacy policies and violating customers’ privacy rights (travel records,

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide

V.

VI.

sensitive geolocation data). They had to adjust its data privacy policies. (W) At the same time, they could sell deCarta services to competitors to yield additional revenue stream (O). (3) Yes. Using cutting edge technology for cutting edge ridesharing solutions. (4) Yes. Uber’s “surge pricing,” dual-star rating system for both the driver and passenger, system for calculating tolls all gave the company a competitive edge. Lastly, the simplicity of their mobile app, in comparison to Lyft, added value to their customers. (S). They also fixed the driver app interface to make it more simple and easier for drivers to see which areas where they were most likely to pick up passengers. This helped the company gain a competitive edge over competitors. (S) ● Lyft’s user interface was an almost exact replica of Uber’s simple mobile app. ● As previously mentioned, Uber has been criticized for their inappropriate use of customer data. (W) In some ways, they have not been appropriately using it to evaluate and improve corporate performance under U.S. Privacy Act. ● Uber has a global and extensive network in regards to their IS and Internet presence. Even in developing markets where mobile phones are needed, it seemed likely that the demand for Uber’s services would expand. ● N/A D. Summary of Internal Factors (See IFAS) Analysis of Strategic Factors A. Situational Analysis—See SFAS Table B. Review of Mission and Objectives 1. Current mission and objectives still appropriate and relevant to key strategic factors. 2. The mission should be changed to provide transportation to “tangible things,” not just humans. 3. The firm will need to consider its extended service— delivery, driverless car, truck, healthcare—the main part of their business Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. Current objectives are good: a. Continue to fine tune strategy. b. Expand into untapped markets (market extension).

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide c. More product variety i.e in markets where cars are not prevalent use bike or scooter for Uber services and name it Uber tuk-tuk, Uber bike, Uber scooter ect. d. Grow organically, not through acquisition. Alternate strategies a. Cost leadership—Part of current Strategy i. Pros: 1. Competitive advantage 2. Lower price bring accessibility by larger market. ii. Cons: 1. Restrict growth b. Differentiation—Not part of current Strategy i. Pros: 1. Utilize current technology and resources. 2. Charge a higher price for better services. ii. Cons: 1. Expensive service would lose customer. 2. Hard to compete with substitutes. c. Stability—Not currently employed i. Pros: 1. Stable revenue to make up for losses and debt. 2. Lean and efficient operations. ii. Cons: 1. Unattractive to Wall Street. 2. Competitors will catch up. 3. Lose talents. d. Growth—Currently Employed i. Pros: 1. Better structured team and talents. 2. Build brand power. 3. Higher revenue. ii. Cons: 1. Higher cost. 2. Quality control. e. Retrenchment—Not currently employed i. Pros: 1. Cut cost, bring more profit. 2. Net income not negative. ii. Cons: 1. Lose talents to competitors. 2. Lose credibility. B. Recommended Strategy 1. Differentiation via technology and acquisition: ● The company has reached its global presence in term of size, but in some current area where possible,

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide Uber should move into improving its service via new technology such as a driverless car. This strategy should be employed at a functional level of the company only. ● Acquire other transportation startups will help Uber tap into new markets and develop new technology quickly. This should be applied at the corporate level. 2. Spending more on researching of driverless technology will bring huge profit to Uber to make up for the losses, make the service much harder to imitate and may even avoid many lawsuits against human driver. 3. The company needs to issue guidelines on acquiring new resources. ● Acquired employees or technology must align with the company mission and goals. 4. This strategy will improve further on the company’s core qualities. VII.

VIII.

Implementation A. Organizational Structure: 1. Restructuring the company into different units based on service/technology is necessary. ● A venture program should be initiated in order to capture new technology/acquisition opportunities. ● Marketing for new tech will be a lot different than current referral/brand recognition-focus marketing programs. 2. Product managers of current services should be head of these programs. B. The programs are feasible with current venture investment at Uber but will add more risks. C. No new operating procedures need to be developed. Evaluation and Control A. Current information system is sufficient to provide feedback for new implementation activities since Uber is famous for having scalable analytics system to track any operation data. 1. Performance results can be pinpointed, thanks to cloud and IoT technologies. 2. Most information should be real-time. B.

Control measures will need to be improved to enforce conformance with recommended strategic plan. 1. Discussion of control measures is not available in the case. 2. Current reward systems can easily recognize good performance through external and internal customer feedback.

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide 3. New fully developed evaluation process needs to be developed to evaluate new technology and ventures. 4. Corrective Action: local executive should be responsible for conformity and corrective action plan. EFAS Table: External Factor Analysis Summary (EFAS) External Strategic Factors

Weight

Rating

Weighted Score

Comments

Driverless Technology

0.15

5

0.75

Cut costs by eliminating driver commission.

Untapped Markets

0.1

4.5

0.45

Leverage global brand in new markets.

Rising Worldwide Cell Phone Usage

0.05

4

0.2

Increase in customer base.

Rising Disposable Income (Especially in Emerging Markets)

0.1

4

0.4

Bigger market.

GrowingNnumber of Drivers

0.05

4.5

0.23

Increase in supply lowers prices & cuts ETA.

Class Action Lawsuit

0.15

4.75

0.71

Recognizing drivers as employees incurs costs.

Legal Battles w/ Government

0.1

5

0.5

Could ban/limit operations in certain locations/scenarios

Opportunities

Threats

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide . Aggressive lobbying. Driverless Technology

0.15

5

0.75

Could eliminate relevance.

Lack of Regulations

0.05

3

0.15

Future unclear.

Increased Competition

0.1

5

0.5

Spend more cash for growth in market share

Total Weighted Score

1.0

4.64

IFAS Table: Internal Factor Analysis Summary (IFAS) Internal Strategic Factors

Weight

Ratin g

Weighted Score

Comments

Product Diversity

.15

4.5

0.68

Meeting needs of all segments.

Fundraising

.10

5

0.5

Able to sustain growth (whilst operating at a loss.)

1st to Market

.10

4.75

0.45

Brand recognition.

Uber App

.14

4.75

0.67

Unparalleled user experience & tech platform.

Global Presence

.13

4.75

0.62

Operations in 300 cities (58 countries).

.10

4

0.4

Waiting for market to self-sustain.

Strengths

Weaknesses Operating at a Loss

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CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide Negative Publicity

.13

3.75

0.49

Aggressive behavior (w/ governments & competition).

Easy to Imitate

.05

4

0.2

Low barriers to entry. High competition→ market share unsustainable w/out differentiation.

Customer Base Limited

.05

3

0.15

Cell phone users only.

Data Privacy Policies

.05

3

0.15

Potential abuse of data. Advocacy groups protesting.

Total Weighted Score

1.0

4.32

SFAS Table: Strategic Factor Analysis Summary (SFAS) Strategic Factors

Weight

Rating

Weighted Score

(O) Driverless Technology

0.14

5

0.7

S h o r t

I n t e r m e d i a t e

L o n g

x

x Cut costs/eliminate drivers.

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Comments


CASE 18 Uber: Feeling the Heat from Competitors and Regulators Worldwide (O)Untapped Markets

0.06

4.5

0.27

(T)Driverless Technology

0.1

5

0.5

(T)Class Action Lawsuit

0.1

4.75

0.48

x

Classify drivers as employees (costs)

(T)Increased Competition

0.08

5

0.4

x

More spending on gaining market share (longer to profit).

(S) Product Diversity

0.08

4.5

0.36

x

(S)Uber App (Tech Platform)

0.15

4.76

0.71

x

Differentiation.

(S) Fundraising

0.15

5

0.75

x

Able to sustain growth.

(W) Operating at a Loss

0.07

4

0.28

x

Prolonging profitability (returns on investment.)

(W) Negative Publicity

0.07

3.75

0.26

x

Weakens brand image/reputation .

Total Weighted Score

1.0

x

x

x

x

4.71

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Expand customer base/increase global presence. x

Unknown implications/how competition will use the new space.

Meet needs of differing segments.


CASE 19 The Boston Beer Company: Brewers of Samuel Adams Boston Lager I. CASE ABSTRACT The Boston Beer Company had been founded by Jim Koch in 1984 after the discovery of his great-great grandfather’s family microbrew recipe in the attic of his home in Cincinnati, Ohio. In his kitchen, Jim Koch brewed the first batch of what is today known as Samuel Adams Boston Lager. Through the use of the family recipe, Jim handcrafted a higher quality, more flavorful beer than what was currently available in the United States. Samuel Adams® beers were known for their distinct taste and freshness. Although different brewers had access to the rare, expensive Noble hops that Samuel Adams® used, its special ingredients remained a secret and were what gave its brews their distinct flavor. Jim Koch refused to compromise on the components that made up the full, rich flavorful taste of Samuel Adams® beer. Jim Koch was viewed as the pioneer of the American craft beer revolution. He founded the largest craft brewery, brewing over one million barrels of twenty-five different styles of Boston Beer products, employing 520 people. Nevertheless, Boston Beer was only the sixth largest brewer in the United States, producing less than 1 percent of the total U.S. beer market in 2010. Since its inception, Jim Koch has had numerous offers from the large brewing companies to buy him out, but he consistently declined those offers. He wanted to remain independent and never compromise on the full, rich flavorful and fresh taste of Samuel Adams beer. Jim never altered his great-great grandfather’s original recipe created over a century ago. II.CASE ISSUES AND SUBJECTS ENTREPRENEURSHIP CRAFT BEER SEGMENT DECLINING BEER INDUSTRY SALES CHANGING SOCIAL TRENDS/DEMOGRAPHICS CORE COMPETENCIES QUALITY GLOBAL STRATEGY DIFFERENTIATION BUSINESS LEVEL STRATEGY DOMESTIC AND GLOBAL COMPETITION MERGERS AND CONSOLIDATION DECISION-MAKING

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? I. CASE ABSTRACT At the time when Panera was created, the fast-food industry was described as featuring low-grade burgers, greasy fries, and sugared colas. Ron Shaich decided to create a casual but comfortable place where customers could eat fresh-baked artisan breads and fresh sandwiches, soups, and salads without worrying about nutrition.i Panera’s restaurant concept focused on the specialty bread/bakery-café category. Bread was Panera’s platform and entry point to the Panera experience at its bakery-cafes. It was the symbol of Panera quality and a reminder of “Panera Warmth,” the totality of the experience the customer received and could take home to share with friends and family. The company endeavored to offer a memorable experience with superior customer service. The company’s associates were passionate about sharing their expertise and commitment to Panera customers. The company strove to achieve what Shaich termed “Concept Essence,” Panera’s blueprint for attracting targeted customers that the company believed differentiated it from competitors. Concept Essence included a focus on artisan bread, quality products, and a warm, friendly, and comfortable environment. It called for each of the company’s bakery-cafes to be a place customers could trust to serve high-quality food. The company’s bakery-cafes were principally located in suburban, strip mall, and regional mall locations and featured relaxing décor and free internet access. Panera’s bakery-cafes were designed to visually reinforce the distinctive difference between its bakery-cafes and those of its competitors. Panera’s success in achieving its concept was often acknowledged through customer surveys and awards from the press. From Advertising Ageii to Zagat,iii Panera was touted as one of America’s hottest brands and most popular chain. Customers rated Panera fifth overall in the restaurant industry in 2008 and highest among fast casual eateries, in an annual customer satisfaction and quality survey conducted by Dandelman & Associates, a restaurant market research firm.iv In 2009, Panera also was named number one Healthiest for Eating on the Go by Health magazine for variety of health menu options, whole grain breads and half-sized items. On May 13, 2010, after twenty-eight years Ronald Shaich stepped down as CEO and Chairman effective immediately following the Annual Stockholders Meeting and William Moreton, previously the Executive Vice President and coChief Operating Officer, assumed the role of CEO. Shaich planned to remain as the Company’s Executive Chairman. Decision Date: 2010

FY Sales: $1,353 million FY Net Income: $801 million

II. CASE SUBJECTS AND ISSUES CEO Transition

First Mover Advantage

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Strategy Formulation Strategy Implementation Core Competencies Diversification Stages of Corporate Development

Competitive Advantage Franchising Social Responsibility Marketing Strategy Competitive Strategy

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss Panera’s sales growth. 2. To discuss Panera’s business level strategy. 3. To discuss the competitive landscape of the restaurant industry. 4. To discuss the challenges surrounding franchise management. 5. To discuss CEO transition. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. How was the ‘fast casual’ segment different from ‘fast food’ and ‘casual dining?’ 2. What was Panera’s business level strategy?

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

3. How did Panera survive the Great Recession of 2008? 4. Why do you think the Crispani pizza failed? 5. What are the unique challenges of managing franchisees versus company owned stores? 6. Was it the right time for Ron Shaich to step down as CEO? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT 1. CURRENT SITUATION a. Current Performance • Total system-wide revenues rose from $350.8 million in 2000 to $1,353.5 million in 2009, share price rose 1,654 percent from $3.88 a share (December 31st, 1999) to $67.95 a share (December 28, 2009). • In 2009 system-wide comparable bakery-café sales growth of 0.5 percent and system-wide average weekly sales increased 1.8 percent to $39,926. • The amount of company-owned and franchise-operated Bakery-Cafes rose from 1,230 on December 30th, 2007 to 1,380 in December 29th, 2009. • Panera Bread made the number one spot in the 2010’s twenty largest fast casual franchises with United States sales of $2,796,500. • 2009 named number one Healthiest for Eating on the Go by Health Magazine. • Ronald Shaich co-founder, CEO, and Chairman resigns from CEO position effective May 10, 2010, and appoints William Moreton as the company’s new CEO. b. Strategic Posture i. Mission: in the business of fast, casual dining—“a loaf of Bread in every arm.” ii. Objectives 1. Created a casual, comfortable place where customers can eat healthy and not worry about nutrition. 2. “Get more cash out of each customer, rather than just more customers”—to increase and sustain profitability. 3. Target of seventeen–to–twenty percent EPS growth through execution of key initiatives. 4. Further build transactions through focusing on differentiation of innovative products (salads)and utilizing new procedures to improve quality. 5. Improve operations, speed of service, and accuracy. 6. Improve margins through testing new initiatives (impulse add-ons, bulk baked goods, and bread as gifts).

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? a. Test new products created during R&D trips, in restaurants. iii. Strategies 1. Differentiation strategy—innovative products using new procedures to further improve quality. 2. Growth strategy—growing store profit, increasing transactions, and gross profit per transaction, and using capital smartly (franchise, acquisitions, and new owned stores). 3. Operate successfully in three business segments: company-owned baker-café operations (585), franchise operations (795), and fresh dough operations (23) (numbers based on 2009 information). 4. Long term strategy—invest in the business to benefit the customer. iv. Policies 1. Value oriented menu offering affordably priced products. 2. Better total experience in restaurant for customers. 3. Commitment to freshness leads to competitive advantage and consistent quality. 4. Concern for the community. 5. Concern for employees 6. Dedicated to offering customers a healthy fast food option. 7. Emphasis on innovation. 2. CORPORATE GOVERNANCE a. Board of Directors i. Six Members with three classes of membership that staggered so only one class expires each annual meeting ii. Average age is fifty-seven and average time on the board is nine-point-five years. iii. Board established three standing committees operating under a charter approved by the board. 1. The Compensation and Management Development Committee. 2. Committee on Nominations and Corporate Governance. 3. The Audit Committee. iv. Compensation package 1. Nonemployee directors—cash payments, stock, and option awards (compensation range from $29,724–$124, 851 in fiscal 2009). a. Stock options (two classes of stock)—traded on NASDAQ as PNRA. i. Class A Common Stock with 30,491,278 shares outstanding (one vote per share). 1. All directors/executive officers as a group (twenty people) hold 1,994,642 shares or 6.22 percent. ii. Class B Common Stock with 1,392,278 shares outstanding (three votes per share).

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? 1. All directors/executive officers hold 1,311,690 shares or 94.22 percent. 2. Combined voting percentage of 13.23 percent. b. Shaich owns 5.5 percent of Class A and 94.22 percent of Class B. b. Top Management i. Fourteen members ii. Average age is forty-nine iii. Compensation package 1. Total compensation for top five highest paid executives ranged from $939,919 to $3,354,708 (see above for officers stock compensation). c. Top management has many years of experience in industry. 3. EXTERNAL ENVIRONMENT a. Societal Environment i. Economy 1. Economic recession (T) 2. Same-store sales declining (T) 3. Declining traffic (T) 4. Competitors lower priced items (T). 5. “Trade down” from casual dining chains to fast food category (T). 6. “Trade up” from dining out to casual dining category (O). 7. Fast casual dining segment experienced 4.5 percent sales growth in 2009 (O). a. Compared to 2008, 3.2 percent sales decline for the restaurant industry. ii. Technology 1. Free Wi-Fi at all café’s (O). 2. Programmed point of sale registers (O). 3. On-line ordering (T). iii. Political—legal 1. Food service and safety (FDA) regulations (T). 2. Agreements with franchise owners (O). iv. Sociocultural 1. Adoption of the philosophy around do more with less (O). 2. Expectation of giving back to the community (O). 3. Organic and fresh items (O). b. Task Environment i. Threat of new entrants: High 1. New café, bakeries, and restaurants open all of the time. 2. Existing national fast food chains trade up to casual dining. 3. Capital requirements high ii. Bargaining power of buyers: Moderate

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

iii.

iv.

v.

vi.

1. Successfully increased prices during the last year to boost gross margins. 2. Buyer can shop between different dining categories. Threat of substitute products: High 1. Everyone spends money on food. 2. Grocery Stores 3. Fast Food 4. Upscale dining Bargaining power of suppliers: Low 1. Economies of scale give Panera bargaining power. 2. Strong reputation results in real estate bargaining power. Rivalry among competing firms: High 1. Panera and Chipotle combined made up 25 percent of their industry. 2. High competition with Starbucks/Dunkin Donuts for breakfast customers. Power of other stakeholders: Moderate 1. Public company responds to shareholders. 2. Board of Directors influence key decisions. 3. Regulated by FDA

See Exhibit 1 for the External Factor Analysis Summary (EFAS) 4. INTERNAL ENVIRONMENT a. Corporate Structure i. Operates in three business segments: 1. Company-owned bakery-café operations 2. Franchise operations (via ADA’s, requiring fifteen or more units per developer) 3. Fresh dough operations (internally and externally contracted) ii. Support through functional departments and complex agreements with franchise owners provide an efficient process. iii. The current structure is conducive to long-term growth, with operations currently generating the bulk of profits . iv. U.S. based business with minimal international presence via three locations in Toronto, Canada. v. Panera’s structure compares to other “fast casual restaurant” chains by not owning stand-alone stores and providing an interior design that matches other restaurants in the same category. vi. Structure and growth rate is similar to Chipotle Mexican Grille in size, locations, and restaurant type. b. Corporate Culture i. A well-defined culture of shared beliefs, expectations, and values existing due to a careful staff selection process,

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? expansive training program, and information sharing across business. ii. Quality training programs and incentives for managers through a Joint Venture program that provides bonuses on the basis of cash flows generates by unit(s). iii. Programs tie closely to offering customers a “total experience” and “offerings that are worth getting out of your car for.” iv. Culture is consistent with expansion and sales objectives rewards general managers and multi-unit managers on the basis of productivity. v. These incentives encourage managers to be higher motivated personnel that provide service which results in increased customer loyalty. vi. No mention is made with regard to ethnicity or background. c. Corporate Resources i. Marketing 1. Customer word-of-mouth is utilized to develop brand image and is heavily used as a marketing tool. 2. Maximizes mediums (i.e. store locations and campaigns of competitors rather than investing a great deal of funds in large-scale advertising). a. Marketing is clearly stated—in store locations, in small quantities through print, television, and radio, in cause-related efforts and community activities, and developing new product items. b. Marketing efforts are consistent with their message to customers of a “total experience.” 3. Tied closely to internal and external environments, as it reflects part of the company’s culture and strategy to effectively execute outwardly facing marketing efforts. 4. Franchises are required to pay the company advertising fees based on sales. 5. International market is not relevant in this consideration. 6. Products are in varying stages of the product lifecycle, particularly as Panera has introduced several new coffees and breakfast items. 7. The company is regularly introducing new menu items that come from its staff test kitchen in an effort to keep menu options fresh and up-to-date. a. Marketing can be in different stages with customer awareness depending on the product.

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? b. Marketing provides Panera with a competitive advantage as marketing and strategic decisions are closely tied together. 8. Panera has found success when marketing “in tandem” with other companies’ large-scale marketing effort, such as offering smoothies during McDonald’s new smoothie campaign. 9. Marketing managers are using accepted marketing concepts such as customer research and small-area testing to evaluate and improve product performance. 10. Marketing managers are key in the strategic management process because marketing is very closely tied to product introductions and programs. ii. Finance (See Exhibit 2 for the Financial Ratios) 1. Strategic goals are to experience growth during the economic recession and continue to increase profits. a. Financial strategy clearly stated in metrics to all strategic business units. b. Financial goals are consistent in external and internal environments. 2. Performance is outstanding despite external challenges. 3. Panera ranks at the top (with a large gap) in comparison to other similar companies (see exhibit 3 for sales for Top Fast Casual Chains in the United States). 4. In viewing the capital resource as cash generated by operations, the company does not have any outstanding borrowings from its existing credit facility. 5. International operations are not financially relevant. iii. Research & Development 1. Test kitchen production in developing new products. iv. Operations & Logistics 1. Objectives, strategies, and policies for operations and logistics are a core competency. 2. Strategies and policies include meeting and exceeding four criterions: a. Limited service format b. Average check cost between $6 to $9 c. Made-to-order food d. Upscale décor 3. The budget is structured around operations and how it contributes to, and detracts from, the company’s bottom line.

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? 4. Product and service-oriented, with an equal focus on both: a. Strong employee training. b. Ownership placed on store unit managers. c. Fresh dough facilities. d. Emphasis on décor and quality ingredients. 5. Liability is in the hands of franchise store-unit managers, which minimizes a great deal of external risk. 6. Attention is paid to scheduling its staff according to customer demand and minimal waste of inventory because orders are made-to-order. 7. They provide quality products at a fast rate, maximizing its bottom line, and providing a competitive advantage. 8. TQM is practiced from a food service perspective (aka the “total customer experience”) and heavily focuses on its customer service. 9. The “operations managers” include general and storeunit managers who have the autonomy in employee, service and inventory management, as well as individual location choices including menus and marketing. v. Human Resources 1. Provide effective training to a skilled workforce. 2. Encourage a strong corporate culture. 3. There is no data in the case with regard to grievances, strikes, or layoffs. 4. Standardized employee training, as well as a performance-based pay for general and store managers. 5. HR supports the company’s past and pending strategic decisions in that employees and the apparent employee satisfaction supports effectively serving the customer. 6. Growing work force to keep customer satisfaction high instead of trying to do more with less. 7. Joint venture program, which is an accepted practice that is proven to improve employee performance. 8. There is no mention of the diversity of the workforce. 9. Human Resources is important in the strategic process because it manages employees and employee satisfaction. 10. Employees are on the front lines in store locations and it is integral that they are trained properly to

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? ensure customer satisfaction and maintain product standards. vi. Information Systems 1. Existing information systems are designed to help support company-owned and franchise locations at point-of-sale. a. Information systems are clearly stated and utilized for performance but are not specifically listed as a line item in budgets. b. Providing information systems for associates and for managers for tracking purposes are consistent with overall strategies. c. Free WiFi for customers contributes to the “total customer experience.” 2. The company’s information systems provide comprehensive data down to daily sales forecasts based on weather-related data from years past. 3. Point-of-sale systems and automate pricing help provide consistency, accuracy, and timely transactions. 4. Customer satisfaction websites gather and share data with employees, utilizing a corporate intranet. 5. Analysis of the information systems offers detailed analytics that helps direct managers and employees to understand success and cost of products, financials, customer satisfaction, and experience. 6. Trends have helped managers allocate resources. 7. It is not clear how Panera’s systems differ and compare to the industry. Exhibit 4 provides the Internal Factor Analysis Summary (IFAS) 5. ANALYSIS STRATEGIC FACTORS a. Strategic Factors i. See exhibit 5 Strategic Factor Analysis Summary b. Review of Mission and Objectives i. No changes required—Panera Bread’s exceptional performance indicates mission and objectives are being met. 6. STRATEGIC ALTERNATIVES, RECOMMENDED STRATEGY AND IMPLEMENTATION a. Strategic Alternatives i. Cost Leadership—price reduction to drive sales volume. PRO: increased sales volume will offset lower margins; increased same-store traffic will expand the customer base. CON: image could be impacted, food quality may be reduced. ii. Stability PRO: company performance provides strong evidence that Panera is on the right path.

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? CON: Potential for competitors to mimic, steal market-share increases. iii. Growth—increase rate of new store openings, expand to international markets. PRO: increased market share, heightened consumer awareness, drive sales dollars up. CON: rapid growth may tax resources and impact the integrity of decision-making involving opening new stores; reputation could be negatively impacted. iv. Supply Chain/Logistics—develop key strategic partnerships with organic farmers and livestock companies. PRO: improved negotiating power and improved access to organic produce and meats. CON: terms and conditions of contract between companies may limit ability to utilize alternatives or adjust pricing downward. v. Marketing Strategy—increase brand awareness by increasing marketing mix. PRO: increased brand awareness, increased sales. CON: target markets already served by existing marketing, poor return on marketing investment. b. Recommended Strategy i. Growth—requires policy modification governing expansion criteria. Achieves growth objectives and expands brand image. Leverages existing core competencies and corporate infrastructure (IT/HR/SC). 1. Expansion to international markets a. Increase speed of opening new restaurants in international markets. b. May require developing partnerships or modifying store layout to support baking operations. c. Ability to leverage existing core competencies. 2. Expansion to both domestic and international airports a. Meet customer needs for fast, fresh, healthy choices at the airport. b. Increases brand awareness and may open new doors in other international markets. c. Ability to leverage existing core competencies. ii. Brand Awareness—requires modification to existing marketing strategy and added resources to oversee marketing campaigns. 1. Increase Marketing Mix—develop better brand recognition and improve 2. same-store sales, while also improving ability and demand for growth into new regions. a. Development of customer loyalty plan. b. Utilize social media groups to grow brand recognition.

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? c. Invest in television commercials. 7. IMPLEMENTATION a. Growth—growth strategy will require leveraging existing policies and core competencies governing site selection, supply chain management, human resources, and information systems. i. Overseen by Senior Management. Installation of committee to investigate and select international sites for expansion (includes airport selection). ii. Financial feasibility of expansion sites will be determined by the committee. b. Brand Awareness—increasing brand awareness through the implementation of a varied marketing mix will require modification of existing strategies and may necessitate new talent being hired. i. Overseen by Marketing Manager. Must evaluate need to hire new resources or outsource marketing functions. ii. Financial feasibility is dependent upon extent and makeup of marketing campaign. The marketing budget will need to be increased. iii. New policies may have to be developed to govern new marketing strategies. 8. EVALUATION, & CONTROL a. Growth i. Information Systems 1. Existing information systems is scalable to support international and domestic expansion. 2. Supports real-time data acquisition and analysis. 3. System supports training, sales management, product mix selection, and resource planning. ii. Conformance 1. Existing standards and metrics will support recommended growth strategy. b. Brand Awareness i. Information Systems 1. Existing information systems is capable of providing information, which can be used to determine impact of marketing mix strategies. 2. Supports real-time data acquisition and analysis. ii. Conformance 1. Existing sales metrics will support evaluation and control of marketing mix. 2. Marketing managers and store managers are responsible for corrective actions. IX. EFAS, IFAS, and SFAS EXHIBITS Exhibit 1: External Factor Analysis Summary (EFAS) External Strategic Factors

Weight

Rating

Weighted Score

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Comments


CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Opportunities Trade-down from Dining Out

0.1

3

0.3

Dining Segment Sales Growth

0.05

5

0.25

Free Wi-Fi

0.05

5

0.25

Do More with Less

0.1

4

0.4

POS Data Acquisition

0.05

2

0.1

Community

0.05

3

0.15

Organic/Fresh Foods

0.1

5

0.5

Customers are still eating out, but are now using casual dining to lower cost. Panera has increased prices to improve margins, due to the fact that their dining category is growing. By providing free Wi-Fi, customers feel comfortable to stay for several hours. While other competitors have adopted this philosophy, Panera hired more workers to keep customer satisfaction high. Panera could use the data collection from programmable registers to learn more about their customer base. Commitment to community (Pay what you can program/donations to food banks). They only use anti-biotic free chicken and have been named the healthiest for eating on the go.

Threats Economic Recession

0.05

4

0.2

Same Store Sales

0.05

2

0.1

Declining Traffic

0.1

4

0.4

Competitors Low Prices

0.1

1

0.1

Trade-down to Fast Food

0.05

3

0.15

On-line Ordering

0.15

1

0.15

Rather than focusing on customers who are unemployed, they focus their energy on the 90 percent of customer who is still employed. To boost sales they are offering additional items to customers at a better "price point." Although the industry is being impacted by declining traffic, Panera provides new offerings and combos to keep customers coming back. This is not considered a serious threat to Panera, they actually raised prices. Due to the healthy nature of their product, they believe people will not trade down. Many competitors are allowing customers to place their orders online (There is no mention of Panera doing the same).

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Total Weighted Score

1

3.05

Exhibit 2—Financial Ratios Panera Bread Ratios Liquidity Ratios

2009

2008

2007

2006

2005

Current Ratio

2.26

1.21

1.19

1.16

1.18

Quick Ratio Inventory to net Working Capital

2.18

1.11

1.10

1.08

1.10

0.07

0.49

0.47

0.48

0.46

Cash Ratio

1.73

0.66

0.53

0.48

0.28

Profitability Ratios Net Profit Margin

6.4%

5.2%

5.4%

7.1%

8.2%

Gross Profit Margin

21.7%

20.6%

21.0%

24.2%

25.8%

Return on Investment

10.3%

10.0%

8.2%

10.8%

11.9%

Return on Equity

14.4%

13.5%

12.9%

14.8%

16.5%

Earnings per Share

$2.81

$2.24

$1.81

$1.88

$1.69

Inventory Turnover

110.1

108.6

93.6

95.1

87.0

Days of Inventory Net Working Capital Turnover

4.2

4.2

4.9

5.1

5.7

7.5

53.2

43.8

46.0

40.2

Asset Turnover

1.6

1.9

1.5

1.5

1.5

Fixed Asset Turnover Average Collection Period Accounts Payable Turnover

3.4

3.1

2.5

2.4

2.4

7.7

7.1

12.6

13.6

14.3

2.2

1.4

2.7

3.4

3.4

Days of Cash

66.4

21.0

23.4

22.9

13.9

N/A

N/A

10.7%

N/A

N/A

Activity Ratios

Leverage Ratios Debt to Asset Ratio

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Debt to Equity Ratio Long-term Debt to Capital Structure

N/A

N/A

16.8%

N/A

N/A

N/A

N/A

16.8%

N/A

N/A

Times Interest Earned Current Liabilities to Equity

200.9

69.6

184.2

1008.3

1644.6

23.8%

22.9%

28.6%

27.6%

27.4%

Other Ratios

N/A

N/A

N/A

N/A

N/A

Exhibit 3—Sales for top Fast Casual Chains in the United States

Exhibit 4—Internal Factor Analysis Summary (IFAS) Weight

Rating

Weighted Score

0.1

4

0.4

HR, Finance, Information Systems, etc.: all contribute to overall vision.

Superior Customer Service

0.2

3

0.6

Due to well-trained employees and “total customer experience.”

Quality of Products

0.2

5

1

Commitment to high-quality ingredients and new flavors.

Diversity of Products

0.05

4

0.2

Expansive menu. Caters to breakfast, lunch, dinner, snack consumers.

Strategically Placed Locations

0.05

5

0.25

Effectiveness of expansion selection criteria.

Internal Factors Strengths Functional Integration with Strategic Goals

Comments

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Monetary Incentives for Managerial Level Employees

0.05

2

0.1

Joint Venture Program

Public WiFi

0.05

1

0.05

Larges Free Public WiFi Network in United States.

0.05

3

0.15

Fast Casual Restaurant Segment

Unique Strategic Focus on Niche Market Weaknesses

**Difficult to find weaknesses due to success in an economic recession and nature of description provided in the case. Limited/no presence in international market (three locations in Canada).

Limited Large-Scale Marketing Efforts

0.05

5

0.25

Almost Entirely U.S.—Based

0.05

4

0.2

Lack of Incentives for Store Associates

0.05

3

0.15

Managerial incentives only mentioned in case.

0.05

1

0.05

Related to franchise locations, now largely being brought under corporate supervision.

0.05

2

0.1

Not mentioned in the case but assumed.

Potential Risks in Decentralized Business Unit Structure Lack of Online Ordering Capabilities Total Weighted Score

1

3.5

Exhibit 5—Strategic Factor Analysis Summary (SFAS) Duration Strategic Factor Analysis

Quality/Diversity of Products

Weight

0.3

Rating

5

Weighted Score

1.5

Short

x

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Intermediate

x

Long

x

Comment Reputation based on high quality, flavorful, healthy choices. Foundation behind price point establishment .


CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

Superior Customer Service

0.25

3

0.75

x

x

x

Functional Integration with Strategic Goals

0.2

4

0.8

x

x

x

New Store Location Process

0.15

5

0.75

x

x

On-line Ordering

0.05

1

0.05

x

x

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Customer satisfaction is a key metric in this industry. Panera differentiate s itself via strong customer service reputation. Panera is committed to developing its employees. Integration and information sharing enhance capability to develop new products, share best practices, and manage business functions. Expansion into new regions (domestic/int ernational) is a likely growth opportunity. Competition is expanding its capabilities based on the increasing presence and utilization of IT by consumers.


CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

Trade-down from Dining Out

0.05

SUM

3

0.15

1.00

x

Business growth reflects trend away from dine-in restaurants and creates a niche for Panera.

x

4.00

X. FINANCIAL ANALYSIS A. FINANCIAL RATIOS YEARS 2009

2008

Current Ratio

1.34

0.79

0.61

0.88

0.85

Quick (Acid Test) Ratio Inventory to Net Working Capital

2.18

1.11

1.10

1.08

1.10

0.07

0.49

0.47

0.48

0.46

Cash Ratio

1.73

0.66

0.53

0.48

0.28

Net Profit Margin

6.36%

5.19%

5.39%

7.10%

8.15%

Gross Profit Margin

10.41%

8.68%

8.37%

10.95%

12.67%

Return on Investment (ROI)

10.28%

10.01%

8.22%

10.85%

11.92%

Return on Equity (ROE)

14.41% $2.78

13.52% $2.22

12.88% $1.79

14.80%

16.46%

$1.84

$1.65

Inventory Turnover

110.08

108.61

93.62

95.13

87.02

Days of Inventory

3.70

3.68

4.25

4.31

4.80

Net Working Capital Turnover

16.52

-35.28

-10.83

-47.85

-35.74

Asset Turnover

1.62

1.93

1.53

1.53

1.46

Fixed Asset Turnover

3.35

3.11

2.48

2.40

2.38

Average Collection Period

7.68

7.07

12.59

13.61

14.34

Accounts Receivable Turnover

47.50

51.66

28.99

26.81

25.45

1. Liquidity Ratios

2007

2006

2005

2. Profitability Ratios

Earnings Per Share—Diluted 3. Activity Ratios

Accounts Payable Period Days of Cash

N/A

N/A

N/A

N/A

N/A

66.45

20.99

23.35

22.94

13.94

28.68%

26.00%

36.15%

26.71%

27.58%

4. Leverage Ratios Debt to Asset Ratio

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CASE 20 Panera Bread Company (2010): Still Rising Fortunes? Debt to Equity Ratio Long-term Debt to Capital Structure

40.22%

35.14%

56.61%

36.45%

38.07%

0.00

0.00

0.17

0.00

0.00

Times Interest Earned

200.89

69.63

184.15

1008.35

1644.56

Coverage of Fixed Charges

N/A

N/A

N/A

N/A

N/A

23.83%

22.86%

28.64%

27.56%

27.40%

Price/Earnings Ratio

N/A

N/A

N/A

N/A

N/A

Dividend Payout Ratio

N/A

N/A

N/A

N/A

N/A

Dividend Yield on Common Stock

N/A

N/A

N/A

N/A

N/A

2009

2008

2007

2006

Current Liabilities to Equity 5. Other Ratios

* N/A—Key information Not Available B. COMMON SIZED STATEMENTS CONSOLIDATED STATEMENT

INCOME STATEMENT Year Ending December Revenues: Bakery-Cafe Sales Franchise Royalties and Fees Fresh Dough Sales to Franchisees Total Revenue Costs and Expenses: Bakery-Cafe Expenses: Cost of Food and Paper Products Labor Occupancy Other Operating Expenses Total Bakery-Cafe Expenses Fresh Dough Cost of Sales to Franchisees Depreciation and Amortization General and Administrative Expenses Pre-opening Expenses Total Costs and Expenses Operating Profit Interest Expense Other (Income) Expense, Net

2005

85.21% 5.79% 9.00% 100.00%

85.17% 83.90% 80.36% 78.00% 5.76% 6.30% 7.42% 8.48% 9.07% 9.81% 12.22% 13.52% 100.00% 100.00% 100.00% 100.00%

24.94% 27.38% 7.09% 11.48% 70.90% 7.41% 4.96% 6.14% 0.18% 89.59% 10.41% 0.05% 0.02%

25.61% 27.14% 6.96% 11.32% 71.03% 8.36% 5.18% 6.50% 0.26% 91.32% 8.68% 0.12% 0.07%

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25.45% 26.83% 6.60% 11.37% 70.25% 8.70% 5.43% 6.47% 0.78% 91.63% 8.37% 0.05% 0.03%

23.75% 24.72% 5.86% 11.12% 65.45% 10.37% 5.33% 7.15% 0.74% 89.05% 10.95% 0.01% -0.24%

22.34% 23.67% 5.55% 10.93% 62.50% 11.66% 5.16% 7.23% 0.79% 87.33% 12.67% 0.01% -0.18%


CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

Income Before Income Taxes Income Taxes Net Income Less: Net Income (Loss)Due to Noncontrolling Interest Net Income Attributable to Panera

10.34% 3.92% 6.42%

8.49% 3.18% 5.31%

8.29% 2.95% 5.35%

11.18% 4.08% 7.10%

12.83% 4.68% 8.15%

0.06%

0.12%

-0.04%

0.00%

0.00%

6.36%

5.19%

5.39%

7.10%

8.15%

2009

2008

2007

2006

2005

29.43% N/A 2.07% 1.33% 1.47% 1.94% 2.23%

11.09% 0.36% 2.26% 1.48% 1.77% 2.12% 1.47%

9.77% 3.32% 3.60% 1.67% 1.63% 0.76% 1.03%

9.60% 3.69% 3.51% 2.19% 1.61% 2.22% 0.71%

38.47%

20.54%

21.77%

23.52%

48.23%

61.88%

61.54%

63.76%

5.59% 8.27% 4.17% 1.58% 1.68% 1.31% 0.88% 23.48 % 61.42 %

Goodwill

10.45%

12.96%

12.46%

10.54%

Other Intangible Assets, Net Long-term Investments Deposits and Other

2.29% N/A 0.55%

3.04% 0.26% 1.33%

3.12% 0.00% 1.10%

1.22% 0.00% 0.96%

Total Other Assets

13.29%

17.58%

16.69%

12.72%

Total Assets

100.00%

100.00% 100.00% 100.00%

LIABILITIES Current Liabilities: Accounts Payable

0.77%

0.60%

0.91%

1.07%

Accrued Expenses

16.23%

16.32%

17.38%

18.93%

Deferred Revenue

0.00%

0.00%

0.00%

0.20%

16.99%

16.92%

18.28%

20.20%

BALANCE SHEET For the year ending ASSETS Current assets: Cash and Cash Equivalents Short-term Investments Trade Accounts Receivable, Net Other Accounts Receivable Inventories Prepaid Expenses Deferred Income Taxes Total Current Assets Property and Equipment, Net Other Assets:

Total Current Liabilities

20-20 ©2024 Pearson Education, Ltd.

11.09 % 0.74% 2.31% 0.96% 15.10 % 100.00 %

1.01% 18.63 % 0.20% 19.85 %


CASE 20 Panera Bread Company (2010): Still Rising Fortunes?

Deferred Rent Long-term Debt Deferred Income Taxes Other Long-term Liabilities

5.18% 0.00% 3.44% 3.07%

5.90% 0.00% N/A 3.18%

4.80% 10.73% 0.00% 2.04%

5.10% 0.00% 0.00% 1.41%

Total Liabilities

28.68%

26.00%

35.86%

26.71%

0.00% N/A

0.00% N/A

0.00% 0.00%

0.00% 0.00%

N/A

N/A

-0.17%

-0.17%

20.10%

22.46%

24.10%

32.48%

0.03%

N/A

0.00%

0.00%

51.66%

51.40%

39.92%

40.97%

71.32%

73.48%

63.85%

73.29%

N/A

0.52%

0.29%

0.00%

Total Equity

71.32%

74.00%

63.85%

73.29%

Total Equity and Liabilities

100.00%

100.00% 100.00% 100.00%

Commitments and Contingencies (Note 13) EQUITY Panera Bread Company Stockholders’ Equity: Common Stock, $.0001 par Value: Class A, 75,000,000 Shares Authorized Class B, 10,000,000 Shares Authorized Treasury Stock, Carried at Cost Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Panera Bread Company Stockholders’ Equity Noncontrolling Interest

i

Horovitz, Bruce, “Panera Bakes a Recipe for Success,” USA Today, July 23, 2009, p. 1.

ii

York, Emily Bryson. Panera: an America’s Hottest Brands Case Study. Advertising Age, November 16, 2009. [http://adage.com/article?article_id=140482]

iii

Zagat Survey. http://www.zagat.com/FASTFOOD

iv

Tritto.

20-21 ©2024 Pearson Education, Ltd.

5.47% 0.00% 1.15% 1.11% 27.58 %

0.00% 0.00% 0.21% 35.28 % 0.00% 37.35 % 72.42 % 0.00% 72.42 % 100.00 %


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market I. CASE ABSTRACT Whole Foods Market® was the world’s leading retailer of natural and organic foods, with 289 stores (2010) in North America and the United Kingdom. The supply of natural and organic foods was not keeping up with steadily increasing demand and could become a serious problem for the company. As the industry attracted more competitors, new prime locations were becoming harder to find. Recently, Wal-Mart has entered the organic grocery market. Whole Foods’ is uncertain about how to meet the company’s growth and sustainability targets. Decision Date: 2010

2010 FY Sales: 2010 FY Net Income:

$9,237,794 $ 245,833

II. CASE SUBJECTS AND ISSUES Grocery Industry Health Foods Horizontal Growth Strategy Mission and Vision Market Segmentation Objectives and Goals Policies HRM Strategy Industry Analysis Socio-cultural Forces Evaluation and Control Entrepreneurial Firm Code of Ethics Strategy Formulation First Mover (Pioneer) Tactic

Sustainability Corporate Strategy Social Responsibility Marketing Strategy Differentiation Focus Competitive Strategy Functional Strategy Organizational Learning Corporate Culture Strategic Groups Demographics and Values Economic Value Added (EVA) Logistical Strategy Bargaining Power of Suppliers Strategy Implementation Retailing

21-1 ©2024 Pearson Education, Ltd.


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

Strategic Alternatives

3

4

5A

5B

6

O

O

X

O

O

O

X

Internal Factors

Corporate Governance

Strategic Factors

2

External Factors

1B

Strategic Posture

1A

Performance

Review Objectives & Mission

Strategy Formulation

O = Emphasized in Case IV.

Strategy Implementation

Evaluation & Control

7

8

O

O

X = Covered in Case

CASE OBJECTIVES

1. To evaluate how a company reacts to opportunities and threats within the industry. 2. To evaluate how a company identifies keys to success within an industry and uses them to gain a competitive advantage over competitors. 3. To evaluate a company’s competitive market position within a given industry. 4. To increase the student’s ability to understand a situation or problem by identifying patterns and addressing key underlying issues in order to develop strategic future thinking that is needed for effective leadership and management in the marketplace. 5. To increase a student’s ability to evaluate a situation and effectively communicate, both written and verbally, remedies for the situation. 6. To increase a student’s ability to analyze and conceptualize a given situation in order to develop future planning skills. 7.

To evaluate a company’s ability to react to a changing marketplace and develop alternative strategies to deal with this change.

V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. We suggest that you can place this case anywhere in your course, because of the turn-on value of the case SUGGESTION FOR DAILY CLASS PARTICIPATION SPECIAL NOTE .

21-2


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market We have found it is difficult to get quality daily participation from our students. We suggest the following: 1. Have the class members prepare—individually or as a team—(a) EFAS, IFAS, and SFAS or (b) just an SFAS for the assigned case. •

We have one or two individual students of a team bring their EFAS, IFAS, and SFAS, or their SFAS on a transparency. We have found in this seventy-five-minute class that SFAS alone as a transparency works most effectively.

2. We compare the students work with the team or individual students making the presentation to the class. •

We also discuss how the Weights and Rating were developed and the Weighted Score for the case under discussion.

3. We ask each student at the beginning of the class to write down his or her Total Weighted Score for the case under discussion and pass it on.

VI.

You can use the results to call on students whose score seem to be out of line with the case.

It allows for discussion of the Total Weighted Score as his or her overall evaluation of how the management of the company is managing the company’s internal and external environment.

We ask the students whether they would buy stock in this company. As a result, the Total Weighted Score seems to have real meeting.

DISCUSSION QUESTIONS 1.

What are the strengths and weaknesses of Whole Foods?

2.

What are the opportunities and threats facing Whole Foods?

3.

What are the strategic factors facing Whole Foods?

4.

Does Whole Foods have any core competencies? If yes, what are they?

5.

Does Whole Foods have a distinctive competency? If yes, what is it?

6.

What are the keys to success in Whole Foods?

7.

What niche is Whole Foods trying to establish?

8.

How can Whole Foods compete with the large national food chains (Publix, Safeway, Wal-Mart, etc.)?

9.

Will customers pay a premium for organic foods?

.

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market 10. How many of the students eat organic foods? 11. How would you evaluate Whole Foods’ growth strategy? 12. How would you evaluate Whole Foods’ performance over past few years? 13. Would you buy stock in Whole Foods? If ‘yes’—why? If ‘no’—why? VII. CASE AUTHOR’S TEACHING NOTE—none available VIII. STUDENT STRATEGIC AUDIT/STUDENT PAPER I.

CURRENT SITUATION A. Performance 1. The total number of stores have increased from 175 in September 2005 to 289 in January 2010. They managed to open only a total of ten new stores for the two years ended September 2009. This was a result of their integrating the stores from the Wild Oats acquisition in 2007 and conserving cash in order to pay down some of the debt taken on in that transaction. 2. Over a period from September 2005 through January 2010, while total sales of Whole Foods have continued to increase, the operating margin has declined. With the acquisition of the Wild Oats, the operating margin decreased significantly from 5.7 percent in 2006 to 3 percent in 2008, as Whole Foods struggled to handle the addition of seventy plus new stores. The fiscal year 2009 has shown some improvement in the most recent operating margin back up to 3.9 percent on an annualized basis from the low point of 3.0 percent for the year ended September 2008. The operating margin has improved due to cost and efficiency improvements. 3. Whole Food Markets has been working to correct their “pricey” image by expanding offerings of private label products through their “365 Everyday Value” and “365 Organic” product lines. Private label sales accounted for 11 percent of Whole Foods total sales in 2009, up from 10 percent in 2008. They have also instituted a policy that their 365 product lines must match prices of similar products at Trader Joe’s. B. Strategic Position 1. Mission a) “Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer. Our success in fulfilling our vision is measured by customer satisfaction, Team Member excellence and happiness, return on capital investment, improvement in the state of the environment, and local and larger community support.” b) Whole Foods Core Values •

Selling the highest quality natural and organic products

.

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market available. •

Satisfying and delighting our customers.

Supporting team member happiness and excellence.

Creating wealth through profits and growth.

Caring about our communities and our environment.

• •

Creating ongoing win-win partnerships with our suppliers. Promoting the health of our stakeholders through healthy eating education.

2. Objectives • Whole Foods Market commits to reducing energy consumption by 25 percent per square foot by 2015. • To reach $15 billion in revenue with 400+ stores by 2020 without sacrificing quality or their current reputation. • To conduct business in a manner consistent with their mission and vision. • To provide minimally processed, high-quality food, engaging in ethical business practices, and providing a motivational, respectful work environment. • To strive to take care of their customers by improving customer offerings, catering to specific locations • To gain 100 percent customer satisfaction by “delighting” its customers in every interaction. 3. Policies • Maintain high ethical standards in all interactions with customers, team members, vendors, and other stakeholders in the company. • Assume social and environmental responsibility throughout the world. • Support of organic farming, which helps sustain the environment and supports and protects farmers • To be actively involved in communities by supporting banks, neighborhood events, compensating team members for community service work. • Contributing at least 5 percent for nonprofit organizations. 4. Strategies • Encourage a team based environment allowing each store to make independent decisions regarding its operations. • Maintain reputation by quality and services for the customer. • Expansion and acquisition fuel growth. II.

CORPORATE GOVERNANCE A. Board of Directors

.

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market 1. Currently eleven board members. • Nine male, two female • Ages ranging from forty-nine to seventy-six years old 2. All board members are highly educated and many are involved in external affairs. a. Many involved on internal committees. b. All possess extensive management and leadership experiences. DR. JOHN B. ELSTROTT, Chairman of the Board, has served as a director of the company since 1995. Dr. Elstrott is a Clinical Professor of Entrepreneurship and the founding director of the Levy-Rosenblum Institute for Entrepreneurship at Tulane University’s Freeman School of Business, which was started in 1991. JOHN MACKEY, co-founder of the Company, has served as Chief Executive Officer since 1980. Mr. Mackey also served as President from June 2001 to October 2004, and as Chairman of the Board from 1978 to December 2009. WALTER ROBB, Co-CEO, joined Whole Foods Market in 1991. He operated the Mill Valley, CA store until he became president of the Northern Pacific Region in 1993, where he grew the region from two to seventeen stores. He became Executive Vice-President of Operations in 2000, Chief Operating Officer in 2001 and Co-President in 2004. Now as Co-CEO, Robb oversees six regions and is on the Whole Planet Foundation Board of Directors. An avid organic advocate, Robb is on the Advisory Board for the Organic Center for Education and Promotion. He is also on the Board of Regents for the University of the Pacific. GABRIELLE GREENE has served as a director of the company since 2003. Ms. Greene has served as a Principal of a diversified investment fund, Rustic Canyon/Fontis Partners, LP, since its inception in October 2005. In addition, Ms. Greene served as Chief Financial Officer of the Villanueva Companies, a private holding company with diverse investment interests from 2002 through 2005. Ms. Greene also serves on the board of directors of Bright Horizons Family Solutions. HASS HASSAN has served as a director of the company since 2005. Mr. Hassan has been a General Partner of Greenmont Capital, an investment firm, since 2006. Mr. Hassan founded Fresh and Wild, Ltd., an organic food retailer in the United Kingdom in 1999. Mr. Hassan served as President and Executive Chairman of Fresh and Wild from 1999 until 2004, when the company was acquired by Whole Foods Market. STEPHANIE KUGELMAN has served as a director of the company since December 2008. She is the recently retired Vice Chairman, Chief Strategic Officer of Young and Rubicam Brands, a worldwide marketing communications company, where she held positions of increasing responsibility commencing in 1971. Since 2006, Ms. Kugelman has been the founder and Chairman of A.S.O., A Second Opinion, a strategy and branding consultancy. She serves on the board of directors of Home Shopping Network. JONATHAN A. SEIFFER has been a Partner of Leonard Green and Partners, L.P. since 1999 and joined Leonard Green and Partners, L.P. in 1994. Leonard Green and Partners, L.P. is an affiliate of Green Equity Investors V, L.P. MORRIS SIEGEL has served as a director of the company since 2003. Mr. Siegel is currently self-employed, having operated Capitol Peaks, an investment firm since 2002. Mr. Siegel was the co-founder of Celestial 21-6 .


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market Seasonings, Inc., serving as Chairman and CEO from 1970 until 2002. Celestial Seasonings merged with The Hain Food Group, forming The Hain Celestial Group of which Mr. Siegel served as Vice Chairman from 2000 until retiring in 2002. JONATHAN D. SOKOLOFF has been a Managing Partner of Leonard Green and Partners, L.P. since 1994 and joined Leonard Green and Partners, L.P. in 1990. Leonard Green and Partners, L.P. is an affiliate of Green Equity Investors V, L.P. Mr. Sokoloff is also a director of Rite Aid Corporation. DR. RALPH Z. SORENSON has served as a director of the company since 1994. Dr. Sorenson is the Managing Partner of the Sorenson Limited Partnership, a venture investment partnership. Dr. Sorenson is President Emeritus of Babson College (1974-1981), Professor Emeritus and former Dean of the University of Colorado, College of Business Administration (1992present), and former Chairman and CEO of Barry Wright Corporation, a NYSE company (1981-1989). Dr. Sorenson is also a former director of the Federal Reserve Bank of Boston and has served in the past on the boards of directors of a number of other prominent public companies. WILLIAM A. (KIP) TINDELL, III has served as a director of the Company since December 2008. He co-founded The Container Store in 1978 and has served as its CEO since that time. Mr. Tindell serves on the boards of both the National Retail Federation (NRF) and Goodwill Industries. He is also an Executive Board Member of the Circle Ten Council for the Boy Scouts of America. B. Top Management 1. John P. Mackey • Co-founder of the company. • Served as Chairman and CEO since 1988, and President from 2001 to 2004. • Currently holds 1,061,266 shares of stock (2010). 2. WALTER ROBB, Co-CEO, joined Whole Foods Market in 1991. 3. Top management all have many years of experience in the food industry. III.

EXTERNAL ENVIRONMENT EFAS see Exhibit 1

A. Societal Environment 1. Economy • Changing economy—more competitive(O) • Market for organic foods increased 80.5 percent from 2001 to 2004 (O/T). • European expansion provides enormous potential (O). • Perceived as a more sophisticated organic-foods market in terms of suppliers and acceptance by the public. • Supermarkets, mass marketers, director marketers, and the Internet. • Sales of natural products nationwide grew by 5 percent to $76 billion in FY2010.

.

21-7


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market •

National Nutritional Foods Association estimates annual sales growth rate of 8 percent to 10 percent for natural foods (O). Targets new locations based on 40 percent college education population (T). • Seen potential scarcity due to a limited number of this population. • Caters to individual geographic preferences and local farm specialties. • Customer willing to pay for quality.

2. Technology • “Take Action Food Centers”—customers can access legislation involving food and environment (O). • Some stores offer home delivery, cooking classes, massages, and valet parking (O). • Utilizes price marketing tool in select areas by using 365 Whole Foods brand name products (priced less than organic products also carried in store) (O). • Created three private label products due to lack of available nutritional brands with a national identity (O). 1. 365 Everyday Value—meets whole foods standards but less expensive. 2. Whole Kids Organic: healthy items for children. 3. 365 Organic Everyday Value: all benefits of organic food at reduced prices. 3. Sociocultural • Minimally processed, high-quality food favored by aging baby boomers and college educated populations (O). • 61 percent of consumers perceive organic foods as increasing longevity and helping improve fitness (Food Marketing Institute Prevention Magazine Study). • Excellent diets using healthy foods promote longer life expectancy (O). • Consumption of fresh fruits and vegetables, pasta, and other grain-based products. • Appeals to increasing baby boomers reaching the age of fifty-five (senior market) (O). • Appeals to growing percentage of working women who have less time to cook (O). • Sales of ready to eat meals/prepared foods tasting like restaurant quality. • Generation Y baby boom to crest at 30.8 million by end of 2005 (US Census Bureau) (O). • Recent surge in health consciousness promoted by government awareness (O). • Television commercials on new food group pyramid.

.

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market 4. Political-Legal •

Whole Foods saves considerably on advertising by relying on customer word-of-mouth (O). • Promoted in several health conscious magazines (O). • Individual stores budget for in-store advertising annually (O). Gain recognition by social awareness (O). • Charitable contributors (5 percent of after-tax profits go to not-for-profit charities). • Awareness of animal cruelty (animals used in products are treated humanely).

B. Task Environment 1. Threat of new entrants: HIGH • Natural and Organic food markets expected to continue: • With health-conscious population increasing. • With expected annual sales to increase by 8 to 10 percent. • Market for organic foods increased 80.5 percent from 2001 to 2004. 2. Bargaining power of buyer: HIGH • Buyers dictate the existence of Whole Foods. • Woodland Hills, CA Whole Foods Market redesigned its prepared foods section more than three times due to 40 percent growth. 3. Threats of Substitutes products: MEDIUM • High inflation or deep recession would force buyers to return to cheaper less healthy foods. • Supermarkets have started offering organic/healthy food sections. • Convenient stores are even offering organic foods. 4. Bargaining Power of Suppliers: MODERATE • Purchases most of products from regional and national suppliers. • Allows company to receive deep discounts and favorable terms from vendors. • Largest independent vendor-United Natural Foods accounted for 20 percent of Whole Foods total 2004 purchases. • Own several regional bake houses, which distributes products to their stores. 5. Rivalry among competing firms: HIGH • Trader Joe’s Co. (founded 1958) (2nd largest)—high quality at low prices.

.

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market •

Located primarily on west and east coasts of the United States. • Low-cost structure. • Privately held company.

6. Power of other stockholders: HIGH • Strict government requirements must be satisfied to be classified as organically grown (time-consuming, more effort intensive, costly). • A change in government laws requiring possibly tougher standards on product reformulation could affect supply of organic food. • 3 percent of US farmland used to produce organic foods. • Farmland thus organic foods can become a scarcity due to high demand. IV.

INTERNAL ENVIRONMENT IFAS see Exhibit 2 A. Corporate Structure 1. Started with entrepreneur John Mackey. 2. Decentralized decision-making; decisions made from the top down. B. Corporate Culture 1. Will only do business with companies that treat their animals humanely. 2. Fourteen pages of code of conduct document that addresses its expected and desired behavior for its employees. 3. Dedication to hand work. 4. Commitment to quality. 5. Concern for employees. 6. Ranked #18 Top 100 Best Companies to Work For (2010). 7. Heavy focus on ethics. 8. Strong business philosophy. C. Corporate Resources 1. Marketing • Targeting urban singles and aging baby boomers, due to their abundance of disposable income. • Seventh highest category on which consumers spend their money. • U.S. households with an annual income of $100,000 represent 22 percent of aggregate income. • Driving demand for organic food because consumers are becoming more health-conscious. • The market for organic foods grew from $2.9 billion in 2001 to $5.3 billion in 2004, an 80.5 percent increase in three years. .

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CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market • •

Main competitor is Trader Joe’s. Targets locations where 40 percent or more of the residents have a college degree.

2. Finance • Focuses on earning a profit while providing job security to its workforce. • Whole Foods donates 5 percent of its after-tax profits to non-profit organizations. • Stock prices increased from under $10 per share to a high of over $50 per share, reflecting a 500 percent increase. • Market valuation of $10.5 billion (2010). • Growth in sales is expected to continue at the rate of 8 percent percent to 10 percent percent of year. • Objective is to reach $15 billion in revenue with 400+ stores by 2020 without sacrificing quality. 3. Research and Development • Organic crops yield a lower quantity of output; accounting for 3 percent of U.S. farmland usage. • Strict government requirements must be met, which is timeconsuming, more effort intensive, and more costly to adhere to. • Demand for such organic products could outreach the limited supply. • Whole Foods acquired a waterfront seafood facility, now the only supermarket to own and operate one of these. • Has grown through the years through mergers, acquisitions, and several new store openings. • Expansion planned into the United Kingdom. 4. Operations and Logistics •

• •

In response to a 40 percent growth in prepared food sales, Whole Foods redesigned its prepared foods section more than three times; products underwent a strict quality test to determine if they are “whole foods material.” Meat and poultry products must adhere to a higher standard. Three private label products and a fourth program which promotes certified organic products.

5. Human Resources Management • •

Now the largest natural food supermarket in the United States, with 54,000 employees operating 289 stores (2010). Have never had any layoffs.

6. Information Systems • Not mentioned

.

21-11


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market V.

STRATEGIC FACTORS SFAS see Exhibit 3) A. Strategic Factors—see Exhibit 3 B. Review of Mission and Objectives • •

VI.

Current mission appears to be very appropriate. The current objectives seem attainable and not unrealistic.

STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

A. Strategic Alternatives 1. Growth: Grow into the European Market Pro: Could provide Whole Foods with a worldwide domination of organic markets. Con: A very risky move to make and will have big consequences if it fails 2. Retrenchment: Can divest stores in the UK to focus on growing their market share in the US. Pro: Create even more of dominance of organic markets in the United States. Con: Getting rid of profit making stores is really stupid. 3. Stability: Whole Foods can stay as is and focus on growing their existing stores. Pro: Can produce even bigger profits for stores already in existence. Con: Does not provide the opportunity for worldwide expansion. B. RECOMMENDATIONS 1. We recommend the stability strategy, at least for a few years, so that Whole Foods can gauge the European market more accurately before expanding into all of Europe and taking such a huge risk. 2. Whole Foods quality and reputation must be maintained and a failure could serve damage to these important qualities. 3. The Euro is strong right now, but it is very new and is still in an unpredictable stage. Waiting a few years will provide Whole Foods with the opportunity to make sure the European economy does not take a turn for the worse. VII.

IMPLEMENTATION,EVALUATION, AND CONTROL—see Exhibit 4

VIII. EVALUATION AND CONTROL—see Exhibit 4 IX. EFAS, IFAS, and SFAS Exhibits

Exhibit 1

EFAS (External Factor Analysis Summary) 21-12 .


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market

Key External Factors

Weight

Rating

Weighted Score

.20

5

1.00

.15

5

.75

.10

4

.40

.10

2

.20

Comments

Opportunities Demographics Favor Quality Over Price

Growth in the United States Organic and Natural Food Markets

Local Support Through Strong Relationships with their Suppliers and Other Key Partners International Expansion

Threats Strong Competition From Trader Joe’s Company and Wild Oats

.20

New Market Entrant .15

2

.30

.05

1

.05

.05

3

.15

Increase in Government Regulations

Scarcity of Prime Locations

TOTAL SCORES

1.00

.

3.85

21-13

Baby boomers and Y boomers are expecting to live much longer lives and desire quality over price. This helps explains why there was a high growth market increase in the United States organic and Natural food markets. Increased 80.5 percent in the three-year term 2001-2004. One way to keep this #1 position is by continuing their strong relationship with suppliers and other key partners Another is through international expansion. Whole Foods plans to vigorously pursue the European Market Although there is strong competition from Trader Joe’s Company and Wild Oats for the #1 sales position, Whole Foods still retains the title However, the opportunity for another small company to enter the competitive market is likely due to the high demand of buyers. Since there are strict government requirements when growing organic foods, a change in government laws requiring possibly tougher standards on product reformulation could affect the supply of organic food. Whole Foods only opens stores in cities that are 40 percent college educated. These target populations are becoming more difficult to locate due to college educated criteria


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market IX. IFAS, EFAS, AND SFAS EXHIBITS

Exhibit 2

IFAS (Internal Factor Analysis Summary)

Key Internal Factors

Weight

Rating

Weighted Score

Comments

Quality Whole Foods Culture

.10

4

.40

Financial Position

.20

5

1.00

Experienced Top Management

.05

3

.15

Industry Position

.10

4

.40

Corporate Responsibility

.15

5

.75

Focuses on quality and high standard of business. Sales and profits are steadily increasing. Over thirty years supermarket experience with CEO John Mackey. Top natural foods supermarket in US. Donates 5 percent of after-tax profits to non-profit organizations.

GlobalPosition

.15

3

.45

Supply of Organic Produce

.15

.15

StrictGgovernments

.10

.20

1.00

3.50

Strengths

Weaknesses

TOTAL SCORES

.

21-14

Stores in US and UK only; room for expansion. 3 percent of farmland is for organic growing, demand is rising higher than supply. Requirements are timeconsuming, effort intensive, and costly to adhere to.


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market IX. SFAS, EFAS, AND IFAS EXHIBITS

Exhibit 3

SFAS (Strategic Factor Analysis Summary) Duration Key Strategic Factors

Strengths Demographics Favor Quality Over Price (O) Growth in the United States Organic and Natural food markets

Weight

Rating

Weighted Score

Comments S

I

L X

.12

4

0.48

.11

4

.44

X

.15

5

0. 75

X

Increase in Government Regulations (T)

.08

3

0.24

Scarcity of Prime Locations (T)

.10

4

0.40

X

Quality Whole Foods Culture (S)

.14

5

0.70

X

Industry Position (S) Experienced Top Management (S)

.12

5

0.60

.05

5

0.25

Global Position (W)

.05

3

0.15

Supply of Organic Produce (W)

.08

4

0.32

TOTAL SCORES

1.00

Strong Competition from Trader Joe’s Company and Wild Oats

4.33

Exhibit 4

.

21-15

Increase in US organic and natural food markets by 80.5 percent from 2001 to 2004.

Strong competition, but Whole Foods still has the #1 sale position. When growing organic foods, a change in govt laws affect supply of organic food.

X

X X

X X

Baby boomers are expected to live longer lives and desire quality over price.

Whole Foods only opens stores in cities where 40 percent of population is college educated. Focuses on quality and high standard of business. Top natural foods supermarket in the U.S. Over 30 years supermarket experience with CEO John Mackey. Stores in US and UK only. 3 percent of farmland is for organic growing, demand is rising higher than supply.


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market

Whole Foods Markets Strategic Factor

Action Plan

Quality over Price

Committee to follow societal changes.

Growth in Organic Markets

Rival Competition

Increase in Government Regulations

Scarcity of Prime Locations

Quality of Whole Foods Culture Industry Position

Experienced Top Management

Global Position

Supply of Organic Produce

Expand current production of current products and develop products to meet market needs. Competition committee to keep track of rivals company and sales. Committee to follow and forecast government changes. Locate new locations that fit current specifications and develop new specifications to allow prime locations to meet different standards. Emphasis on quality for each sale. Committee to follow current industry trends and position. Use current success in top management to train lower level managers to secure future quality. Committee to research potential locations outside of the US and the UK. Develop and maintain good relations with current suppliers and potential Suppliers.

.

Priority System (1-5)

3

Who Will Implement? Ms. Glenda Flanagan Principal Accounting Officer, Exec. VP

Who Will Review?

How Often?

Mr. John P.

Sales Position

Mackay CEO

Monthly

in Food Market Growth in Sales

CEO

Monthly

of Products

James P. Sud 3

VP Growth and

What Criteria Reviewed?

development

3

VP Marketing

CEO

Monthly

Rival Sales

3

Mr. A. C. Gallo Chief Operating Officer

CEO

Quarterly

Legislation and Laws

Monthly

Potential Sales in

VP Growth

CEO

3

Targeted Locations

3

VP products and services Chief Operating

3 2

2

2

21-16

Officer Chief Operating Officer

VP Growth

Chief Operating Officer

VP Marketing

Daily

Complaints

CEO

Quarterly

Industry Changes

Quarterly

Strategic Decisions of

CEO

CEO

Monthly

CEO

Monthly

Top Management Target Sales in Potential Markets Supply Growth


CASE 21 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market 2010 GROWTH RATES % Sales (Qtr vs year ago qtr)

Whole Food Markets 13.80

Net Income (YTD vs YTD)

78.60

Net Income (Qtr vs year ago qtr)

78.60

Sales (5-Year Annual Avg.)

13.88

Net Income (5-Year Annual Avg.)

12.01

Dividends (5-Year Annual Avg.)

NA

FINANCIAL CONDITION Debt/Equity Ratio

0.16

Current Ratio

1.6

Quick Ratio

1.2

Interest Coverage

28.3

Leverage Ratio

1.6

Book Value/Share

14.49

PROFIT MARGINS % Gross Margin

34.9

Pre-Tax Margin

5.0

Net Profit Margin

3.0

5Yr Gross Margin (5-Year Avg.)

34.6

5Yr PreTax Margin (5-Year Avg.)

4.1

5Yr Net Profit Margin (5-Year Avg.)

2.4

X.

FINANCIAL ANALYSIS

Was inappropriate for this case.

.

21-17


CASE 22 Burger King I. CASE ABSTRACT Burger King was the second largest fast food hamburger restaurant chain in the world as measured by the total number of restaurants and system-wide sales. As of June 30, 2010, the company owned or franchised 12,174 restaurants in seventy-six countries and U.S. territories, of which 1,387 were company-owned and 10,787 were owned by franchisees. Of Burger King’s restaurant total, 7,258 or 60 percent were located in the United States. The restaurants featured flame-broiled hamburgers, chicken and other specialties sandwiches, french fries, soft drinks, and other low-priced food items. Originally called Insta-Burger King, the company was founded in Florida in 1953 by Keith Kramer and Matthew Burns. Their Insta-Broiler oven was so successful at cooking hamburgers that they required all of their franchised restaurants to use the oven. After the chain ran into financial difficulties, it was purchased by its Miami-based franchisees, James McLamore and David Edgerton, in 1955. The new owners renamed the company Burger King. The restaurant chain introduced the first Whopper sandwich in 1957. Expanding to over 250 locations in the United States, the company was sold in 1967 to Pillsbury Corporation. Burger King successfully differentiated itself from McDonald’s, its primary rival, when it launched the Have It Your Way advertising campaign in 1974. Unlike McDonald’s, which had made it difficult and time-consuming for customers to special-order standard items (such as a plain hamburger), Burger King restaurants allowed people to change the way a food item was prepared without a long wait. Pillsbury (including Burger King) was purchased in 1989 by Grand Metropolitan, which in turn, merged with Guinness to form Diageo, a British spirits company. Diageo’s management neglected the Burger King business, leading to poor operating performance. Burger King was damaged to the point that major franchises went out of business and the total value of the firm declined. Diageo’s management decided to divest the money-losing chain by selling it to a partnership private equity firms led by TPG Capital in 2002. The investment group hired a new advertising agency to create (1) a series of new ad campaigns, (2) a changed menu to focus on male consumers, (3) a series of programs designed to revamp individual stores, and (4) a new concept called the BK Whopper Bar. These changes led to profitable quarters and re-energized the chain. In May 2006, the investment group took Burger King public by issuing an Initial Public Offering (IPO). The investment group continued to own 31 percent of the outstanding common stock. II.

CASE ISSUES AND SUBJECTS FRANCHISING RETAIL SALES AND MARKETING DECLING SAME STORE SALES GLOBAL OPERATIONS HR MANAGEMENT COMPETITION

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? I. CASE ABSTRACT Sonic is an iconic American drive-in fast-food chain with nearly thousands of franchise establishments across the vast land of the United States by 2014. As Sonic continued to expand, it ran into various hurdles. The most daunting challenge was to enter urban environments, where space was too scarce to make drive-in possible. At the same time, while the drive-in model was highly effective in the US, thanks to nostalgia, it did not have the same emotional appeal to international consumers. Should Sonic move away from the drive-in model and reinvent itself? If so, would it become just another fast food burger joint with a customizable menu? And how could it compete with larger players, such as McDonald’s and Burger King, which already had a substantial urban and international presence? Decision Date: 2015

FY Sales: $552 million FY Net Loss: $47 million

II. CASE SUBJECTS AND ISSUES Restaurant Operations Strategy Formulation Human Resources Core Competencies Franchise Management Competitive Strategy

Store Location Competitive Advantage Marketing Promotions Customer Experience Supply Chain Culinary Innovation

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss Sonic’s core competencies.

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? 2. To discuss Sonic’s growth potential. 3. To discuss the competitive landscape of the fast food industry. 4. To discuss the challenges surrounding culinary innovation. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. How important is the Drive-In model to Sonics success? 2. Do customers choose Sonic for its food; the drive-in experience; or the store atmosphere? 3. Should Sonic focus its expansion efforts domestically or globally? 4. How important is a customizable menu? VII. CASE AUTHOR’S TEACHING NOTE—not available VIII. STUDENT STRATEGIC AUDIT

I. Current Situation A. Current Performance ● History ○ In 1953 Troy Smith founded the Top Hat Drive-In in Oklahoma, which later became Sonic Drive-In. ○ 3,500 locations in the United States. ○ Largest chain of drive-in restaurants in America. ○ Goal: become America’s most-loved restaurant brand. ● Performance ○ ROI: they have highly liquid investments such as money market accounts. ○ Market share: in the past year the share price has been stable it has gone from a low of $24.31 to a high of $36.34. ○ Profitability: the company’s long-term debt is fifteen times its cash on hand because of its strategic

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? expansion. If it were to enter tough times in the future it will have a difficult time repaying their debt. B. Strategic Posture 1. Sonic’s mission, objectives, strategies, and policies are clearly stated. Their core values are stressed in their employee handbook and they promote themes of working together and caring for both employees and customers. 2. Mission a. Sonic’s mission is quick-service drive-in fast food. The mission is appropriate as they maintain a strong focus on using the drive-in method to differentiate them from the competition. 3. Objectives a. Their initial objective was always growth and they achieved this by franchising. They also wanted to become “America’s most-loved restaurant brand.” They fulfilled America’s nostalgia for drive-in restaurants making them successful in this niche. Sonic then moved toward innovative focus to develop exciting menu items, products, and processes that were ahead of its competitors. b. We believe that these objectives are consistent with each other, the mission, the internal, and external environment as well because they separate themselves from the competition giving them a unique advantage and they watch trends to see what consumers are looking for and that is why they were innovating their menu items. 4. Strategies: a. Sonic’s strategy for growth relies on maintaining consistency. Consumer experience would be the same no matter which Sonic a person went to. Sonic did this by providing franchisee support services that included employee training and seminars that reinforced both Sonic’s core values and its operations to standardize each new franchise. They also chose their locations wisely, with targeted expansion into small towns in the central U.S. This allowed them to reduce their costs and enter the market where there was higher purchasing power, yielding quicker and greater return on investment for both the franchise and franchisee. These also maintained consistent with each other, the mission, objectives, and internal and external environments. 5. Policies: a. Concerned with keeping up with current technological trends. b. Focused on affordable and convenient food and service. 23-3 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? 6. Sonic has encountered issues expanding abroad because they do not have a multi domestic strategy. Their main image is drive-in to appeal to America’s nostalgia for this kind of restaurant, but internationally people don’t share those same sentiments. II. Corporate Governance A. The Board of Directors 1. CEO Sonic: Clifford Hudson ● COO GameStop Corporation: Tony Bartel ● Former CEO and President of Jos. A. Bank Clothiers: R. Neal Black. ● Executive Vice President and CMO of Dick’s Sporting Goods: Lauren Hobart. ● Former Executive Vice President and CMO of Dunkin’ Brands: Kate Lavelle. ● Executive Chairman of the Board of Devon Energy Group: J. Larry Nichols. ● Senior Advisor Vestar Capital Partners: Federico Pena. ● Chairman F.E. Richardson & CO: Frank Richardson. ● Managing Director Centennial Ventures: Jeffrey Schutz. ● Director Lobeck-Taylor Foundations/former Mayor of Tulsa, Oklahoma: Kathryn Taylor. ● Former Vice President, Global Marketing of Marriott International: Susan Thronson. o All of the board of director members are external except for the Sonic CEO Clifford Hudson. 2. The board of directors owns a significant number of stocks. 3. Since 1991, Sonic has been a publicly traded company and their common stock is traded on the NASDAQ stock market. 4. All of the board of directors come from different backgrounds and have an array of skill sets that have contributed to the Sonic’s success. For example, Tony Bartel’s experience in marketing and strategy in both the retail and restaurant industry provide a broad understanding of the company’s marketing initiatives and strategic planning. Mr. Bartel also has a background in finance, tax, and accounting, which can provide the company with a financial oversight. As a senior marketing executive for a Fortune 500 company, Lauren Hobart will provide insight into consumer needs and marketplace trends that are currently influencing the industry. 5. Time on the board: - CEO Sonic: Clifford Hudson—since 1993 • COO GameStop Corporation: Tony Bartel—since 2014 • Former CEO and President of Jos. A. Bank Clothiers: R. Neal Black— since 2016

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? •

Executive Vice President and CMO of Dick’s Sporting Goods: Lauren Hobart—since 2014 • Former Executive Vice President and CMO of Dunkin’ Brands: Kate Lavelle—since 2012 • Executive Chairman of the Board of Devon Energy Group: J. Larry Nichols—since 2007 • Senior Advisor Vestar Capital Partners: Federico Pena—since 2001 • Chairman F.E. Richardson & CO: Frank Richardson—since 1991 • Managing Director Centennial Ventures: Jeffrey Schutz—since 2010 • Director Lobeck-Taylor Foundations/ former Mayor of Tulsa, Oklahoma: Kathryn Taylor—since 2010 • Former Vice President, Global Marketing of Marriott International: Susan Thronson—since 2015 6. The board of directors are very much involved and actively participate in the future direction of Sonic. They have chosen people with the right skill set and background to be able to make educated decisions on the company’s next move. B. Top Management 1. CEO: Clifford Hudson President and CMO: Todd Smith Executive Vice President and CFO: Claudia San Pedro Executive Vice President and Chief Development and Strategy Officer: John Budd President of Sonic Restaurants Inc.: Harold Ceron Senior Vice President and General Counsel: Paige Bass Senior Vice-President of Development: Andrew Ritger Senior Vice-President of Franchise Development: E. Edward Saroch Senior Vice-President of People: Anita Vanderveer 2. Top management has more than enough knowledge, skills, and background to be able to run the company. They have diverse work experience from different industries such as marketing, management, and finance. 3. Top management has been responsible for the corporation’s performance. Everyone in the top management group has been at the company for more than three years, except Harold Ceron who has been at Sonic for two years. Also, most of the team has been external hires with exception of two or three people. 4. Before implementing any project, Sonic’s top management determines the viability of the project, identifying the most efficient way to conduct it, therefore, having a systematic approach. 5. Top management is highly involved in the strategic management process. 6. Top management provides the direction while lower level managers implement it. They are constantly overlooking how lower management performs. 23-5 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? 7. One of Sonic major underlying principles is their code of conduct and ethics. They are constantly updating their principles and making sure that they are followed throughout the entire organization. 8. The CEO, CFO, CMO, CIO, chief of development and strategy are all highly compensated with Sonic stock; they have a combined total of $7,259,315. 9. Top management has the necessary skills to deal with future challenges. They have been in the industry for many years and have gained experience that can be useful down the road. III. External Environment: Opportunities and Threats (SWOT)—(See Exhibit 1) A. Societal Environment 1. a. Economic i.Opportunities: enter new emerging markets. ii. Threats: price competition and fluctuations. b. Technological i.Opportunities: new technology for their supply chain management, better data collection and analysis software, increase comfort levels with technology, and business automation. ii. Threats: glitches in the system. c. Political-legal i.Opportunities: political stability in major markets. ii. Threats: increase in government regulations. d. Sociocultural i.Opportunities: more menu options that will attract people with different eating habits. ii. Threats: health related issues with food. 2. The economic, technological, political, and sociocultural opportunities and threats vary from country to country. B. Task Environment (Industry) a. Threat of new entry: Low i. Large capital investment to enter the market. -Permits, buildings (real estate), technology, supply chain ii. Established brand recognition, time-consuming, and costly infrastructure. b.

Bargaining power of buyers: High i. Low switching cost of changing from one restaurant to another.

c. Threat of substitute products or services: High 23-6 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? i.

Lack of differentiation among fast food menu options.

d. Bargaining power of suppliers: Low i. Many suppliers provide the raw materials used. ii. Low forward vertical integration. e. Rivalry among competing firms: High i. Many fast food restaurants selling similar products. ii. Competitors: McDonald’s, Subway, Starbucks, Wendy’s. f. Relative power of unions, government, special interest groups, etc.: 2. What key factors in the immediate environment that (customers, competitors, suppliers, creditors, labor unions, government, trade associations, interest groups, local communities, and shareholders) are currently affecting the corporation? Which are current or future threats? Opportunities? Competitors are currently affecting the corporation. This also brings into play the customers because they are the ones being targeted by these different corporations and Sonic has to do whatever it takes to attract them. In the future, I think the government will be a threat as regulations increase and the need and want for healthy and pure food rises. C. Summary of External Factors—(See Exhibit 1) At present time, the most important for Sonic would be to expand by entering into international markets successfully. The industry, in general, is constantly focused on competition and fluctuating prices. In the future, the focus should be shifted to developing healthier menu items and keeping up with new technologies. IV. Internal Environment A. Corporate Structure 1. Centralized management (S) a. HQ in Oklahoma (twenty-five key personnel) b. Franchise model i. 3500 location in North America. B. Company Culture 1. American nostalgic 2. Great/unique customer service (roller blade servicers). 3. Respect for everyone touched by the Sonic Brand. 4. Entrepreneurial spirit and the power of the individual. 5. Importance of relationships as a way of life. 6. Surprising and delighting everyone touched by the brand by doing things differently. 23-7 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? C. Corporate Resources 1. Marketing a. Sonic’s marketing objectives: i. Expand operations to all fifty U.S. states, primarily through franchise development. 1. The goal of 1,000 new drive-ins by 2024. 2. Growth of over 300 drive-ins in California by 2020. 3. Entry into new and emerging international markets within the next decade. ii. The marketing strategy is consistent with Sonic’s “growth” objective b. Sonic’s performance, in terms of market position and marketing mix. i. Iconic drive-in style proved hard to duplicate: distinct brand differentiation. ii. One-of-a-kind menu offered a variety of options not available from other brands. iii. Strong presence in forty-four states nationwide. iv. Provide a full range of franchisee support services. c. Competitors comparison i. National advertising budget in excess of $100 million annually—one of the top five burger or sandwich advertisers in most major markets with memorable and recognizable advertising. ii. Compare to McDonalds and Burger King 1. Primarily reliant on expansion across America. 2. Lack of presence in international markets, especially emerging markets such as India and China—challenges to customize menus if going overseas while maintaining the standard of quality and consistency. 2. Finance a. Sonic’s financial objectives: i. Positive same-store sales in the low to mid-single digits. ii. Net profit margin in the range of 10 percent to 12 percent. iii. Incremental royalty revenue growth from same-store sales improvements, new unit development, and 900 drive-ins converting to a higher royalty rate structure. iv. Drive-in-level margin improvement between 100 to 150 basis points, reflecting an improving outlook for commodity cost inflation, and leverage from company drive-in same-store sales growth. The financial objective of incremental royalty revenue growth from same-store sales improvements is consistent with the drive-in concept, since it differentiates Sonic from the others, and the model continues 23-8 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? to work well in North America due to nostalgia. In addition, the sale growth of low to mid-single digits is appropriate when Sonic focuses on offering customers a fully customizable menu. b. Sonic’s financial performance

*: Data is retrieved from MarketWatch. **: Data is retrieved from Yahoo! Finance. i. The current ratio decreased from 1.33 in 2012 to 1.20 in 2014. 1. Still significant greater than one—strong ability to pay off short-term liabilities from short-term assets. 2. Quick ratio was not much different from current ratio—easy to liquid most of current assets into cash when needed. ii. Both gross profit and net profit margins were improved over the period. 1. Primarily from a reduction in food and packaging expenses and reduced payroll and other employee benefits. iii. Debt to asset ratio was stable throughout three years. 1. Debt was used for the strategic expansion across the country and the implementation of the company’s goal of opening 1,000 more Sonic drive-ins over 10 years. a. The company invested heavily in buildings and improvements, new drive-in equipment, and brand technology development to achieve its long-term expansion goals. 2.Sonic could have the risk of not being able to repay its debt. However, the times interest earned ratio had

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? increased since 2012, and was almost four times in 2014— reduce the risk. c.Peers group comparison

(Data retrieved from S&P Capital IQ. Peers group included BJ’s Restaurants, Inc., Bojangles’, Inc., Chipotle Mexican Grill, Inc., Denny’s Corporation, DineEquity, Inc., Dunkin’ Brands Group, Inc., Fiesta Restaurant Group, Inc., Noodles & Company, Panera Bread Company, and The Wendy’s Company) i. Profitability ratio: Sonic was more profitable than its peers were, except 2012, in which the company was underperformed its peers by more than 100 bsp. ii. Key valuation ratio: Sonic’s average forward PE ratio was 23.7, which was slightly higher than its 23.3 PE TTM, but the company was still traded at discount compared to its peers, whose average forward PE ratio was 26.5. 3.Research and Development a. Sonic’s R&D objective is to create the unique and extensive variety of food and drink choices. i. Invest in a state of the art facility to develop and test new products—open Culinary Innovation Center. ii. The Culinary Innovation Center gave Sonic an edge to satisfy its goals and ensure the quality and novelty of the menu items served at Sonic Drive-In. 4. Operations and Logistics a. Sonic’s operation objectives: i. Create the feeling of familiarity—highly recognizable customer experience. 1. Same logo, store look and feel, food, and service. ii. Distinguish itself from others by iconizing the nostalgic brand, offering menu items reminiscent of the past, and combining them with modern management and customer relation’s methods.

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? iii. Reinforce Sonic’s core values and operations to standardize at each franchise by focusing on employee training and development. 1. $100-200k of franchise’s fees is allocated for employee training. 2. Creation of “A-team”, Sonic’s store-certified training team. 3. Each franchisee and one full-time employee and manager are required to participate in the career development program. 4. Store managers are required to complete a management seminar within six months of hiring at a location. iv. Make the supply chain operations more efficient, consistent, and profitable. 1. Incorporated a centralized data management system with universal codes across all locations to address. a. Increase the ability to forecast and anticipate demand. b. Leverage suppliers more effectively and lower the overhead by standardizing which suppliers to use, and how to negotiate with them. b. As of 2014, 3,500 Sonic Drive-Ins served guests every day, and 1000 more Drive-Ins would be added by 2024. c. The Drive-Ins can only provide service in the areas that have large parking lots—compete for a limited number of locations d. Competitors can locate both inside cities and in the same locations as Sonic Drive-Ins. 5. Human Resource Management A. The HRM is clearly stated in the employee handbook. 1. Sonics HRM Objective: a) Respect for everyone touched by the Sonic Brand. b) Entrepreneurial spirit and the power of the individual. c) Importance of relationships as a way of life. d) Surprising and delighting everyone touched by the brand by doing things differently. 2) Strategies: a) Senior leadership works to establish and uphold its core values, emphasizing top-notch relations with customers and refining processes to best serve them. b) Increasing employee efficiency allowing the company to decrease it’s the number of employees from 12 million to 11 million. 23-11 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? 3)

Performance: a) Management: twenty-five b) Employees: 11 Million (2014) domestically. c) Extensive network of over 3500 stores nationwide allows for fluidity in job transfer. d) High turnover in position allows for new recruits to enter the company and current employees to move to new positions. B. Competitive Advantage from HRM 1. Lots of promotion opportunities have given employees an incentive to work to their best. 6. Information Systems I. 2014 information system strategic focused on improving data collection and data analyses. II. The focus on their information system was to serve the customer the best possible, and the fastest, way possible. III. Improved (POS) point of sales that allows faster transactions. IV. Improvement on the supply-chain-management technology that has reduced inventory costs by accurately predicted demand. D. Summary of Internal Factors—(See Exhibit 2) Core competencies ● Research and development ○ Allow them to create customized foods and created a competitive advantage over their competition. ○ One-of-a-kind menu offered a variety of options not available from other brands. ● Information System ○ Point of sales system that allows fast transaction combined with great customer service. Distinctive competencies ● Marketing ○ Iconic drive-in style proved hard to duplicate—distinct brand differentiation. V. Analysis Strategic Factors A. Situational Analysis—(See Exhibit 3) B. Review of Mission and Objectives: 1. Sonic’s main objective is to grow and expand and that is appropriate for their key strategic factors. But, in order to keep that objective, their mission will have to change. 2. We believe that Sonic should update their current mission. It was brought up that their model was designed to be highly customizable and adaptable to indoor dining and for smaller locations in more developed urban areas. However, they stayed 23-12 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? focused on offering the drive-in experience in order to differentiate themselves. In order for Sonic to grow and expand not only in the urban areas of the United States but internationally, they are going to have to shift to indoor dining. They can keep the retro feel and experience of dining in a way that makes you feel like you went back in time, but indoor because it will appeal more to city people and internationals. 3. The effect on the firm would be that they would have to invest in larger infrastructures for dining-in and making sure that they have enough staff to handle indoor eating. VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. The objective of growth by franchising the drive-in concept can be challenged when Sonic enters new areas, where the drive-in concept is not applicable. 2. There are two alternative strategies. a. Offer healthier options on their menu in order to keep up with their competitors and appeal to a broader market. i. Pro: 1. Leverage the Culinary Innovation Center. 2. Attract new customers, who want healthy food. ii. Con: 1. Do not have competitive advantages in this new market. 2. Require higher standard of raw materials, such as organic products, which could raise the cost. b. Expand into indoor dining and leverage the fully customizable menu, allowing customers more control over their orders. i. Pro: 1. Enter urban areas, where the drive-in concept is difficult to be applied. 2. Bring the indoor dining model overseas, where people are not familiar with the drive-in concept. ii. Con: 1. Lose the competitive advantages and areas of differentiation as drive-in place. 2. Have more competition with other fast-food restaurants. B. Recommended Strategy 1. Expand into indoor dining and leverage the fully customizable menu. a. Sonic should add a new indoor dining business level. b. The new functional level also has to be included, but it will not be too different from the drive-in business. 2. This strategy can solve the problem of expanding into urban areas and international markets, where space is a limitation and maintain the growth objective. 3. No new policies need to be developed. 23-13 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? 4. The iconic marketing style can be negatively affected since customers are familiar with Sonic as drive-ins. However, the indoor dining business can have a different name, such as “Indoor Sonic.” VII. Implementation A. New marketing programs should be developed for the indoor dining business. The New business should take advantages, such as convenience and takeaway, of the drive-in concept, and apply them into the indoor dining. For instance, Sonic can establish an indoor dining place close to the parking lot of a mall. Customers can order through phone or mobile app, and then they decide to either eat indoor or have their order delivered to their vehicles, while they are still in the parking lot. Clifford Hudson, the CEO, and Todd Smith, the President and CMO, should be the highest people to develop and be in charge of these programs. Although much other personnel will have to work on the actual process, the involvement of Clifford and Todd will enhance the commitment of Sonic to the new business. B. The program is financially feasible since the cost of establishing an indoor dining place will not be much different from the cost of driveins. Sonic has prepared to expand into all fifty states already, so the new indoor dining business is appropriate for urban areas, like Boston, MA. C. No new standard operating procedures need to be developed. The general competitive advantages of Sonic, in term of services and food quality, will not change. However, some operating procedures would need to be modified in order to apply to indoor dining. VIII. Evaluation and Control A. Indoor dining business in urban areas would need more frequent supplies at smaller amount due to smaller space. However, the improvement on supply-chain-management technology at Sonic will be able to accurately predict the demand. In addition, the information system strategic focusing on improving data collection and data analyses would help Sonic understand customers better, which ultimately enhances Sonic’s customer satisfaction. Besides, Sonic would need to develop a mobile app, which customers can make their order through. The development would not be too complicated since there are similar apps on market already. In addition, the app is a great way for Sonic to collect data from customers to analyze.

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? B. As mentioned above, no new standards or controls need to be developed. However, Sonic will need to modify some of them to be more appropriate to indoor dining. Every manager and employee in the new business should be responsible for taking corrective action. In addition, the specific level of actions should depend on the hierarchy of the corporation. Exhibit 1—External Factors Analysis Summary (EFAS) External Strategic Factors

Weight

Rating

Weighted Comments Score

Enter New Emerging Markets

0.15

1

0.15

New Technology for Supply Chain management

0.03

5

0.15

Stability in Major Markets

0.07

5

0.35

Developing Menu Items

0.1

3

0.3

0.15

2

0.3

Competition

0.15

5

0.75

Price Fluctuations

0.05

4

0.2

Increase in Government Regulations

0.1

3

0.3

0.15

3

0.45

Could danger their food offerings and cost of food.

0.05

4

0.2

They will turn to

Opportunities:

Develop New Models

Only have presence in the US market while competition is abroad. Will help with data collection and analysis. Keeping a strong footprint in the US will keep Sonic dominant. People are looking for healthier options. Indoor dining to target urban areas and abroad.

Threats:

People Looking for Healthier Food

Many more stores and international presence. Suppliers often raise prices.

23-15 ©2024 Pearson Education, Ltd.


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? Low Entry Barriers

other places. It is not very expensive to start building store by store.

Total Scores

1.00

3.15

Exhibit 2—Internal Factors Analysis Summary (IFAS) Internal Strategic Factors

Weight

Rating

Weighted Score

0.15

5

.45

0.1

3

.3

.15

3

.45

0.05

4

.2

.15

5

.45

.15

5

.75

.10

4

.4

.10

2

.2

.05

1

.05

Comments

Strengths: Brand—Drive-in Dining Information System Research and Development Franchise Model for Expansion Customer Service Weakness Restricted to Suburbs Areas Improper Representation of the Brand Lack of International Presence Drive in Model

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CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? Total Scores

1.00

3.25

Exhibit 3 Strategic Factors Analysis Summary (IFAS Key Strategic Factors

Weighted Rating

Weighted Scored

Short

Medium

People looking for healthier food

.2

4

.8

X

X

.3

5

1.5

X

X

2

.2

X

X

X

x

.2

3

.6

.2

3

.6

Improper representa .1 tion of the brand BrandDrive-in Dining

x

Competitio n Enter new emerging markets Total Score

1

3.7

Exhibit 4: Financial Rations Financial Ratios 2014 Current Ratio

1.2

2013

2012

1.93

1.33

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Long

X

x

Comments


CASE 23 Sonic Restaurants: Does its Drive-In Business Model Limit Future Growth Potential? Quick Ratio

1.16

1.88

1.29

Cash Ratio

0.62

1.23

0.78

Gross Margin TTM

38.10%

36.70%

36.10%

Net Margin TTM

8.70%

6.80%

6.60%

Return on Total Capital

9.20%

7.80%

6.50%

Return on Equity

75.40%

70.00%

70.80%

EPS

0.85

0.64

0.61

Inventory Turnover

164.9

147.5

165.3

Receivables Turnover

15.9

14.7

20.1

Asset Turnover

0.85

0.82

0.8

Total Debt/Total Capital

88.10%

86.00%

89.70%

Total Debt/Total Equity

740.40% 612.10% 866.60%

Times Interest Earned

3.9

2.9

2.8

Payout Rate

0.0%

0.0%

0.0%

P/E TTM

25.13

22.17

15.36

Dividend Yield

0.0%

0.0%

0.0%

23-18 ©2024 Pearson Education, Ltd.


Case 24 - Restaurant Brands International - Teaching Note Background In 2010, 3G Capital merged Burger King and Tim Hortons to create Restaurant Brands International (RBI). In 2014, RBI acquired Popeyes Louisiana Kitchen. Although RBI's three restaurant chains had strong brand name recognition with extensive franchise networks, none were market leaders in the red ocean of quick service restaurants (QSR). Burger King lagged behind McDonald's in the burger segment; Tim Hortons came fourth in the coffee and snack segment; and Popeyes ranked third in the chicken segment. RBI was focused on expanding its international reach, developing efficient franchise partnerships and producing cost efficiencies among its subsidiaries. But in developed economies, the mature QSR market was threatened by saturation, the trend toward healthier foods and lower unemployment rates. Further, in developing economies, such as China and India, RBI was threatened by lax regulations protecting its franchises and brand names, as well as offerings centered on North American tastes. Finally, RBI was saddled with high long-term debt. Among so many uncertainties, how could RBI grow its market position? I.

Current Situation A. Performance History - Born from a merger between Burger King and Tim Hortons Inc in 2018 - The coffee and donut chain was founded by NHL legend Tim Horton in 1964 in Hamilton, Ontario - Burger King was founded in 1954 in Miami. The company’s ownership history was long and complicated: it was acquired by Pillsbury in 1967, then became a subsidiary of Guinness in 1997. - Popeyes was founded in 1972 in New Orleans, Louisiana and began franchising in 1976 - While Restaurant Brands International had only been around three years by 2017, its three independent subsidiaries each has its own 40-year history Economic Performance Asia - the fast food industry grew 9% in 2015, higher than the 6.9% growth of Chinese GDP - Analysts predicted strong potential for brand-identifiable fast food expansion in China - Asian countries experience annualized GDP growth of 4.7% through 2022, greater than the 3.9% rate since 2011, a strong contrast to the 5-year forecasts for the U.S. (1.9%), EU (1.7%), and Japan (0.4%), through 2022 Internationally - RBI was also exposed to currency fluctuations, and it benefited from currency swaps between the U.S. dollar, Canadian dollar, and the Euro Rankings and Accolades - RBI is the world’s third largest QSR brand


B. Strategic Posture 1) The corporations current mission is not clearly defined but their objective is to become one of the world's premier global brand. This is both stated and implied from their performance. 2) Mission - While RBI had no clearly defined mission statement at the time of the initial merger between Burger King and Tim Hortons in 2014, its CEO Daniel Schwartz stated that the company aimed to “create the world's leading global restaurant business through a strong commitment to our franchisees and a consistent focus on serving guests around the world.” - Burger King pledged to “offer reasonably priced quality food, served quickly, in attractive, clean surroundings;” - Tim Hortons to “deliver superior quality products and services for our guests and communities through leadership, innovation and partnerships;” - Popeyes “to be the world’s best quick service restaurant experience.” 3) Objectives - Restaurant Brand International’s main objectives are: a) to expand its international reach, b) develop efficient franchise partnerships, c) produce cost efficiencies among its subsidiaries. d) continue competing in the red-ocean of fast food in developed countries. e) expand its three brands in the more untapped developing world 4) Strategies a) Ability to leverage its large franchise networks to benefit from economies of scale b) A large franchise network allowed the company to expand into new territories while minimizing its financial risk c) RBI could expand faster than if it had to bankroll all of its expansion on its own. d) A core competency of 3G Capital was its skill at consolidation and cost cutting e) RBI received tax benefits from locating its headquarters outside the US, in Canada. f) Loyal following with brand name value. 5) Policies a) Minimum wage laws different in the US and Canada. These regulations had to be upheld b) And since brand recognition was an important part of RBI, franchising and intellectual property rights were also a major concern c) In USA, food safety was regulated by the FDA and following these specified requirements for sanitation and food handling was an important regulation. 6) Yes the current mission, objectives, strategies, and policies show that RBI is doing their best to expand their operations globally. They are continuing to do so as they begin to expand in the Asian market. II. Corporate Governance A. Board of Directors


1) 12 members. 5 internal. 7 external 2) 3.84% of all shares is owned by insiders (includes management). A $1,000,000 grant of stock options is awarded to all board members upon appointment. 3) Publicly traded. Common and preferred stocks. 4) Most of the BoD of RBI have extensive international experience with corporations such as McDonald’s and Nestle. Most of them come from RBI’s subsidiaries where they had leadership positions before the merger. 5) Almost all since Dec 2014, except two that joined in 2016. 6) Considering that some of the board members come from 3G Capital and Berkshire Hathaway, primary owners of RBI, they are very influential in strategic management. B. Top Management 1) CEO, CFO, CTDO, CCO, General Counsel, Presidents of Burger King, Tim Hortons and Popeyes. 2) Common skills and knowledge include knowledge of strategy and business development, consumer insights, finance, succession planning, risk assessment, mergers and acquisitions. 3) The CEO, CFO, and CCA come from an equity investment background which coincides with RBI’s effective acquisition of all three subsidiaries, making them responsible for company’s performance. Most of managers come either from 3G Capital or from acquired companies. Almost all managers have been with the company for more than 3 years, except CCO Duncan Stanley Allpress Fulton, who joined the company in July 2018. 4) Top management has been following RBI’s greatest strength of leveraging its large franchise network to strategically fulfill one of its main objectives of expanding its international reach. 5) Top management is very involved in strategic management process by carefully coordinating efforts of all three subsidiaries to gain market share in each of the separate markets. 6) RBI’s different levels of management work very well with each other. 7) There has been no reason to believe the opposite. Despite some inherited issues with PETA, RBI has been active in solving ethical issues in a proactive manner. 8) RBI offers stock options as a multiple of base salary. For the CEO 5x base salary, and for other officer 3x base salary, which has to be accumulated in a 5 year period. 9) Top managers have very diverse background that puts them in a good position to recognize and respond to future challenges. An example of this is the new role of Chief Technology and Development Officer and held by the former CFO Josh Kobza. III. External Environment: Opportunities and Threats (SWOT) A. Societal Environment 1. Economy Industry growth Globally (O) i. GDP growth in China (O) ii. Forecasted GDP growth in all countries in the Asian region (O) iii. Burger King dominated fast food industry in the US (O) iv. In developed economies such as North America and Europe there was market saturation, lower unemployment rates, and competition (T) v. Low Unemployment rates in the US and Canada (4.5% and 6.7% in March 2017) (T) vi. Procurement risk in different locales from fluctuating meat prices (T) vii. Currency fluctuations (O/T)


2. Technology a. Technological advancement always provided opportunities for competitors to optimize operations and foster new forms of competition (T) i. development of self-serve kiosks and mobile apps allowed customization of meals, and required less manpower behind the service counter (T) ii. technological advancements cut costs while maintaining service levels (T) 3. Political - Legal a. The political and legal part centered on complex legislation: laws governing minimum wage, intellectual property, franchising, and food safety. (T) 4. Socio-Cultural a. Shift towards healthy eating in the early 2000s entrenched in American culture(T) i. Growth of alternative “healthy” fast food chains such as Subway and Chipotle, as well as “healthier” fast-casual food chains Five Guys, Shake Shack, and Panera. (T) ii. Food delivery services such as Blue Apron allowed ingredient-conscious consumers to customize their meals and retain convenience. (T) iii. McDonald’s introduced a healthy choices menu and Burger King to revise some of the ingredients in its signature Whopper to source more natural meat and cheese. (T) iv. Perception of U.S. fast food chains as the source of the American obesity epidemic posed a threat to RBI’s international expansion. (T) b. Fast Food industry Globally (O/T) i. 85% of the fast food industry in China was independently owned. (O/T) ii. Burger King’s Whoppers in India were only made with veggie, chicken, or mutton (sheep) patties, condoning beef consumption elsewhere and Burger King’s association with the allAmerican beef burger threatened RBI’s ability to expand in India, a nation over 30% vegetarian. (T) iii. Yum! Brands’ non-beef focused KFC, Pizza Hut, and Taco Bell chains were better positioned than Burger King to expand in India. (T) iv. RBI’s offerings were centered on the U.S. and Canada tastes, undercutting its possibilities for broad acceptance in emerging economies. (T) v. The younger, less wealthy populations of many developing countries (mostly in sub-Saharan Africa), were seen as greater consumers of fast food when they ate out than the aging, nutrition-conscious populations of the developed world. (O) B. Task Environment 1. Threat of new entrants: High a. Varies from country to country but there are many opportunities for fast food restaurants to enter the market globally as well as within the US i. China is a large market to penetrate with 85% of the industry independently owned ii. RBI captured more than 15% of Russia’s fast food market and 14% of Germany’s iii. Share of the U.S. market was only 5.3%, held back by strong competition 2. Bargaining power of buyers: High a. Sales breakdown i. 92% of Bruker King’s revenues came from franchise and property revenues ii. Tim Hortons provided 72% revenues for RBI b. High influenced by customer preferences and trends i. Healthy trend c. Consumers have the opportunity to pick and choose from lower cost substitute or even go to other chain restaurants whenever they please 3. Threat of substitute products or services: High


a. Because of the new eating healthy trend, many alternative fast food services achieved success in the industry b. Differentiation in the product i. “Healthy” fast food chains such as Chipotle, Panera, and Shake Shack allowed consumers to customize their meals ii. McDonald’s introduced a healthy choices menu c. High competition between the companies 4. Bargaining power of suppliers: Low a. Tim Hortons tried to partner with Cold Stone Creamery and Wendy’s to increase the number of its locations around the world i. Later it ended these partnerships as the company was not benefiting from the partnership b. RBI should have relied on different meat suppliers because of the fluctuating meat prices 5. Rivalry among competing firms: High a. Biggest competitors are, Yum! Brands, McDonald's, and Starbucks. i. McDonald's is the largest QSR in the world. ii. In 2017 McDonald’s had 36,900 locations worldwide and was the market leader iii. number two in the coffee and snack segment. iv. It had a reputation as one of the most innovative companies in the QSR industry, for instance varying its hamburger menu by offering salads and breakfast all day. v. Yum! Brands, the umbrella for KFC, Pizza Hut, and Taco Bell, was the largest QSR in the world in terms of number of locations with 43,500 vi. Starbucks had 24,464 locations coming in fourth behind third largest QSR RBI 6. Power of other stakeholders: Low a. Not much at play between other stakeholders in the fast food industry IV. Internal Environment: Strengths and Weaknesses (SWOT) A. Corporate Structure 1. RBI’s current operations follow a decentralized corporate structure: a. It is decentralized - each franchise operates independently, and RBI leverages each brands’ core values and employee and franchise networks. b. Organized based on 1) functions and 2) geography. For instance, Burger King’s beef-based offerings and functions are more suitable for the U.S. and Canada rather than India. 2. Structure is clearly understood by subsidiary – each brand independently focuses on providing quality and experience to customers based on their respective segments. Also, each brands’ independent strengths are used to help solidify their market positions. 3. No, the present structure is not consistent with RBI’s current objectives and strategies for international operations. First, RBI’s objective is to expand its international reach and solidify its three brands as dominant players in the developing world. However, through a decentralized structure, the brands operate independently, which creates individual challenges, including: a. Burger King’s association with all-American beef threatens its Indian expansion b. Tim Hortons’ expansion beyond tier 1 cities in China and India requires a significant operational adjustment to the U.S. model c. Tim Hortons’ inability to establish a worldwide brand that reaches outside of Canada d. Procurement risks that exist in different locales for Popeyes chicken prices


4. RBI’s decentralized structure compares poorly with those of similar corporations. For instance, “Yum! Brands’ non-beef focused KFC, Pizza Hut, and Taco Bell chains were better positioned than Burger King to expand in India,”. Also, Yum! Brands had the largest QSR in the world regarding locations at 43,500, which was almost double the size of RBI. B. Corporate Culture 1. No, rather than establishing well-defined corporate beliefs or values, RBI leverages each brands’ respective core values, employee networks and community reputations as means to create a corporate culture. Also, RBI did not establish a mission statement at the time of the initial merger, as it relied on Burger King and Tim Hortons to define their own organizational expectations and values through such a statement. 2. No, RBI’s main objective is to expand internationally and solidify its three brands in developing countries. Although all three brands state that they value and provide consistent quality and experience to customers, RBI has neither designed nor created an overarching, well-defined corporate culture to further support these expectations or values. 3. As mentioned, RBI did not create a centralized, well-defined corporate culture for its three brands. However, each brand -- which operates independently -- has a similar cultural position on important issues, including: a. Quality of performance - all three brands (e.g. Burger King, Popeyes and Tim Hortons) stress the importance of delivering consistent experiences and superior products to consumers regardless of their ever-changing tastes b. Adaptability to changing conditions - all three brands have cultures that focus on offering superior products; the brands demonstrate this by beginning to invest in healthier foods to satisfy legislative requirements and consumers’ health-conscious needs c. Internationalization - Each subsidiary expects that franchisees comply with local laws and customs of other countries, while remaining true to their respective brands 4. It can be argued that the brands’ cultures are compatible with the employees’ diversity of backgrounds. Each brands’ franchisees are to comply with local laws and the customs of countries. However, RBI’s brands are also U.S.-based and their corporate cultures are built on western beliefs, expectations and values. Therefore, it is also possible that the brands’ cultures are not compatible with the employees’ diversity of backgrounds. 5. In contrast to the previous response, RBI’s brands do not effectively consider the values of each nation’s culture in which they operate. Examples include: a. Burger King providing chicken or veggie patties in India to satisfy Hindu beliefs, but still promoting its focus on beef elsewhere b. RBI’s portfolio not including Chinese menu options for China, which indicates its brands’ inability to meet cultural values regarding food c. “India was becoming the world’s largest consumer market…[and]...required significant cultural adjustment [from Burger King]”. C. Corporate Resources 1. Marketing


a. RBI’s marketing objective is to build international brand awareness and presence for its three brands (i.e. Burger King, Popeyes and Tim Hortons). In the RBI merger-era, current marketing strategies include 1) forming strategic alliances and 2) launching adverts that focus on the three brands’ food offerings (including promotion of their healthier products). i. The marketing objective is implied as it is based on RBI’s desire to establish its brands as dominant, international players. Tim Hortons created a strategic alliance with outside companies such as Wendy’s to increase its global locations (Gold & Hoffman, 2017). Regarding RBI itself, its 2016 income statement shows that it spent USD $106,000 in Sales, General and Administrative expenses, which may indicate an increase in international-based marketing expenditures throughout the year. ii. No, as mentioned RBI’s objective is to establish its three brands as dominant, international players. However, the corporation’s, “Portfolio does not include any brand serving Chinese food, potentially hampering its ability to compete in China,” (Gold & Hoffman, 2017). Thus, this indicates that RBI is unaware of its external environment, as its brands continue to market to and target international non-buyers such as those in China. Also, RBI’s brands face strategic alliance failures (e.g. Tim Hortons and Wendy’s) when attempting to drive global brand awareness. b. RBI is performing poorly in terms of analysis of market position and marketing mix. An overview of this lackluster performance includes: - Poor understanding of international consumers (e.g. not providing local menu items for Chinese tastes) - Fairly poor analysis of domestic needs (e.g. Burger King uses more natural beef and cheese on its Whopper to satisfy healthy trend, but RBI’s brands remain unhealthy) - Continuing to offer mature products in a mature QSR industry (i.e. “red ocean,” commodity and brand parity issues) - Subsidiaries’ inability to secure market leadership in their respective segments - Unsuccessful marketing efforts based on actual food offerings and strategic alliances - Failure to create broad acceptance for its brands in emerging markets (e.g. India) i. Trends that emerge from this analysis include: - Using technology to drive product differentiation and labor savings (e.g. simplifying the order process through RBI’s in-store kiosks and mobile app ordering) - Emphasizing the importance of franchise networks and their ability to drive international brand awareness and sales - Expanding on “healthier” menu choices to compete with existing competitors, fast food substitutes and new market entrants ii. These trends have impacted past performance and will likely affect future operations in the following ways: - Technology and automation - Technical processes have streamlined labor scheduling and matched labor-based costs to demands. In the future, the trend will allow RBI to cut costs, use less manpower and offer self-customization of meals. - Greater focus on franchise networks - Franchise partnerships have cut costs among RBI’s three subsidiaries and created economies of scale. A greater focus on franchise networks will allow RBI to 1) expand faster into international territories, 2) drive brand awareness and 3) minimize its financial risk due to franchisees’ own investments.


- Health-conscious consumers - Buyers perceive RBI’s brands (e.g. Burger King) as unhealthy and choose “healthier” fast-casual alternatives. The trend will greatly affect future operations, as consumers are continuing to choose healthier substitutes over the commoditized fast food industry and its new health-based offerings. iii. RBI’s analysis showcases its inability to understand its brands’ market positions and marketing mixes. That said, RBI’s lackluster analysis did not support past strategic decisions, as indicated by its brands’ respective market shares. However, RBI can use this analysis to adjust or reinvigorate its pending strategic decisions, such as considering how its brands can enhance their marketing research practices to better understand international markets, and consequently, boost global sales. iv. No, based on past performance, RBI’s brands were unable to differentiate themselves from competitors. Essentially, marketing no longer provides a competitive advantage for RBI, as its brands compete in the QSR industry and are perceived to be the same due to their similar products and similar prices. As mentioned in the case, RBI’s brands compete in a “red ocean,” which provides little-to-no room for potential differentiation and growth. c. RBI’s marketing performance poorly compares with that of similar corporations. Examples of this lackluster performance include: - Burger King attempting to beat out the market leader (McDonald’s) through sales promotions and price wars - Burger King failing to compete against McDonald’s based on product; McDonald’s continues to innovate by introducing new menu choices (e.g. breakfast all-day and salads) - Current market share Tim Hortons is fourth behind Starbucks, McDonald’s and Dunkin Donuts Burger King is second behind McDonald’s - Popeyes is number three behind KFC and Chick-Fil-A - Tim Hortons’ inability to establish a worldwide brand outside of Canada - Burger King falling behind Yum! Brands’ ability to cater to Indian consumers d. No, RBI’s brands fail to use marketing concepts and techniques to improve product performance. For instance, none of RBI’s brands have conducted market research to understand how menu items can be adjusted to Chinese tastes and preferences. Also, RBI’s brands fail to consider the product life cycle. As an example, Burger King fails to innovate its menu, while McDonald’s introduces new offerings to 1) reinvigorate its brand in a mature QSR industry and 2) cater to current consumer trends, such as offering salads for the health-conscious segment. e. No, marketing does not adjust to the conditions of each country. As noted, RBI does not offer products that cater to Chinese tastes. Thus, RBI’s three subsidiaries are unable to drive brand awareness in the country. Also, Burger King is positioned poorly in the minds of Indian consumers, and it is not adjusting its marketing strategies, including those in products and promotions, to mitigate those unfavorable perceptions. f. The strategic management process is comprised of four steps including environmental scanning, strategy formulation, strategy implementation and evaluation. That said, a marketing manager’s role in the process consists of:


- Environmental scanning - Conducting a SWOT analysis to understand the external and internal elements that impact RBI and its brands - Strategy formulation - Defining the competitive advantages of RBI’s brands and highlighting their current weaknesses, which allows RBI to gain a clearer picture of how it can realistically grow - Strategy implementation - Stating what type of budgets or resources are needed to implement marketing programs that meet corporate objectives and that reach different consumer segments - Evaluation and control - Understanding how well marketing campaigns performed and how they can be adjusted to meet corporate objectives or goals 2. Finance a.Restaurant Brands International Inc has been focus is primarily in paying off long term debt which was at 44% in 2016, increase revenues from operations from BK primarily through international expansion, and decrease vulnerability and consolidate ownership through purchase of preferred stock. b. i. The company is working well in decreasing debt and improving net profit margins. We see improvement in almost all key ratios. This improvement has seen RBI key financial ratios go from below industry average to above. The company lacks behind in inventory turnover which could be a future investment in inventory strategy. ii. RBI’s 2016 annual report warns of vulnerability of having to report statements in different currencies in different countries and acknowledges that besides their attempts to minimize risks, they are vulnerable to interest rates fluctuations. iii. One development with future repercussions that is worth mentioning is RBI’s decision to redeem all preferred stocks. RBI may have done this to consolidate ownership, counter undervaluation, or boost its key financial ratios. iv. Yes, for the most part. RBI’s objective to decrease debt has proved successful to a certain extend. International reach has expanded, increasing total assets in the form of franchise expansion and brand. v. Experts from 3G Capital and Berkshire Hathaway have been able to consolidate all three brands in prosperous businesses, improving most of their ratios. A definite answer to this question would depend on many factors, but one would believe that RBI uses its financial expertise very well in improving efficiency and risk management. c. Ratio

RBI.

Industry Average

What it means?

Net profit Margin

15%

12.85%

RBI has been able to increase its net profit ratio from 9% in 2015 which is below the industry average to 15% in 2016 which is well above the industry average.


P/E ratio

31.94

28.74

The P/E ratio took a hit in 2016 in comparison to 2015 but is still above the industry average. This was mainly caused by decreased anticipation of investors for future growth.

Current Ratio

1.72

1.41

The current ratio improved in 2016 compared to 2015 when it was below the industry average. This was mainly because of RBI’s efforts to pay off their debt.

Debt to Equity Ratio

10.23

7.8

This continues to be the area of most concern for RBI. Although they did decrease it from 2015 when RBI had a $8.9billion debt, it still remains a problem.

Total Assets

19,124, 900

13,483.91m

Total Assets remain high, partly because of successful franchise expansion.

Total Liabilities

17,422, 400

12,915.75m

Large debts continue to challenge top management.

Return on Equity

36%

26.98%

Return on equity improved in 2016 and continues to be higher than the industry average.

Inventory Turnover

57.74

33.02

This huge difference could suggest that RBI has to invest in a more efficient inventory strategy.

d. RBI was deemed by many to be overleveraged. This was mainly because of their high loans and income from operations. RBI used this leverage to purchase Popeye’s in 2017 and then buy back its 68,530,939 Class A 9.0% cumulative compounding perpetual voting preferred shares later that year. e. Yes. Finance has to adjust to a number of factors that are specific to each country such as different reporting regulations, currency exchange ratios, tax rates etc. f. The financial manager oversees the financial sustainability of the corporation, advises the board on financial issues that concern sustainability, investment, financial vulnerability etc.

2016

2015


1.

Liquidity Ratios

Current Ratio

1.72

1.22

Quick (Acid Test) Ratio

1.67

1.15

Inventory to Net Working Capital

0.08

0.33

Cash Ratio

1.21

0.68

Net profit margin

15%

9%

Gross profit margin

25%

43%

Return on investment (ROI)

3%

2%

Return on Equity (ROE)

36%

28%

Earnings per Share

1.48

0.51

Inventory Turnover

57.74

49.82

Days of Inventory

12.01

12.78

Net Working Capital Turnover

4.68

16.30

Asset Turnover

0.22

0.22

Fixed Asset Turnover

2.02

1.88

Average Collection Period

39.15

35.53

2.

3.

Profitability Ratios (%)

Activity Ratios


Accounts Receivable Turnover

N/A

N/A

Accounts Payable Period

19.82

11.31

Days of Cash

128.57

68.29

Debt to Asset Ratio

91%

93%

Debt to Equity Ratio

10.23

12.77

Long-term Debt to Capital Ratio

4.94

6.33

Times Interest Earned

3.74

2.34

Coverage of Fixed Charges

2.85

1.95

Current Liabilities to Equity

0.71

0.84

Price/Earnings Ratio

31.94

71.58

Dividend Payout Ratio

88%

32%

Dividend Yield on Common Stock

1.43%

1.39%

4.

5.

Leverage Ratios

Other Ratios

3. Research and Development a) RBI does not have any R&D objectives i. The External environment in the Asian markets has forced RBI to change some of their menu items. However, the change is limited and not fully developed. ii. The use of technology, in monitoring performance or growth, has been minimal. iii. Absence of R&D provides RBI with a lack of competitive advantage b) The corporation has not invested in R&D c) RBI is not competent in the benefits of technology d) Operational costs per restaurant are rising with rising unemployment rates. Lack of technological forces to combat this are negatively affecting RBI’s competitive advantage


e) RBI’s investment in R&D is extremely poor when compared to its competition. f) Adjusting to geographical conditions is done at a very minimal level currently. g) The R&D manager should comprise and develop a program to streamline processes at the restaurant while simultaneously cut costs. 4. Operations and Logistics a) The corporation’s current operational strategy is different for each of its 3 brands. i. Burger King required a high number of unskilled workers to man the POS systems, make the burgers and keep the restaurants clean. Whereas the coffee at Tim Hortons was made by machines so the need for too many employees wasn’t high. ii. While they are consistent with the brand’s mission, operational costs were high because of the complexity of the fast food industry. iii. Each new franchisee has to undergo specific training and lack of technology invested within their restaurants called for high operational costs. b) Operations were different for each of the three subsidiaries of RBI. i. Burger King had 15,738 locations across 100 countries and was set up into three international “master-franchises” in order to ease operations. ii. Since 82.4% of Tim Hortons were located in Canada, they only needed 1 global headquarters which made operations easier. iii. Both restaurants accessed a similar model to source inventory. Restaurant Services Inc., served Burger King while Tim Hortons had its own headquarters where the coffee was roasted and the donuts were manufactured. c) i. Since over 80% of Tim Hortons restaurants are located in Canada, any geographical threats, political threats, environmental threats or natural disasters would pose as a major matter of concern for RBI. ii. Burger King faced many issues when FDA tried to promote a healthy lifestyle and RBI would not like the same for other geographical regions. d) RBI’s brands have lacked the capability to adapt to newer technology. Thus making staffing at brands like Burger King and Popeyes a big expense. e) Logistically and Operationally, RBI performs poorly in comparison with its competition. i. Since each brand of RBI is not the industry leader makes matters worse for them. ii. Since the taste of a whopper has to be precise regardless of location, sourcing and shipping can cause a significant concern for Burger King. Additionally, Burger King has not been doing well in the Asian markets which are dominated by their competitors. iii. RBI has tried to keep the taste and quality of their menu items consistent throughout all locations. This was done in order to gain a competitive advantage and was part of their strategy. iv. No. The current operational strategy does not support them in gaining a competitive advantage. f) The supply chain of sourcing ingredients for menu items is different for each of RBI’s brands. There are no performance indicators and to evaluate whether their methods are efficient. g) Yes. The operational and logistics team has to adjust to each geographical location they are present in. h) The operations manager should streamline bottlenecks and increase efficiency to cut costs.


5. Human Resource Management a) HR not discussed in-depth and directly by case. But some objectives should be: i. Hire right people for growth in international markets. ii. Trim the fat in corporate headquarters (for ex., marketing) of each of the three brands and consolidate more efficient processes. b) RBI’s brands are franchised out and individuals hired are wary from location to location i. Due to lack of items sold by Tim Horton’s, it employees less people than Burger King. ii. These trends showcase a negative impact on the company’s performance. Inability to change these will likely result in poor performance going forward. iii. No. To gain a competitive advantage, RBI must act on these trends. iv. No. The current HRM strategy does not provide RBI with any competitive advantage. v. No. The company’s employees do not provide a competitive advantage to RBI. c) In order to fulfill the cost efficiency goal, RBI should consider investing in automated technology to reduce labor costs at each of its brand restaurants. d) The case does not talk about evaluation and improvement techniques used by the HRM team at RBI. e) The company is not promoting diversity within the organization. f) Yes. The HRM adjusts to each country’s conditions. However, each brand functions by themselves. This does not provide a lot of opportunity to most employees. g) The HRM manager needs to harness higher capabilities of his/her employees. The HRM manager also needs to coordinate with the operations and technology teams to look for ways to cut labor costs at restaurants. 6. Information Systems a) RBI does not have an IS strategy. i. The QSR industry wasn’t a technology-dependent industry. However, competition within the industry has trends to cut operating costs using technology. b) RBI’s IS is performing very poorly. i. RBI, specifically Burger King, has failed to adapt to newer technology like kiosks, which can help reduce labor costs. ii. A late bloomer to technology in the kitchen, Burger King also relies on peoples, who add overhead costs, to work on burgers while McDonalds uses an automated assembly line with minimal human intervention.

D. Summary of Internal Factors See IFAS table in exhibits

V. Analysis of Strategic Factors (SWOT) A.Situational Analysis See exhibits for SAFS B.Review of Mission and Objectives RBI does not need to change their mission. Each arm has a specific mission that are aligned with the overall objectives of the companies

VI. Strategic Alternatives and Recommended Strategies


A. Strategic Alternatives 1. Current objectives are good for the company i. Reinforce and expand localization of menus in other countries to differentiate ii. Cut costs to improve cost leadership 2. Alternatives strategies i. Cost Leadership - Technology and Automation Pros a. Reduce costs b. Higher margins c. Reduce lead times Cons a. Cost of technology b. Resistance to change from franchisees worldwide c. Loss of brand image since people will not be making your burger ii.

Growth - Acquire an Asian-based franchise Pros a. b. c. Cons a. b. c.

iii.

Increase market share in Asia Cultural insights Brand awareness Need to take another loan, company has already heavily leveraged debt Increases operational complexity Dealing with cultural differences

Differentiation - Reinforce and expand localization of menus in other countries to differentiate Pros a. b. c. Cons a. b. c.

Drive consumer sales Improve brand image Capture different market segments Sourcing challenges to find local suppliers Increase costs Consumer behaviour risks

B. Recommended Strategy 1. i. Corporate - Acquire an Asian-based franchise (Restaurant Brands International, Inc.) ii. Business - Decrease costs by using automation technology (Burger King and Popeye’s) iii. Functional - Localize menu items in international markets such as India and China (Burger King) 2. Reinforce and expand localization of menus in other countries to differentiate a. Short-term i. They can cut down on costs and differentiate themselves by improving menu items and serving vegetarian b. Long-term


i. Market penetration. This strategy will expand local customer base. 3. Policies a. Revise policies that deal with global standardization of menus 4. Impact a. This standardization strategy impacts core competencies by changing their mission on quality

VII. Implementation A. Infiltrate global expansion projects of different brands by sharing analysis and data of menu localization within RBI 1. CCO of RBI should be the project leader 2. CMOs and CIOs of all three brands B. There are no significant costs associated with the implementation of this program. C. This program requires some centralization which will affect operating procedures.

VIII. Evaluation and Control A. This program would require some centralization of feedback mechanisms which is not currently implemented because all three brands operate as independent entities. 1. Yes, it can be pinpointed by area and unit because localization of menus is geographically dependent. 2. Yes. Information has to be timely for operational efficiency. B. Control measures are not in place because the recommended strategy is not implemented yet. 1. Not at the moment. New standards would have to be developed. 2. RBI has put in place thorough rewarding system for top management. 3. CCO reports to the CEO who takes corrective action. C. Summary of External Factors 1. The most important external factor to consider for the industry in its present time is the bargaining power of the consumer as well as the rivalry among competing firms. a. RBI knows that the consumer has the option to change their eating habits and preferences based on the social norms or environment. b. They must always be working with their menus to produce options that are “out of the box” to compete with their rivals EFAS External Factors

Weight

Rating

Weighted Score

Comment

Bargaining Power of Consumers

0.20

4

.6

Consumers have the opportunity to pick and choose from lower cost substitute or even go to other chain restaurants whenever they please and this means that RBI has to constantly be satisfying consumer needs


Cultural shift of consumers to healthy eating

0.20

4

.6

Currently the cultural shift in healthy eating is a tremendous external factors in RBIs goal to expand globally, since more people are less inclined to eat fast food, this hampers their opportunity.

Growth of global fast food industry

0.25

4

.4

The fast food industry is expanding globally in Europe and asian markets like China and India. With the emergence of companies such as JumboKing and ZhenKungFu across these regions, this is a strong threat to RBIs expansion

Rivalry among competing firms

0.15

2

.6

Firms including Starbucks and Yum Brands! have started expansion into China making KFC and McDonalds huge in places like Beijing and Shanghai, this impacts the external threat to RBI when trying to expand as well.

Political Threats

0.15

2

.45

The political external landscape is centered on complex legislation: laws governing minimum wage, intellectual property, franchising, and food safety, RBI needs to ensure that their laws are in line with those in the region they are expanding too

Threat of substitutes

0.15

3

.3

“Healthy” fast food chains such as Chipotle, Panera, and Shake Shack allowed consumers to customize their meals, this is an external threat because RBI must also be changing their menu to meet customer needs

Technological advancement ________ Overall

0.15

2

.45

With new advancements in technology, competitors will optimize operations and foster new forms of competition

_____ 2.65

IFAS Internal Factors

Weight

Rating

Weighted Score

Comment

High Debt Exposure

.20

1

.2

Restaurant Brands International Inc has been focus is primarily in paying off long term debt which was at 44% in 2016. RBI was deemed by many to be overleveraged. This was mainly because of their high loans and income from operations. RBI used this leverage to purchase Popeye’s


Increased revenue through international markets

.15

4

.6

increase revenues from operations from BK primarily through international expansion, and decrease vulnerability and consolidate ownership through purchase of preferred stock.

Above industry average on key ratios

.10

4

.4

See Financial Ratios section to see improvement over recent years

Low inventory Turnover

.10

3

.3

One key ratio RBI falls short of the industry average in inventory turnover

Vulnerable to interest rates fluctuations

.15

3

.45

Do to the many currencies RBI does business in, it is exposed to interests rate fluctuation and inflation risk when comparing currencies.

Consolidation across brand segments

.15

4

.6

Experts from 3G Capital and Berkshire Hathaway have been able to consolidate all three brands in prosperous businesses, improving most of their ratios. A definite answer to this question would depend on many factors, but one would believe that RBI uses its financial expertise very well in improving efficiency and risk management

Repurchase of Preferred Stock ________ Overall

.15

3

.45

RBI is spending a considerable amount on repurchasing preferred stock in order to reduce undervaluation, and boost key ratios

_____ 3

SFAS Strategic Factors

Weight

Rating

Weighted Scored

Comment

High Brand Awareness

.15

4

.6

Brand loyalty in Tim Hortons has helped the brand fend off new market entrants such as Dunkin’ in Canada. This had an adverse effect of Tim Hortons when they tried to expand in New England and Seattle; brand loyalty for Dunkin’ and Starbucks ended up rendering the expansion as a failure.

Diversified Portfolio

.10

4

.4

RBI currently holds brands in different QSR segments which allows them not to rely heavily on a single segment. This especially helps since they are not the leader in any of those segments. This can also be a


plus with sharing of knowledge across segments, where one brand is efficient in a certain procedure, Coffee for Tim Hortons, it can pass the knowledge on to another brand that historically has trouble in that process, coffee at Popeyes. Scale

.15

5

.75

RBI is able to leverage its large franchise network to benefit from economies of scale at its own corporate locations. Together the corporate locations and the franchises have greater impact on purchasing and sales decisions than the corporate locations would have on their own. Wit the expansive franchise network, RBI does not have to front money for new stores, it can leverage its vast network and franchise out locations which allows easy expansion.

Not A Segment Leader

.15

3

.45

RBI is currently the third largest QSR brand based on revenue. Burger King was second to McDonald’s in the burger segment. Popeyes is third behind Chick-fila and KFC in the chicken segment. Tim Hortons is number four behind Starbucks, McDonalds and Dunkin’ Donuts in the coffee segment. McDonald’s is the largest QSR brand (in terms of revenue) in the world and their portfolio is only made up by its McDonald’s brand. Yum! Brands, which is made up of by KFC, Taco Bell, and Pizza Hut, is the largest QSR in terms of physical locations across all of its brands with 43,500. They are also second in revenue behind McDonald’s. Starbucks is the leader in the coffee and snacks segment, where it has 24,464 locations which is more than RBI’s three brands combined.

Expanding Foreign Markets

.20

2

.4

RBI has high potential to tap foreign markets that have low fast food presences.

Saturated Market

.10

2

.2

The QSR industry is currently in its mature phase, where annualized growth is only expected to grow at a rate of 1.6% for the next five years. This has sparked a price war amongst competitors in the space, who are all trying to grab as much market share as possible to increase sales. This low growth has also stunted innovation in the industry.

Price War

.15

3

.45

Due to a saturated market and low growth, there is a


_______ Overall

_____ 3.25

price war in the QSR industry. Examples of this are McDonald’s McPick 2, Burger King’s 5 items for $4, and Wendy’s 4 for 4 menu items. These price promotions are an attempt to grab more market share from other brands, which in turn cuts into company profits.

References Bamford, C. E., Hoffman, A. N., Hunger, J. D., & Wheelen, T. L. (2018). Concepts in Strategic Management and Business Policy: Globalization, Innovation, and Sustainability(15th ed.). New York, NY: Pearson. “Company Overview of Restaurant Brands International Inc.” Bloomberg.com, Bloomberg, www.bloomberg.com/research/stocks/private/people.asp?privcapId=821389. “Corporate Governance.” Restaurant Brands International ™, www.rbi.com/Corporate-Governance/Index?KeyGenPage=329743. Gold, N., & Hoffman, A. N. (2017). Restaurant Brands International: Always Playing Second Fiddle with Burger King, Tim Hortons & Popeyes Chicken. “Press Releases.” Restaurant Brands International ™, www.rbi.com/Press-Releases. “QSR: Dividend Date & History for Restaurant Brands International Inc.” Dividend.com Dividend Stocks - Ratings, News, and Opinion, www.dividend.com/dividend-stocks/services/restaurants/qsr-restaurant-brands-internationalinc/#stock-dashboard. “QSR Major Holders | Restaurant Brands International Stock.” Yahoo! Finance, Yahoo!, 4 Oct.


2018, finance.yahoo.com/quote/QSR/holders?p=QSR “Restaurant Brands International Announces Further Commitment To Technology & Innovation.” Http://Www.rbi.com, www.rbi.com/Cache/1500106757.PDF?O=PDF&T=&Y=&D=&FID=1500106757&iid=4591210 “Restaurant Brands International Inc Annual Report 2016.” Http://Www.rbi.com, Restaurant Brands International, www.rbi.com/Cache/1500096187.PDF?O=PDF&T=&Y=&D=&FID=1500096187&iid=4591210 . “Restaurant Brands PE Ratio 2013-2018 | QSR.” MacroTrends, www.macrotrends.net/stocks/charts/QSR/restaurant-brands/pe-ratio. “Sustainability Framework 2016.” Http://Www.rbi.com, www.rbi.com/Cache/1500094564.PDF?O=PDF&T=&Y=&D=&FID=1500094564&iid=4591210 .


Case 25 - Electronic Arts Teaching Note Background: Electronic Arts, which was founded in 1982, is a major publisher of video games and software. EA was founded by three former managers at Apple Computers who started with a team of 11 people and $5 million. The first product EA ever produced was a software game for Atari 800 in 1983. The Commodore was released shortly after, which forced EA to change their software to be compatible with the applicable hardware. Even in its early years, EA focused on making their software and games compatible with different kinds of hardware systems. In 1990, EA dedicated 50 percent of the product development costs to adapt the software to run on multiple devices. In 1987, EA began manufacturing in Europe to expand their platform and customer base. Two years later in 1989 EA went public with a market cap of $84 million; that same year income rose 208%. In 1989, Nintendo accounted for 80% of sales in the U.S, but EA refused to partner with them because Nintendo wanted EA to agree to not provide games to any of its competitors. To expand to even more markets, EA acquired Distinctive Software Inc. based out of Canada and renamed it Electronic Arts Canada. In order to increase market share and dominance, EA created an Affiliated Labels program that acquires rights to software developed by outside companies. In addition, EA used and continues to seek for stars and athletes to promote their products such as John Madden. Strategically, EA established its own sales force which helps keep track of consumer trends and allows them to have more control over their inventory. In the early 90’s, EA started EA Sports and purchased the licensing agreements for the NBA, NHL, MLB and NFL. EA then purchased Origin Systems based in Texas. From this they expanded their predominantly action, sports based products to incorporate more fantasy role-playing games and First Person Shooting games.1

I. CURRENT SITUATION A. CURRENT PERFORMANCE 1. History i. FY2018 is the first year when service revenues caught up to product revenues with each equaling $2.6 billion • Products = Game Sales • Services = Recurring Revenue (dominated by microtransactions followed by software) ii. 2018 Q2 and Q3 outperformed Earnings per share expectations • Q2 Expected: $0.06, Actual: $0.26; Q3 Expected: $1.15, Actual: $1.31 iii. FY2018 Stock change = -10.3% (117->105$/s) • Hit 148$/share in July, but has fallen drastically due to Battlefront 2 microtransactions scandal iv. Current global market share at 4.9% 2. Expansion i. EA has accesses over 40 markets outside North America ii. 1987: Opened offices in Europe 1

Reference for Business, “History of Electronic Arts Inc.”, (accessed 14 November, 2016)


iii. 1992: Acquired Distinctive Software Inc. and renamed it EA Canada iv. Global partnerships to translate and access markets in China (Tencent Holding Ltd.) and Korea (Nexon Co. Ltd.) v. Also opened EA Russia to translate games and serve local customers better 3. Strategic Moves i. 1991: EA Sports with licensing agreements and athlete promotion ii. 1992: Acquired Origin Systems for RPG and FPS games iii. Freemium mobile games - invest $1.1 billion for Research and Development • 2011: Bought popular developer PopCap iv. 2006: Bought DICE who developed the Frostbite game engine v. 2016: 10-year exclusive licensing agreement for Star Wars games 4. Ranking and Accolades i. 2012 and 2013: Named Worst Company in America for poor customer relations and mediocre products ii. As of 2016, EA is the leading player in multimedia and gaming graphics software iii. 2017: #1 rated game developer on Metacritic B. STRATEGIC POSTURE 1. Mission: To inspire the world to play games not just because it is a game but also an art form 2. Objectives i. Get license to make games with content people are already excited about ii. Create global interactive entertainment software for online-service, personal computers, internet-connected consoles, and mobile phones iii. Increase market share and dominance iv. Update already existing franchises 3. Strategies: i. Improve talent acquisition/retention ii. Design games placing the players first, looking to develop relationships iii. Commitment to selling games digitally iv. Portfolio diversification to reduce risk v. PC-to-Console approach 4. Policies: i. Improve stock options for over 2,000 employees ii. Acquire top companies (PopCap) and intellectual property (Star Wars) iii. Becoming the minority investor in collaborators and some competitors (Ubisoft) iv. Increase opportunities to pay money digitally for games and extra things in game.

II. CORPORATE GOVERNANCE A. BOARD OF DIRECTORS Name Leonard S. Coleman

Internal/External Years Name External 7 Talbott Roche

Internal/External Years External 2


Jay C. Hoag Jeffrey T. Huber Vivek Paul Lawrence F. Probst III

External External External External

7 9 13 27

Richard A. Simonson Luis A. Ubiñas Denise F. Warren Andrew Wilson

External External External Internal

12 8 5 5

2. Share of Stock: The board of directors do hold a significant share of stock 3. Classes of Stock: i. Total 1,010,000,000 shares: 1,000,000,000 Common Stock, 10,000,000 Preferred Stock ii. Class A and Class B Common Stock of which both have voting rights iv. The shares are publicly traded 4. Skills and Experience: i. Experience and knowledge in sports industry, risk management, talent selection, online infrastructure and technology management, entrepreneurial thinking, strategic management, digital and marketing distribution and management, corporate governance ii. Members are part of and have served as management of diverse, large and public industries iii. Lawrence Probst served as the CEO for 15 years and been a part of the board for 20 years iv. Has membership criteria to have the experience, skills and characteristics 5. International Experience: The company does have operations in Canada, Japan, and Switzerland, but the board does not seem to possess international experience 6. Decision Making: i. Primary role is to oversee both the stockholders’ interest and the success of the business ii. Takes the ultimate decision to improve the overall health of the business and shareholders iii. Board also has access to the officers, management and the books and records of EA to carry out their responsibilities B. TOP MANAGEMENT Name

Designation

Andrew Wilson

CEO

Years, Hire 5, Internal

Name

Designation

Mala Singh

Chief People Officer

Years, Hire 2, Internal

Blake Jorgensen

COO and CFO

6, External

Jake Schatz

General Counsel & Corporate Secretary

4, Internal

Patrick Söderlund

CDO and EVP

1, Internal

Joel Linzner

EVP of Worldwide Business Affairs

2, Internal

Laura Miele

Chief Studios Officer

1, Internal

Ken Barker

Chief Accounting Officer

12, Internal

Chris Bruzzo

CMO

4, External

Matt Bilbey

EVP of Strategic Growth

1, Internal

Ken Moss

CTO

4, External

2. Experience: i. Experience in various functional departments such as online publishing, finance, ecommerce, game designing, marketing, analytics, platforms and technology, legal counsel, litigation, accounting and auditing, and strategic growth ii. Not many of the top executives have had the experience of working around the world 3. Future Challenges: Top management appear to have skills to deal with future challenges


4. Decision Making: i. Top management responsible for the company’s performance. BOD has a Nominating and Governance Committee who is responsible to review the performance of the CEO ii. There is a systematic approach to strategic management, with the executives working together with the CEO. All the decisions are well thought and ethical. The Board of Directors have the final say in decision making which is communicated by the CEO to the board 5. Compensation: Combination of base salary, performance cash bonus awards, equity incentive plans in the form of PRSUs and RSUs

III. EXTERNAL ENVIRONMENT: Opportunities and Threats A. SOCIETAL ENVIRONMENT 1. Economic: i. High demand and surging cost of game developers (O/T) ii. 65% of US households owned at least one video game playing device, 63% had at least one person playing regularly (O) iii. Fluctuating foreign currency rates (T) 2. Technological: i. Changing technologies (game console design change, increasing the speed of processor and graphics card). Games take years to develop, sometimes after a console has been replaced (T) ii. Trends of mobile-based games generating a new revenue stream (O) iii. Online Player Network (O) iv. Cybersecurity (T) vi. Free-to-download mobile apps provided opportunities for users to digitally purchase features and generate revenue through advertisements (O) vii. Virtual reality gaming (O) 3. Political-legal: i. The Video Game Rating Act 1994 placing age restrictions on video games content (T) ii. Piracy of software in underdeveloped countries with inadequate law enforcement (T) 4. Sociocultural: i. 93% of parents control what games and how much time their children play (T) ii. Video game software has been a seasonal business (sports seasons or Christmas) (T) iii. Controversial micro-transactions (T) B. TASK ENVIRONMENT (Industry) 1. Threat of new entrants (High) i. Tiered barrier of entry: High startup cost, high salary of software and video game developers, timely process but smartphone app and indie PC game development does not have high barriers to entry ii. Creativity rules over costs 2. Bargaining power of buyers (High)


i. Buyers have tons of choices ii. Zero switching cost iii. No Brand loyalty 3. Threat of substitute products or services (Moderate) i. A large number of free mobile games ii. Board games iii. Other more affordable, same category games 4. Bargaining power of suppliers (High) i. Influence from console producers ii. Chips, graphic cards produced by specialized vendors 5. Rivalry among competing firms (High) i. High competition for first person shooters and RPGs from Blizzard and Sony ii. High competition for party games with Nintendo iii. No competition for games that they hold exclusive licenses (Star Wars and sports games) 6. Relative power of unions, gov, special interest groups (Low) i. Game reviewers’ opinions C. SUMMARY OF EXTERNAL FACTORS (See EFAS Table)

IV. INTERNAL ENVIRONMENT: Strengths and Weaknesses A. CORPORATE STRUCTURE 1. Four Divisions: (S) i. EA Worldwide Studios: Action-adventure, role-playing, racing, and combat games ii. EA Sports: FIFA Football, Madden NFL, Fight Night, NBA, NCAA, Rugby, Football, Cricket, NCAA March Madness, Tiger Woods PGA Tour, NHL Hockey, NASCAR iii. EA Maxis (Previously EA Play): Develops life-simulation games and online communities iv. EA All play: Includes original EA and partner franchises like Tetris, Ultima, The Simpsons, SCRABBLE, MONOPOLY, World Series of Poker, Real Racing, online games for the Pogo.com online service 2. Corporate Structure: i. The decision-making process decentralized to different divisions (S) ii. The company is organized by market (S) iii. The present structure is consistent with current corporate strategies • Decentralized


• Full-time: 9,300 (5,800 working out of the US) • Part-time • Contractors for art and translation • Diversity in board members iv. There are 3 core pillars to EA’s current strategy. • Players First • Commitment to Digital • One EA iv. Corporate Structure in Similar Company: Blizzard Entertainment’s structure is teams of “talent areas”: Art and Animation, Design, Engineering, Production, and Operations. B. CORPORATE CULTURE 1. Demographics i. Cover all type of age ii. Cover all type of gender iii. Sell in several languages around the world by contracting, purchases, or starting local firms/branches to translate and adapt for local consumption 2. Values i. Top tier art, creativity and original ideas ii. Best rendering technology iii. Cross-platform usability iv. Experimenting and innovative, open to new ways of thinking v. Building a successful team with people committed and accountable to their work 3. Issues: i. History of overworking employees • 2006 paid of $600 million to settle unpaid overtime • Regularly have workers give 70-100 hours weeks even without an upcoming release 4. Diversity: Has embraced diversity and inclusion by recruiting people from underrepresented groups like women in technology, LGBT. The company also provides training and mentorship programs to elevate people from these groups C. CORPORATE RESOURCES 1. Marketing i. Overview • Marketing Objective: Build and maintain meaningful relationships with players • Marketing Strategies: Marketing and advertising efforts resonate with consumers • Marketing Programs: o Customers engaged in the process of game testing. Before the game release to the market, these customers provide valuable feedback to EA o Social media platforms are taking an increasing portion in EA marketing activity. This marketing philosophy is consistent with the corporation’s mission ii. Effective Marketing:


• •

The driving force of EA sales is based on diverse demographics For EA fiscal year ended March 31, 2018, international net revenue comprised 59 percent of total net revenue iii. Marketing Channels • Online and mobile advertising • Television advertising • Retail Merchandising • Event Sponsorship • Communications with consumers via email iv. Engaging Channels with Consumer • Broad marketing channels • Online advertising • Mobile advertising • Event sponsorship • direct communication via e-mail • Involving them in alphas, betas. Example: In 2015, had over nine million people participating in the biggest beta test in the company history for Star Wars: Battlefront v. Marketing strength • EA diverse product lines took players to the field, into outer space, or to battle grounds in games such as Madden, Battlefront, and Battlefield. This ability to engage players is the core strength for EA Marketing vi. Market trend (S) • In casual and competitive game, the increasing numbers of adult is the new trend • This trend is good for EA, since adult players have more purchasing power. vii. Marketing Figures • 2017 and 2018 EA spent 9 percent of revenue on marketing • Marketing and sales spending dropped by $32 million, (5% compared to FY2017) viii. Commitment and contingency in Marketing (W) • Huge payments to content license, like FIFA, FAPL, DFL, NHL, ESPN • Have to pay minimum guarantee payments ix. Selling Agent Consideration (W) • Rely on third party to contract end consumer • Rely on third party to report sales and revenue 2. Finance i. Revenue increased from $3,575M to $5,150M (2014 - 2018) (S) ii. Earnings per share beat expectations by over 100% over the last two quarters, good for reestablishing investor confidence (S) iii. Very high and increasing shareholder equity. This may be a poor decision along with their not increasing their debt because in the long run equity is more expensive than debt(W) Key Ratios

2018 2017 2016 Explanation

Current Ratio

2.41

2.15

1.80

Current ratio= CA/CL. High CR shows that EA is generating enough cash to meet its short-term obligations. CR greater than 2, not utilizing assets


ROI(%)

0.12

0.13

0.16

ROI= NP after taxes/Total asset. EA has a Decreasing ROI trend. In 2018 they have a low assets utilization, one of big reason being they have a high current ratio in that year

ROE(%)

0.23

0.24

0.34

ROE=NP after taxes/shareholder equity. Increasing equity, but do not get a equalize amount of net income

Net Profit Margin (%)

0.12

0.15

0.33

NPM=Net Income/Sales Their net profit margin with an increase in sales. That means their expense and cost are increasing year to year

3. Research and development i. Spend a great amount on R&D and the proportion increases continuously • In 2017, 25 percent of EA revenue is the cost of research and development • In 2018, the percent of R&D cost increase to 26%. ii. In the R&D, EA values the employee more than assets. Research and development expenses increased by $115 million, and only $21 million is facilities-related cost. The majority is related to employee compensation iii. Primarily software development costs. Required to capitalize software development costs incurred for computer software to be sold iv. Retained licenses and intellectual properties to protect intangible assets 4. Operations and Logistics i. Significant Relationship with Sony & Microsoft since EA does not have their own platform to release their games, they have to rely on platforms owned by others to sell their games ii. Sony & Microsoft promise to non-exclusively provide use of their technology for developing games on their platforms by a license iii. Platform licenses may be terminated by console manufactures if EA does not resolve breaches in contact it is made aware of by written notice iv. Because of seasonal holiday demand and the launch timing of games, EA has historically experienced the highest percentage of sales in their third fiscal quarter. v. EA has to pay a great amount payment to content licensors, including payments made to celebrities, professional sports organizations, movie studios, copyrights, personal publicity rights • Update for free (W) • Provide periodic and nonperiodic fix for games through online platform for free • Historical pattern of providing unspecified updates 5. Human Resource Management i. On March 31, 2018, EA had approximately 9,300 regular, full-time employees, over 5,800 of whom were outside the United States. The ability to attract and retain qualified employees is a critical factor to success for EA. And the success in future depend on EA’s ability to continue to attract and retain those talents over the world ii. Success depends on Talents in Company (S) • “Employees who were directly associated with the development and marketing of those games were invaluable”


“Some full-time employees were given stock options and employees stock purchase plans.” • EA believed that its human capital was the driving force behind the company’s success iii. Union (W) • 8% of its employees were represented by a union, the most of them are from EA’s Swedish development studio. • No uniform union to represent the benefit of employees in EA. It is hard to guarantee the benefits for each employee there iv. Management of diversity • The Board of Directors believes that complementary and diverse perspectives, whether based on business experience, diversity of gender, ethnicity, culture or other factors, contribute to the Board of Directors’ effectiveness as a whole • The Board of Directors has regularly added new members — three of nine director nominees have served for five years or less 6. Information Systems i. EA must develop, implement and take advantage of their Information Systems in order to make its products and services more competitive • EA has invested, but should be investing more, in new business strategies, technologies, products, and services • Developing EA Player Annual Report Network which will allow EA to market and deliver content and services for our franchises more efficiently as well as enable new player-centric ways to discover and try new experiences ii. Cyber Security • EA relies on technological infrastructure provided by third-party business partners to support the online functionality of products and services • The virtual economies established in many of the games are subject to abuse, exploitation and other forms of fraudulent activity • Could be adversely affected if consumer protection, data privacy and security practices are not adequate • Subject to payment card association rules and obligations pursuant to contracts with payment card processors • Need new protections to stop games from being pirated, especially in countries with weak intellectual property laws D. SUMMARY OF INTERNAL FACTORS (See IFAS Table)

V. ANALYSIS OF STRATEGIC FACTORS (SWOT) A. SITUATIONAL ANALYSIS (See SFAS Table) B. REVIEW OF MISSION AND OBJECTIVES 1. Continue digital based strategy with new focus on not letting payment give players online multiplayer advantages 2. Focus on providing experiences while making revenue


3. Establish long term relationship and align the interests with sports leagues by paying them in stock instead of cash

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY A. STRATEGIC ALTERNATIVES 1. Strategic Alternatives: i. Current objectives are good, but EA should do more to implement them ii. EA needs to do a better job with customer concerns. Specifically, they need to design micro-transactions in acceptable ways iii. Should continue developing their games for PC first, but should maybe help make PC gaming more accessible through partnering with a hardware company iv. Continue growing by acquisition when good options are available, but, put more effort into intra-industry cooperation v. Develop more features for online platforms so that people would buy official versions of games to gain access code to interact with other players. Only with access codes can a player can join in the online platform vi. Only allow people to pay for advantages in single player vii. Identify new technology trends and implement it within their games such as virtual reality and augmented reality with greater voracity 2. Alternative Strategies i. Customer Feedback Division – (not employed) • Pros: o Improve brand loyalty and the idea EA cares o Make more appealing games o Avoid backlash and last-minute changes to game mechanics • Cons: o Increase administrative costs o Need to revise design process ii. Emphasize skill for game rewards (partially employed) • Pros: o Avoid future scandals around microtransactions o Improve brand image as one that stands for fair competition o Build consumer loyalty • Cons: o Decreased microtransaction revenue iii. Develop a low-cost Linux platform for playing EA PC games on TVs (not employed) • Pros: o Improve brand image o Increase the accessibility of peak graphics gaming o Opportunity to offer exclusive deals to those who buy the platform • Cons: o Development + production costs o Need additional administration if they cannot get a partner to be in charge.


iv. Enhance the social network and provide unique code for each player to get access to player network (partially employed) • Pros: o Reduce software piracy o Increase player community • Cons: o Development + production costs o User privacy and security issue v. Research and experiment with Virtual Reality and Augmented Reality (partially employed) • Pros: o Capture the increasing VR and AR market which is expected to increase to 209 billion by 2022 o Increase revenue sources • Cons: o Cost of development is high o Difficult to implement in games like soccer and basketball o Unit cost for customers is high B. RECOMMENDED STRATEGY 1. Create a division which will work on customer’s feedback. This division will work with other divisions for future development. This move can improve the culture of the company and develop a strong loyalty for its gamers and connect the gamer and company as a whole 2. Emphasize skill for gamers: Effort has been put toward balancing rewards for paying more money and playing well in games such as Fifa World Cup and Battlefront, but buying a premium edition of the game provides an advantage in online play in Fifa 3. Develop a lower cost platform for running PC games connected to a TV running Linux. EA can give away at a discount or free for downloading certain or all EA games. Cost to marketing in other channels and risk of completely relying on other channels will be diminished 4. Develop more features for online platforms to allow players to interact with other players. Player is provided a unique access code when buying a new game that he or she can use to get access to the multiplayer mode

VII. IMPLEMANTATION A. ORGANIZATIONAL STRUCTURE 1. Create a customer feedback division 2. Create a game audit team to ensure there is no violation to new SOPs (see below) B. PROGRAMS 1. R&D: Develop a lower cost platform for running PC games, research on VR and AR 2. Marketing: Currenting advertising program is well developed 3. Form partnership with or acquire a company with experience in Linux platforms, maybe Valve 4. Pursue partnership with Activision for investment to share costs and opportunities


C. FEASIBILITY AND TIMETABLES 1. Feasibility (financial): Its financially feasible-business strategy due to high current assets not being utilized 2. Pro-forma Budgets: We cannot assess the budget due to the current data we have 3. Priorities and time table i. Create a division work on customer feedback as soon as possible ii. Developing a lower cost platform will take time to do research and development C. NECESSARY STANDARD OPERATING PROCEDURES 1. Need new SOPs for incorporating feedback 2. A strict rule against allowing money to impact the balance of online play

VIII. EVALUATION AND CONTROL 1. The development of the EA Player Annual Report Network should update their information systems enough to support better customer relationships i. Though will require new policies to follow through on, perhaps with the help of a new department 2. There must be regular checks of all planned streams of revenue to check against dollars for multiplayer advantage situations 3. A new low-cost Linux platform must be viewed as an industry building opportunity and not just a money-making opportunity. Executives must make sure that projects managers make a platform to serve the players and the company otherwise it will fail i. The platform’s success must be measured by its adoption and the positive reaction, not just profits Exhibit 1- EFAS (External Factor Analysis Summary)

Key External Factor

Weight Rating Weighted Comments Score

Opportunities Market Expanding

0.2

4

0.8

The video game industry is booming with continued revenue growth ($138B by the end of 2018). Spending by gamers increases 13.3% year over year.

Industry transformation to recurring revenue model

0.15

3

0.45

More predictable and valuable earnings stream

Growing trends of mobile games

0.05

2

0.1

76% of all games are on mobile platforms

Development of Blockchain

0.05

2

0.1

Blockchain market is expected to grow from


technology providing transparency, decentralization, and security

USD 200 Million in 2017 to reach over USD 16 Billion by 2024

Threats High risk of cyber attack

0.15

5

0.75

Video game publishers lose up to 40 percent of their in-game revenue and microtransactions to fraudsters each year.

Low protection of IP in developing nations

0.15

3

0.45

Players distribute copies of games illegally

Highly competitive market

0.15

5

0.75

1.3 billion apps on Google Play and App Stores, shortening lifecycle of new published games

Potential lawsuit against microtransactions

0.1

3

0.3

Politicians vowed to take action to protect underage kids from the game's monetization practices.

Total Scores

1

3.7

Exhibit 2- IFAS (Internal Factor Analysis Summary) Key Internal Factor

Weight Rating Weighted Comments Score

Strengths Technology

.15

5

.75

EA has leading skills and professionality in multimedia and graphic within its industry.

Software Development

.1

5

.5

EA spent 25% of its revenue on R&D in 2017. In 2018 the cost has increased to 26%. The budget allocated on R&D will keep them competitive and productive in this industry.

International Approach

.05

5

.25

EA sells its games in many countries with different local language.

Demographic

.05

5

.25

EA’s games are good for all type of age and all type of


Approach

genders to play.

Distribution center

.05

4

.2

Decentralized structure and only 40 percent of its employees working within US.

Employees

.1

5

.5

Spend a high amount of money to retain talent people. Really focus on employee as a artist to build innovation for its product.

Company Structure

.05

5

.25

The company is divided into four divisions. Each division is in charge of one of their game. Every division can work on their own part and develop it based on its specific game type need

Marketing

.1

4

.4

Variety of channels to communicate with its audience.

Dependence on thirdparty vendors for fulfillment services

.1

5

.1

Products selling is completely based on other platforms. These platforms have the right to stop selling product at any time. Keeping a good relationship with these platforms is vital

Maintaining license and right

.1

2

.2

Huge payments to content license, like FIFA, FAPL, DFL, NHL, ESPN. A high barrier to entry for other companies

Payment collection

.05

3

.15

Recurring payment in nature. Required to capitalize software development costs incurred for computer software to be sold

Cyber Security

.05

4

.2

EA’s cyber security is based on a third party. Cyber security is very important for EA because most of its content and product on through online platform.

Union

.05

4

.2

Only 8% of its employees were involved in a union. Also, they all are in EA’s Swedish development studio.

Total Scores

1

Weaknesses

3.95

Exhibits 3- Strategic Factors Analysis Summary (SFAS) Key Strategic Factors

Weight Rating Weighted Score

Duration

Comments

Short Medium Long Opportunity Market Expanding

.1

4

0.6

x

x

x

Leader of game ideas and graphic. Constantly expanding geographic reach. Different languages into lots of EA’s games. Platforms are getting more common in more countries.

Highly competitive market

.1

3

0.3

x

x

x

The winning of games nowadays is not only about how much budget is spent on each game but more about innovation. EA does its best job to retain and attract innovative employees


Brand awareness

.025

4

0.1

x

x

By creating a customer feedback division, they could increase their culture and improve their brand awareness.

High risk of cyber attack

.15

4

0.6

x

x

Short term, EA has a third party to protect its online platform. Long-term, needs to follow up new technology to protect its platform/products

Highly competitive market

.1

4

0.4

x

x

x

Many new entrants to the mobile and PC markets.

Technological and software development

.15

5

0.75

x

x

x

EA always spends a high amount of budget on marketing and R&D. in 2018, they increased R&D to 26% of their revenue

Employees

.025

5

0.125

x

x

x

Consider its employees as artists to motivate for innovative new games

Dependence on third-party vendors for fulfillment services

.15

5

0.75

x

x

Maintaining license and right

.15

5

0.75

x

x

Total Scores

1

Threat

Strength

Weaknesses The new platform will reduce the influence form 3rd-party vendors. The risk for contract shutting down will be diminished. x

EA sports counts half of EA game sales. EA still needs to continuously pay for its license and right.

4.375

Exhibits 4 - A. Financial Ratios Ratios

2018

2017

2016

Current Ratio

2.41

2.15

1.80

Quick Ratio

2.41

2.15

1.79

Inventory to net working capital

0.00

0.00

0.02

Cash Ratio

1.71

1.06

1.03

Net Profit Margins

0.12

0.15

0.33

Gross Profit Margin

1.00

1.00

0.99

ROI

0.12

0.13

0.16

Liquidity Ratios

Profitability Ratios


ROE

0.23

0.24

0.34

EPS

3.39

3.19

3.73

Inventory Turnover

N/A

N/A

N/A

Days of Inventory

N/A

N/A

N/A

Net working Capital Turnover

1.47

1.74

2.27

Asset Turnover

0.60

0.63

0.62

Fixed Asset Turnover

11.37

11.16

1.99

Average Collection Period

27.29

27.05

19.35

Accounts Receivable Turnover

13.40

13.39

18.77

Accounts payable Period

N/A

N/A

N/A

Days of Cash

301.7

193.2

207

Debt to Asset Ratio

0.46

0.47

0.51

Debt to Equity Ratio

0.86

0.9

1.08

Long-term Debt to Capital Ratio

0.22

0.24

0.29

Times Interest Earned

34.03

27.04

32.3

Coverage of Fixed Charges

15.5

13.08

11.44

Current Liability to Equity

54.21%

59.5%

71.2%

18.78

29.06

36.3

Activity Ratios

Leverage Ratios

Other Ratios Price/Earnings Ratio Dividend Payout Ratio

N/A

N/A

N/A

Dividend Yield on Common Stock

N/A

N/A

N/A

Note: 1. Coverages of fixed charges is calculated by adding up Operating Leases and Licensing and Lease Obligations 2. The company has not paid out cash dividends and do not foresee paying it

Exhibit 4- B. Common Size Statement (%) Items

2018

2017

2016


5,150

4,845

4,396

1,277

1,298

1,354

Sales & Marketing

641

673

622

Research & Development

1320

1205

1109

General & Administrative

469

439

406

Total Operating Expense

2430

2317

2137

Interest Income

50

25

15

Interest Expense

44

47

28

Total Other Expense

15

(14)

(21)

Net Income

1,043

967

1,156

Revenue Cost and Expense Cost of Revenue Operating Expense

Other

Note: Total Other expenses is calculated after accounting for foreign currency transactions which has not been mentioned in the above table

Bibliography SEC Filings (2018). Retrieved from https://ir.ea.com/financial-information/sec-filings/default.aspx Corporate Governance Guidelines. Retrieved from https://ir.ea.com/corporategovernance/governance-documents/default.aspx EA Centralized their Marketing Analytics. (n.d.). Retrieved October 14, 2018, from https://info.datorama.com/centralized-marketing-analytics-with-ea Ell, K. (2018, July 20). Video game industry is booming with continued revenue. Retrieved October 14, 2018, from https://www.cnbc.com/2018/07/18/video-game-industry-is-boomingwith-continued-revenue.html


Fuller, S. (n.d.). Topic: Video Gaming Industry. Retrieved October 14, 2018, from https://www.statista.com/topics/868/video-games/ Metacritic's 7th Annual Game Publisher Rankings. (n.d.). Retrieved October 14, 2018, from https://www.metacritic.com/feature/game-publisher-rankings-for-2016-releases Takahashi, D. (2018, October 09). Nomadic will launch Arizona Sunshine VR arcade in Orlando. Retrieved October 14, 2018, from https://venturebeat.com/2018/10/04/nomadic-will-launcharizona-sunshine-vr-arcade-in-orlando/ Totilo, S. (2013, June 19). This is What EA's Up To (On the Day Zynga Hired One of Their Top Guys). Retrieved October 14, 2018, from https://kotaku.com/5875652/this-is-what-eas-up-toon-the-day-zynga-hired-one-of-their-top-guys Why the Earnings Surprise Streak Could Continue for Electronic Arts (EA). (2018, October 02). Retrieved October 14, 2018, from https://finance.yahoo.com/news/why-earnings-surprisestreak-could-141002922.html Wolverton, Troy (February 3, 2009). "Electronic Arts has lousy quarter; slashes 1,100 jobs". The s Mercury News. Archived from the original on February 2, 2017. Retrieved May 2, 2009.


Case 26 - Nike, Inc: Late Arrival to the “ATHLEISURE- WEAR” Trend - Teaching Note Background Nike’s mission was designing and promoting athletic footwear and apparel “to bring inspiration and innovation to every athlete in the world.” For Bill Bowerman, the definition of an athlete was anyone with a body: thus anyone and everyone, regardless of age or gender was a potential customer—an enormous target market. As a crucial part of its business strategy, Nike strove to offer highly differentiated products and services compared to its competitors, quickly becoming the “go-to” brand for athletes and general customers alike. The company honed a customer-based approach that emphasized the importance of maintaining connections with consumers through its products. The heart of Nike’s strategy to achieve long-term revenue growth was constant innovation to design and sell “must have” products to deliver compelling consumer experiences and build deep personal consumer connections to all Nike brands through retail and digital platforms. Nike’s desire to be “the most authentic, connected and distinctive brand”1 and its core belief in the power of sport drove its ascent as a global brand, powering its worldwide success. For its shareholders Nike sought to deliver maximum value by building a profitable global portfolio of branded footwear, apparel, equipment, and accessories businesses,2 differentiating itself from other companies through the global scale of its customer outreach via its Nike Direct digital platforms present in 45 countries, and indirect brand licensing and sales representatives covering virtually every country worldwide. In 2017, Nike instituted a bold new strategy for decision-making in an industry that was becoming increasingly competitive. Simply put, the idea was: “Triple Double: 2x Innovation, 2x Speed, and 2x Direct” to drive innovation and create more stylish, more immediately available apparel for customers’ every wardrobe need, creating the expectation of “must-have” style. Nike then set out to build new capabilities and analytics to deliver products directly to customers in real time, and invested heavily in its direct-to-consumer channels to develop as many touch points to customers as possible. The company focused on generating earnings, maintaining its top-tier position in the industry, and leading the charge in product design. Yet it also desired to move the world toward a better, more sustainable future at the same time, and began to embrace more sustainable practices.

Discussion Questions: 1. Do you think it is a good idea for Nike to take political stances like featuring Muslim women in their ads? Should Companies take political stances and risk offending some of its customers? 1

Nike Inc, Marketplace management. https://investors.nike.com/default.aspx?SectionId=17a554ff-c2bb-4af8-817f-2536e96800e4&LanguageId=1 2 Nike, Inc. 10-k report: https://investors.nike.com/investors/news-events-and-reports/?toggle=events


2. Did Nike make a mistake to feature Colin Kaepernick in their ad campaign? 3. Which store do you think has the best athleisure wear? LuLuLemon, North Face, Athleta or Nike? 4. Nike is known for its athletic shoes, how can they convince consumers to buy their clothes? 5. In March of 2018, the company admitted it had received widespread complaints of inappropriate workforce behavior. Nike was caught up in the #MeToo Movement for reports of an “old boys club,” where women faced pay inequities, inappropriate behaviors, and a lack of representation at the executive level. Women employees felt they were subject to a more rigorous vetting process and were not promoted as quickly as male colleagues. Do you think Nike has changed? 6. Do you think Nike is a “World Class Company?” Background for General Discussion The advent of the “athleisure-wear” industry in the new millennium further complicated Nike’s competitive landscape. Nike arrived late to the athleisure-wear trend. Activewear brands especially designed for women such as Lululemon, Athleta, Fabletics, and others lured women away from established athletic brands such as Nike and Adidas. At the same time, non-athletic companies such as Target, Amazon, and even luxury brands like Tory Burch launched activewear lines hoping to get in on the action. Atheleisure-wear was the strongest engine of sales growth in the industry, but Nike had missed the boat: the company’s huge size and lack of diversity in middle and upper management rendered the company slow to jump on board. Had Nike been as quick as its competitors to see the handwriting on the wall, it more than likely would have capitalized on the increasing demand for athleisure-wear. Losing its edge in anticipating consumer preferences or developing innovative products threatened to derail Nike’s position at the top of the pack. Equally important, the company’s recent scandals involving gender discrimination allegations and the Colin Kaepernick uproar emanating from Nike’s domestic operations generated particularly negative reactions from U.S. customers. Nike needed to regain the trust of women, baby boomers, and other alienated groups to stop Adidas from snaring too much of its market share. Past scandals, such as the sweatshop allegations in the 1990s, led to declining sales for a number of years. More recently, the Colin Kaepernick marketing campaign had both attracted and put off customers. The company’s latest fiasco, involving allegations of gender discrimination, risked alienating Nike’s fastest growing segment, women and girls. Furthermore, social media and the speed at which negative information spread, accelerated and amplified the scope of the negative publicity and made it that much more difficult to overcome. The Nike empire was dependent on its ability to maintain an image of corporate integrity and brand culture. Any further negative publicity or failure to respond to the latest claims in an effective manner could seriously damage the company’s strongest attribute—its brand. Losing its edge in anticipating consumer preferences and developing innovative products, coupled with bad


#MeToo publicity and controversial political press, all threatened to derail Nike’s position at the top of the pack.


CASE 27 Under Armour

I. CASE ABSTRACT CEO Kevin Plank, “As a growth company, our success is not only defined by the results we achieve today but how we position the Under Armour Brand for sustainable long-term growth. We remain dedicated to building our large scalable businesses and see tremendous opportunities beyond our current business drivers. We are relentless in our pursuit to better leverage the Under Armour Brand across broader categories such as footwear and deeper into international markets. The strength of our Brand, the commitment of our team, and our ability to invest give us great confidence in our future.”i While Plank expressed satisfaction over his quote, he noted that the second quarter saw the second consecutive decline in footwear sales. UA’s footwear sales had declined by 4.5 percent over second quarter 2009 and were showing a 16.6 percent decline for the first six months of 2010 over 2009. This was in contrast to apparel, the company’s core category, which saw a 32.2 percent uptick over 2009, and accessories that had gone up by 28 percent (Table 1 shows summary performance for the first two-quarters of the fiscal year 2010).ii “We have tremendous opportunities in our apparel category, particularly in the international markets. We haven’t sold a single t-shirt in China,” he reflected. “But to be a leading player in the field of sports, shouldn’t we have a major presence in athletic footwear? That’s the key decision that I and my team have to make immediately. How best to manage the balance among our three categories of products so that UA continues to be a force to be reckoned with in the industry?” Decision Date: 2010

FY Sales: $1 billion FY Net Income: $68 million

II. CASE SUBJECTS AND ISSUES Blue Ocean Strategy Strategy Formulation Strategy Implementation Core Competencies Competitive Strategy Differentiation

Sports Apparel& Footwear Competitive Advantage New Product Development Market Segmentation Manufacturing/Outsourcing Industry Analysis

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CASE 27 Under Armour III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss product differentiation. 2. To discuss global competition. 3. To discuss international growth opportunities in China. 4. To discuss blue ocean strategy. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for a team presentation. 3. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. What advantages did UA get upon its entry? 2. What is UA’s competitive position in performance apparel at the time of the case? Can it sustain its position? 3. Compare the performance apparel and footwear industries. Examine UA’s motivation for entry into this market. VII. CASE AUTHOR’S TEACHING NOTE— UNDER ARMOUR IN 2010 TEACHING NOTE CASE SYNOPSIS

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CASE 27 Under Armour Under Armour (UA) pioneered the performance apparel category in the sporting goods industry. The company, founded in 1996 by Kevin A. Plank, owned 78 percent of the market share in its category and had revenues of $856.4 million in 2009. Around 94 percent of the company’s revenues, however, came from the United States and Canada. In 2006, UA took industry giant, Nike, head-on by entering the athletic footwear segment of the industry. Early results indicated that UA had not made much headway in athletic footwear. As Plank reviewed the results for the second quarter of 2010, he noticed that footwear revenues had decreased for the second quarter in a row. He now faced a decision with regard to the company’s footwear foray and also in terms of allocating resources between various segments of the company and its international operations. KEY ISSUES The case identifies several key issues that a consumer products company faces: • • • •

Managing a company’s growth. Making strategic decisions across the product life cycle (PLC). Balancing the resource needs of different segments of a company. Identifying and capitalizing on international opportunities.

PLACEMENT The case is ideal for an undergraduate or graduate course in strategic management. Given the case issues listed above, the case is best positioned in the middle of the semester in the module(s) that deals with strategic positioning, competitive advantage, and resource allocation. LEARNING OBJECTIVES The case deals with a company that has a very identifiable brand name in the United States and one that deals with a consumer product that college students are very familiar with. As such, the nature of the product and the brand name are likely to draw considerable interest in the case from students. As a corporate strategy case, “Under Armour in 2010” has specific learning objectives: 1. The implications of entry into a “blue ocean” market. 2. The need to consider both differentiators and the economic logic of competing in consumer product markets. 3. Examining the application of resource-based view concepts (such as value creation zone, is a resource Valuable, Rare, Difficult to Imitate, Non-Substitutable, Exploitable, specific versus general resources) to corporate strategy. 4. The need to identify methods for allocating resources among various segments of a company. KEY THEORETICAL CONCEPTS The case illustrates the use of various corporate strategy concepts. These concepts are covered in a variety of reading materials. What follows below is

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CASE 27 Under Armour a list of the key concepts used in the case and the relevant reading material for that concept: •

Under Armour created a new segment in the sports apparel part of the sporting goods industry. In effect, it identified a “blue ocean” market. This concept is covered in W. Chan Kim and Renee Mauborgne’s Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant, Harvard Business Press, 2005. An article-length treatment of the blue ocean concept is available in W. Chan Kim and Renee Mauborgne, “Creating New Market Space,” Harvard Business Review, January-February 1999, pp. 83-93. • The resource-based view of strategy is covered in a number of strategy textbooks and articles. While there are several articles or books that describe the resource-based view, the following are two good examples of short articles: (1) David J. Collis and Cynthia A. Montgomery, “Competing on Resources: Strategy in the 1990s,” Harvard Business Review, July-August 1995, pp. 118-128. This article offers an excellent and practical introduction to the resource-based view. The “Value Creation Zone” concept is a good framework to thoroughly examine the strategic value of a firm’s resources. (2) Pankaj Ghemawat and Patricio del Sol, “Commitment versus Flexibility,” California Management Review, Volume 40, No. 4, Summer 1998, pp. 26-42. This offers a useful framework (with ample examples) to look at the issue of committing to a set of resources versus remaining strategically flexible with regard to resources. • The strategy diamond concept is a useful tool to examine the fit among the various elements of a company’s strategy. Specifically, two key elements of the strategy diamond, “differentiators” and “economic logic” are particularly useful in the context of Under Armour. The concept is covered in a highly accessible form in: Mason A. Carpenter and William Gerard Sanders, Strategic Management: A Dynamic Perspective, 2nd edition, Pearson Prentice Hall, 2009. DISCUSSION QUESTIONS 1. Examine Under Armour’s entry into the performance apparel industry. What advantages did UA get upon its entry? 2. What is UA’s competitive position in performance apparel at the time of the case? Can it sustain its position? 3. Compare the performance apparel and footwear industries. Examine UA’s motivation for entry into this market. 4. What would your recommendation be to Kevin Plank about UA’s future? Explain your rationale. SUGGESTED DISCUSSION FLOW Given below is a diagrammatic representation of a possible pattern of discussion. The pastures correspond to the questions listed above.

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CASE 27 Under Armour

Pasture 1 •UA’s entry into performance apparel •Concept of “blue ocean” •First mover advantages

Pasture 2

Pasture 3

•UA’s differentiators •UA’s economic logic •UA’s activity system in apparel

•Comparison of performance apparel and footwear •UA vs. Nike, Adidas in footwear

Pasture 4

Recommendations

•UA’s eco. logic and differentiators revisited •UA’s resources – general or specific •International markets

•Resource allocation •Maintenance of competitive advantage •Int’l expansion vs. footwear •The decision

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. Examine Under Armour’s entry into the performance apparel industry. What advantages did UA get upon its entry? UA, in effect, created the performance apparel industry. Using the Kim and Mauborgne framework, Kevin Plank identified a blue ocean market space. He started with the basic cotton t-shirt, found it ineffective to combat sweat, experimented with different types of fabric, and finally, created one that could wick away sweat and thus keep the athlete’s outerwear light. Students should be encouraged to use Kim and Mauborgne’s “Four Actions” framework of new market space creation: reduce, eliminate, create/add, and raise to examine the creation of performance apparel as a new market space. They should be encouraged to start with the basic cotton t-shirt and, using the framework, see how Plank conceived of an entirely new business venture. As the creator of a “blue ocean,” UA had significant first mover advantages. They could position themselves as pioneers with a product that is useful to the customer and use the window before competitors step in to establish their brand. Students will point out that, as a start-up, UA was cash strapped and hence could not spend much on marketing. The instructor can then steer the discussion to UA’s guerilla marketing strategy—going after athletes known to Kevin Plank, sending product samples to equipment managers of teams, etc. The “A” students will also point out the element of luck—Jeff George on USA Today, as well as fortuitous timing—Oliver Stone’s Any Given Sunday, etc. UA could do all this while being under the radar of Nike and others because the performance apparel market was too small and in a nascent stage for it to matter to the leaders in the athletic equipment industry. In an MBA class, the instructor can pose the question: is this an example of disruptive

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CASE 27 Under Armour technology? Was UA a classic disruptor who took advantage of flying under Nike’s radar? What students should get out of this pasture of discussion is a sense of UA’s advantage because of its timing of entry. 2. What is UA’s competitive position in performance apparel at the time of the case? Can it sustain its position? Once UA’s first mover advantage is clear to students, the instructor should move the calendar forward to the present and pose the question: what is UA’s competitive standing now that Nike and Champion (among others) have entered the performance apparel industry? As a backdrop to this discussion, the instructor can steer the students to examining UA’s valuable resources as a way to reinforce the resource-based view concepts. UA had a 78 percent market share in the performance apparel market in 2009. Clearly, it was the market leader and has been able to hold on to its first mover advantage. Nike, Adidas, and Champion had introduced their own performance apparel brands, but haven’t been able to make deep inroads into UA’s market share. Why is this so? The discussion should turn to an evaluation of UA’s strategy diamond, in particular, its differentiators and economic logic. What are UA’s differentiators? Students are likely to point out UA’s brand name, its product technology (i.e., the performance attributes of the product), and the athletes who endorse the product. Once again, the “A” students will likely point out that, for UA’s target market, the brand is seen as the maverick, a brand that they discovered for themselves and not one (like Nike) that they have seen their parents wearing. There is a quote from Kevin Plank in the case that reiterates this: “we’re the athletic brand of this generation …” Using these differentiators, UA was able to charge a premium price for its product and, as case Exhibit 3 points out, has not been forced to reduce its price upon the entry of competitors. The instructor should encourage students to identify UA’s key resources/capabilities and have them take each resource through the VRINE (valuable, rare, costly to imitate, non-substitutable, exploitability) framework. This will allow the students to see the link between UA’s differentiators and its economic logic. Resources/capabilities such as the brand name (which is both a resource and a differentiator), technology (which is embodied in product performance), and channel relationship are key here. By applying the VRINE framework, students should get a sense of the sustainability of UA’s competitive advantage in performance apparel. For example, path dependence could be a key barrier to imitation as far as the brand name is concerned, while some element of causal ambiguity prevents imitation of UA’s technology. In an MBA class, the instructor (especially if there is a written assignment involving the case) can encourage students to create UA’s activity system (a concept developed by Michael Porter) to show how strong the activities are and how their interconnectedness—technology with brand name, both technology and brand name with endorsers’ support as well as the support of channel partners such as Dick’s Sporting Goods help reinforce UA’s competitive advantage. At the end of this pasture of discussion, students should come away with a clear understanding of what gives UA a sustainable advantage in the performance apparel market. As a segue to the next question, the instructor can pose the question: is UA’s competitive advantage limited to performance

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CASE 27 Under Armour apparel or can it extend to other segments of the athletic equipment industry? 3. Compare the performance apparel and footwear industries. Examine UA’s motivation for entry into this market. The key point to be brought out in this pasture of discussion is that, while UA created the performance apparel industry, there are entrenched competitors in the athletic footwear industry at the time of UA’s entry. While Nike and Adidas may have been caught unaware by UA (the disruptor) in performance apparel, the dynamics of the game in athletic footwear is very much in their favor. They have a number of advantages going for them in athletic footwear: well-established product line, strong brand recognition, solid channel relationships, a broad category of athlete endorsers, and above all, sizeable market share. In fact, as the case points out, Nike’s advertising budget is greater than UA’s revenues! Students may point out that Kevin Plank regards UA brand name as particularly appealing to its target market. Wouldn’t this help UA’s entry into footwear? It would certainly help UA, but Nike has a strong brand name in athletic footwear and so does Adidas. The bulk of this discussion should center on the nature of two important resources that UA has—its brand name and its moisture wicking technology—and the issue of their transferability to athletic footwear. In their article, Ghemawat and del Sol examine resources from a key perspective: usage specificity. Some resources are valuable but their usage is limited to specific contexts. These are in contrast to “usage flexible” resources that do not have the same constraint. Usage flexible resources allow the firm to leverage them in multiple contexts. The question that the instructor should pose to the class is this: are UA’s brand name and moisture wicking technology limited to the performance apparel market or would they be equally valuable in athletic footwear? This is likely to lead to an intense debate, particular the issue of the brand name. As a pioneer, is UA’s brand name too closely associated with performance apparel that people may not normally think of shoes when they think of the UA brand name? Here is where the class should debate the Kevin Plank quote: “We’re the athletic brand of this generation. The 15-year old kid of today is not growing up and saying, ‘Golly Jeez, I really want a pair of that brand with the orange (Nike) box.’ They’re growing up and saying, ‘I want a pair of Under Armours.’” Is Plank overestimating (understandable, as he is the founder and CEO) the value of the UA in non-performance apparel contexts? Consider the comments of Eli Portnoy and Laura Ries, two marketing experts. They believe that the UA brand name is too closely tied to the “undergarment” segment and that it does not transfer well outside it. The “A” students will discern that these are the personal opinions of the people involved (Plank, Portnoy, and Ries) and that there is no objective evidence that the brand does not transfer (while the “C” students will probably not make the distinction between fact and opinion). The debate should then move to the transferability of moisture wicking technology. How does moisture wicking help in shoes? Is UA featuring moisture wicking as a major element of its footwear? Neither is supported by case facts. While moisture wicking is integral to an undergarment, it appears to

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CASE 27 Under Armour be less integral to footwear. Also, it does not appear that UA is making moisture wicking a major element of its footwear advertising. This pasture should end with UA’s motivations to enter the footwear segment. Three percent of the market is all that UA is looking for (“The Pursuit of Three Percent”) since this is 3 percent of a $31 billion market and getting that would nearly double UA’s revenues. UA probably looks at this as so low a market share to be under the radar of Nike and Adidas. UA may also believe that its brand name is valuable in the entire athletic equipment context and so sees this as a major opportunity to capitalize on. 4. What would your recommendation be to Kevin Plank about UA’s future? Explain your rationale. The discussion in the above pastures should set the stage nicely for the “action” question. The decision has to do with UA’s entry into the athletic footwear market and whether this decision is the right one or should UA put more resources into international expansion. While there is nothing theoretically wrong with pursuing both, students should keep in mind that UA has limited resources (money, top managers, etc.) and so may not be very effective in doing both. It may be forced to emphasize one over the other. A good way to look at the footwear industry entry question (in addition to the usage specificity issue raised earlier) is to go back to the “differentiators” and “economic logic” issues discussed in Question two. Do the same differentiators work equally well in athletic footwear as they do in performance apparel? Is the link between differentiators and economic logic as sound here as it is in performance apparel? Evidence in the case seems to suggest otherwise. The case points out that: there was a decline in gross margins in 2009 because of “less favorable footwear and apparel mix,” liquidation of unsold footwear, the failure of the running shoes launch, etc. Are these to be taken as “teething” troubles and are typical of a new market entrant? The other pasture here is to ask the question: is the performance apparel segment saturated or is there growth still in this segment? What about international expansion? Kevin Plank is worried that the company is going to miss the boat on growth. His quote, “the time between $500 million and $1 billion is a weird time. It’s the Bermuda Triangle…” is telling. Is UA’s entry into footwear a knee-jerk reaction to the “Bermuda Triangle” of growth? UA has almost no international presence—it gets 94 percent of its revenues from the United States and Canada. As Plank remarks, “we haven’t sold a single t-shirt in China.” International expansion is a key move that UA has to make. Its 78 percent market share in the U.S. is a valuable strength that it can leverage abroad. In the United States, UA is synonymous with performance apparel and so it makes sense to capitalize on this abroad. The instructor should steer the class to examine the international opportunity for UA. If the class has international students, perhaps their perspective on how UA would be perceived in their home market would be a useful debate point. Summary and Key Takeaways

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CASE 27 Under Armour The instructor should summarize the discussion at this point so that the students leave the class with key takeaways. UA is a successful company that created a new market—a blue ocean market—and established a 78 percent U.S. market share in it. It has a number of key resources supporting its competitive advantage in performance apparel. The entry into footwear is tricky, though. It faces entrenched competitors—Nike and Adidas—and there is also the question of what advantage it can carry over to footwear from performance apparel. Is its footwear entry taking its attention away from opportunities in performance apparel outside of the United States and Canada? Key takeaways include the importance of managing growth (the Bermuda Triangle issue), the salience of context-specific differentiators that may not have equal value in other contexts, the value of a resource-based strategy, and the key issue of allocating resources among various company initiatives. VIII. STUDENT STRATEGIC AUDIT I. Current Situation

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CASE 27 Under Armour A. Current Performance 1. History: Founded by Kevin Plank in 2003, he took UA to go public with IPO of $13 in 2005. 2. Economic Performance: •

In 2009, UA earned revenue of $837 million. However, footwear sales declined by 4.5 percent over the second quarter and had 16.6 percent decline for first six months of 2010. While both apparel sales increased by 32.2 percent and accessories sales increased by 28 percent. In 2010, UA had a market cap of $2.28 billion.

B. Strategic Posture 1. UA’s current mission, objectives, strategies, and policies are both clearly stated and can be seen from its performance. 2. UA is in the sports clothing and accessories business. Its mission is “TO MAKE ALL ATHLETES BETTER THROUGH PASSION, DESIGN AND THE RELENTLESS PURSUIT OF INNOVATION.” It is an appropriate statement for UA because its products are meant to provide high-end performance for sports enthusiasts. 3. The corporate business and functional objectives are to 1) achieve both growth in sales and profits, 2) provide technological leadership in the field of performance apparel, and 3) increase leverage for UA brand across broader categories, such as footwear and deeper into international markets. These objectives are consistent with its strategic postures. 4. The corporate, business and functional strategies are to pursue: 1) growth through innovation and increased performance apparel technologies with development and sale of the footwear line is to create higher demand and revenue; 2) product differentiation with focus on a competitive pricing strategy; 3) highly integrated marketing and sales through its distribution channels; and 4) increase international market share through its international expansion. These strategies are consistent with its strategic postures. 5. The policies are to focus on utilizing microfiber technologies, and on producing high performing apparels. UA has an extensive portfolio of intellectual properties from its proprietary technologies that are used to provide better overall performance. They are consistent

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CASE 27 Under Armour with its strategic postures of producing highperformance apparel that the latest technologies. 6. UA’s current strategic postures reflect its international expansion plan. Despite declining footwear sales in 2009 and 2010, Kevin Plank believes that UA needs to have major presence in global athletic footwear industry. He mentioned that “thirty-five share of the market would nearly double UA’s total revenues.” Current international branded footwear market is worth $31 billion. II. Corporate Governance A. Board of Directors 1. The eight members of BOD are Kevin Plank, Byron Adams Jr., Douglas Colthrap, Anthony Deering, A.B. Krongard, Bill McDermott, Eric Olson, Brenda Piper, Harvey Sanders, and Thomas Sipple. They are all external directors, except Kevin Plank, Chairman & President, CEO and Byron Adams, CPO. 2. In total, the BODs own in total around 30 percent of its shares, with Kevin Plank owning 25 percent of the shares. 3. The stock is publicly traded. 4. The directors have diverse work experiences in industries such as design, manufacturing, finance, marketing, investment, software, law, and corporate governance. They also have international experience necessary to support its international expansion. 5. Most of them have been Under Armor directors since its IPO in 2005. 6. These board members are actively involved in Under Armor’s strategic management. They actively participate and suggest its future directions. B. Top Management 1. The top management consists of Kevin Plank (Chairman, President and CEO), Byron Adams (CPO), Brad Dickerson (CFO), Kip Fulks (COO), Karl-Heinz Maurath (President, International), Gene McCarthy (SVP of Footwear), Matthew Mirchin (SVP, Global Brand & Sport Marketing), Adam Peake (SVP of US Sales), John Rogers (VP/GM of Ecommerce), and Henry Stafford (SVP of Apparel). 2. The ten executives have diverse work experiences, with backgrounds in different industries including

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CASE 27 Under Armour technology, consulting, design, sales, and marketing. They are international experts in countries such as in Latin America and Scandinavia. 3. The top management has been responsible for Under Armor’s performance over the past few years. They helped Under Armor to strive in sport apparel industry. 4. It has established a systematic approach to strategic management only to a certain extent, due to Under Armor’s nature of using innovation as its main drive of growth. 5. The executives have been heavily involved in the strategic management process. 6. N/A 7. Strategic decisions are made ethically in a socially responsible manner. Being socially responsible is part of Under Armor’s corporate culture. Its principle of developing nonpetroleum-based vehicles clearly shows its commitment to foster sustainability. 8. N/A 9. Top management is sufficiently skilled to cope with likely future challenges. They have directed Under Armor into the right direction towards overall growth. III. External Environment—EFAS refer Exhibit 1 A. Societal Environment (PESTEL Analysis) 1. Economy a) General performance apparel and footwear industry is growing and is huge globally (O). i. Regarding athletic footwear industry, UA is competing in a huge global industry. ii. In performance apparel industry, that UA created, it has 78 percent market share in 2009. b) The economic recovery has created more demand for higher-priced products (O). c) UA’s pricing strategy is very competitive, similar to Nike, and much higher compared to the rest of apparel industry (T). 2. Technological Industry-related technology is always advancing in sporting goods industry. Some are available for general use, however, most technologies are proprietary. Many companies

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CASE 27 Under Armour own patents on technologies that they developed in-house. Development of new technologies will indirectly decrease cost of production and definitely increase price tag of the products, due to its more advanced features (O). 3. Political—Legal As most of the sporting goods companies outsource their manufacturing functions, they are prone to labor related issues, such as sweatshops and underage labors. Many companies, in fact, have been charged with this issue. (T) 4. Sociocultural a. The women’s segment of the sports apparel category is the fastest growing industry segment. Women are now spending more of their income on sporting apparel (O). b. Apparel made from synthetic products is the fastest growing segment in the sports apparel market. More and more people want lighter and better performing sports apparel (O). c. More people are getting more conscious of their health, and exercising is one of the proven ways to stay in shape (O). d. Customer perceptions of performance apparel being just for athletes, not for everyone. The value of the performance may not be widely realized (T). e. Similar to the fashion industry, this industry is highly based on trends, meaning that customers’ perceptions on products are constantly changing (T). B. Task Environment 1. Threat of New Entrants: Low a. Advance technology is well understood by major sporting goods companies. b. It is very difficult to get into such a saturated industry. Products have to be both cutting-edge and affordable. c. A competitor needs to develop its own technologies or partner with another company. 2. Bargaining Power of Buyers: High a. Saturated industry, customers are highly influenced by trend and have a number of choices in each category of sporting goods. b. Companies compete on a variety of price points. 3. Threat of Substitute Products: Low a. Substitute products: casual apparel, non-specialized footwear. b. Due to large selection of sporting goods, and its relatively low price, substitute products are not as favorable by customers. 4. Bargaining Power of Suppliers: Low a. Products manufacturing are sourced to many suppliers and contractors. Companies typically have local offices to monitor their manufacturers.

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CASE 27 Under Armour b. As the industry is highly based on latest technology and trend, contractors need to compete to produce on-time. 5. Rivalry Among Competing Firms: High a. Primary competitors are Nike, Adidas, Champions, New Balance, Reebok, Puma, Fila, Le Coq Sportif. b. Competition among them is highly based on price points. Technology is secondary factor to most of them. Only those that sell in the higher range of the price, competes on technology. 6. Power of Other Stakeholders: Low a. Labor unions are constantly protesting against the industry regarding the companies’ actions towards their labors. However, they are not very much affected as labor laws are not as strict abroad, where they manufacture their products. C. Summary of External Factors Based on the PESTEL Analysis and Porter’s Five Forces, Under Armour, as an incumbent, is in an attractive performance apparel and footwear industry. Due to intense competitive rivalry, UA needs to always differentiate itself and offer cutting-edge technology to the customers. UA has large room to grow, considering that the company is considering expanding globally to large untapped market such as China, India, Indonesia, etc. It is crucial for UA to keep its customers satisfied with the products based on the price they are paying for, as it will lead to long lasting brand loyalty. IV. Internal Environment—IFAS refer Exhibit 2 A. Corporate Structure 1. UA’s current corporate structure is centralized, with all the decisions made in the HQ. UA also relies heavily on its intellectual property and its patents. It is organized on the basis of functions which can be clearly seen from the role of the top-level executives (S). 2. The structure is clearly understood by everyone in the corporation (implied by case). 3. Currently, structure is consistent with its corporate strategies (S). 4. Not typically comparable to other companies of this type and size as most of similar operations that focus on performance apparel is a department within a large company (S). B. Corporate Culture 1. Despite operating in a considerable rigid industry, there is a shared belief of employing innovation in works and operates as a football team; its environment is fast paced (S). 2. The culture of innovation and hardworking is consistent with its corporate strategies (S).

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CASE 27 Under Armour 3. The culture holds the central role in solving problems faced by the corporation (S). 4. The culture is compatible with the employees’ diversity of backgrounds in sporting goods industry. UA operates its business like a football team (S). 5. UA outsourced almost all of its manufacturing to contract manufacturers in Asia and Latin America. However, UA operates a small manufacturing facility in Glen Burnie, Maryland to provide superior and quick service to special customers (S). C. Corporate Resources 1. Marketing a. Under Armour brand is heavily tied to the high-performance apparel, which started with providing athletes with what they need. Marketing strategies are guided by its brand mission as well (S). i. Marketing strategy is clearly stated from its company’s vision of “The athletic brand of this generation. And next.” ii. They are consistent with the corporation’s overall strategic postures. b. Under Armour’s current marketing outreach is focused on the performance apparel industry. The marketing mix (4Ps) is targeted on individuals in the fifteen–to–twenty-five age groups. UA focuses on a narrower segment of “athletes”. It has a very competitive pricing strategy. UA revenue is mainly from the US and Canada, with more than 20,000 stores selling its products. (S) i. Trends emerge is that customers are becoming more aware of higher performance apparel. ii. The trend has significantly impacted past performance and will definitely boost future performance. iii. This analysis supports the corporation’s past and pending strategic decisions. iv. Marketing does provide UA with significant advantage. UA use “influencers” to market his products. c. UA’s marketing performance compared to other corporations is as advance and as rigorous as other companies. It spends around 13 percent of its revenues on marketing. d. N/A e. The marketing operations outside the US is still very limited, with 95 percent of its revenue coming from the US and Canada. However, UA is strategizing to go into foreign market firstly through its footwear line.

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CASE 27 Under Armour f. N/A 2. Finance a. Main objectives are to increase growth in profits and sales by creating and selling new products as well as providing technology leadership with its performance apparel products. UA broke down its revenues into apparel, footwear, accessories, and licensing (S). i.

The objectives are clearly stated.

ii. The objectives are consistent with their goals of creating sustainable long-term growth. UA is dedicated to building out large scalable businesses beyond its current business drivers. It wants to enter international markets as well. b. Under Armour cash position isn’t ideal due to its footwear segment. Despite the IPO in 2005, UA has -7.5 percent cash flow margins in 2007. It has been recovering ever since. UA had a decline in gross profit margins in 2009 due to less favorable footwear and apparel product mix and liquidation of unsold footwear inventory. UA has generally consistent and favorable margins (W). i. UA is a dominant leader in the performance apparel industry and has many proprietary technologies. However, in the footwear industry, UA is not performing as well as it would want to. ii.

N/A

iii. UA’s decline in profit margin in 2009 is a result of uncertainty in customers’ buying trends. UA financial future success depends largely on its extensive marketing initiatives. iv. Yes, UA is planning to expand its footwear line globally and it is focusing on improving its technologies in the performance apparel industry. v. Finance does provide UA with a competitive advantage as they are considerably stable financially at the moment. c. UA’s financial performance is comparable to other sporting goods companies. Its market capitalization is not as large as other larger companies, due to its specialization in performance-based products. d. Yes, they are a public company that is required to follow GAAP and SEC regulations. e. N/A f. N/A 3. Research and Development (R&D) a. The technologies are the main source of advantage for UA. These are the microfiber/temperature control that helps speed up the evaporation of sweat,

27-16 .


CASE 27 Under Armour marketed as the ColdGear and HeatGear; “LockerTag” that prevent skin irritation from tags and labels. (S) i. The R&D objectives are implied by the business they operate in (performance apparel industry) and their financials with the operating expenses heavily weighted to R&D. ii. Yes, it is consistent with their objective to provide highperformance apparel for “athletes.” iii. Technology is critical to corporate performance. The company’s revenue stream is contingent on developing superior performance related products. iv. Yes, they are focused on technology innovation and education and put the appropriate resources toward that objective. v. Yes, their biggest competitive advantage is their proprietary technologies that are patented or patent pending. b. They are earning revenues from the sales of the performance apparels, footwear, and accessories (S). c. As any other sporting goods companies, UA’s product design is kept at its HQ. There is no technology transfer to the manufacturing division, as it is all outsourced (W). d. N/A e. Their investment in R&D is considerably more compared to other sporting goods companies due to its focus on high-performance technology. f. N/A; products design is done in the US. g. N/A 4. Operations and Logistics a. UA outsourced almost all of its manufacturing to contract manufacturers in Asia and Latin America. A team from UA evaluates potential contract manufacturers on quality, social compliance, and financial strengths prior to certifying them. Manufacturers procure raw materials and provide finished products to company’s distribution facility. Manufacturing contracts are typically short-term and UA ensured that it has multiple manufacturers for a single product. It also operates a special make-up shop in Glen Burnie, Maryland to provide superior, quick service to special customers (S). i. They are clearly stated in the case. ii. It is consistent with its strategy of keeping high standard for its products.

27-17 .


CASE 27 Under Armour b. UA operates two leased distribution facilities in Glen Burnie, MD, near its HQ in Baltimore, MD. Products are shipped to retailers and company stores via third party logistics provider, both in US and Europe. Because of overseas manufacturing, lead times for design and production is long (W). i. UA outsources all of its manufacturing plants. ii. N/A c. Outsourced manufacturing may be vulnerable outside attention of not complying with international labor standards. Local manufacturers typically have fewer requirements for operations (W). d. N/A e. UA cost of production is similar to other sporting goods companies that outsource their manufacturing division. i. UA needs to ensure the overall issues related to outsourcing to developing countries. ii. UA has to make sure that the contractors remain compliant to prevent any legal issues. iii. UA’s Hong Kong and Guangzhou, China offices support and monitors its manufacturing activities for apparel and footwear. iv. The operations don’t yet provide the company with a competitive advantage except for their proprietary technologies. f. Due to nature of outsourcing, UA does not have full control of manufacturing process (W). g. N/A h. N/A 5. Human Resources Management (HRM) a. UA employed 3000 people in September 2010. Half of the employees work at manufacturing facilities, with the rest of distribution facilities and corporate HQ. UA’s employees are non-unionized. UA has a very strong football-based corporate culture. UA uses football terms such as teammates and huddles. UA believes in playing offense even in a tough economic condition. It has a get-it-done attitude and never considering UA to be too small to take on other sporting products giants (S). i. The HRM objectives and strategies are clearly stated in the case, even going as far to use the phrase ‘teammates’ to refer to employees. ii. Yes, HRM is consistent with its goals to provide high-performance products.

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CASE 27 Under Armour b. UA’s HRM strategy is largely based on its culture and history of the founder (S). i.

UA manages its HRM as a football team.

ii. Strong company culture will increase employees’ sense of ownership to the company. iii. Yes, the company’s focus is on innovation and the HRM practices coincide with that focus. iv. Yes, the HRM gives the company a competitive advantage by integrating strong culture to its business operations. v. Yes, the get-it-done attitude is a source of competitive advantage. c. N/A d. N/A e. N/A f. N/A; Manufacturing division is outsourced to contractors. g. N/A 6. Information Systems (IS) There is very limited information on usage of IS as a strategy for Under Armour. The case does emphasize the role of technology in UA’s products, however, there is not enough information to imply on IS role. D. Summary of Internal Factors Currently, marketing is Under Armour’s core competency. With strong “influencers,” UA could effectively market its products to “athletes” or those who would want high-performance sporting apparel. R&D is also a source of competitive advantage for UA as its technology enables the company to strive in performance apparel industry. UA is dominating the performance apparel industry with 78 percent market share in 2009. As any other sporting goods companies, UA outsourced most of its manufacturing activities and keep one small, specialized manufacturing close to its HQ for special customers. Financial performance shows encouraging trend despite bad cash flow margin in 2007. Regarding HRM, UA runs its business like a football team. It has such a strong corporate culture that is based on its no-give-up attitude. V. Analysis of Strategic Factors (SWOT) A. Situational Analysis—SFAS refer Exhibit 3 Please refer to Exhibit 3, the Strategic Factors Analysis Summary. B. Review of Mission and Objectives

27-19 .


CASE 27 Under Armour There is no change required for UA’s mission and objectives. VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. The current objectives can be met if UA continues to focus on its technology improvement to create high-performance products. UA also has to ensure that it maintain proper control of its contract manufacturers. UA has to ensure that it keeps improving its marketing strategies, to better understand the needs of the customers. Lastly, UA needs to ensure that the footwear segment could be improved through more aggressive efforts to promote the products globally. 2. The major alternative strategy that is available to UA is to just focus on the performance apparel and accessories, momentarily stopping its footwear segment. Under this strategy, UA will have more time to experiment and improve its footwear technology. UA needs to produce higher performance footwear then create a new segment in footwear industry, similar to what it did in the apparel industry. UA then would not be affected by the financial burden of the footwear segment. a) Cost leadership would be a difficult strategy for UA to implement due to the high costs associated with improving high-performance technologies. It is also against UA’s fundamental mission and strategic direction. Based on the industry that UA is in, differentiation fits the best. It is currently leading the performance apparel industry, and it has to maintain its lead against other companies. b) It would be difficult for UA to adopt a stability corporate strategy because it will remain stagnant. It is the least applicable to UA. A growth strategy is the best option for UA because there is still large percentage of untapped market in the industry. UA needs to capitalize this opportunity. c) A clear functional strategy that would fit well with current business and corporate level strategies at UA would be a technological and marketing advancement. UA needs to be willing to fund technologies R&D and marketing research to improve its product offerings to retain and attract new customers. UA needs to educate the public that its products are not just for athletes; it is of high value to everyone that does any kind of sports. B. Recommended Strategy 1. I believe that UA should pursue a differentiation business level strategy. This will allow UA to maintain its leadership status in performance apparel industry. UA will be able to create high quality product and charge a premium price. For corporate level strategy, growth strategy suits UA well. Sporting products industry is still slowly expanding as more people find the benefit of exercising. In addition to keeping is majority share in performance apparel industry, UA needs to invest in technologies and marketing efforts to break into global footwear industry. It is the functional strategy that UA should pursue. 2. The differentiation strategy is made possible due to the strategic factors related to technology advancements and strong marketing initiatives.

27-20 .


CASE 27 Under Armour It will address short-term problems such as decrease profit margin for certain segment, and will also tackle long-term issues of maintaining growth. The corporate level strategy of growth will address the issues related to increasing interest in synthetic based apparels and also the uprising group of people that will pick up exercising. Growing the products functionality will let UA provide customers with a larger amount of options to fit their needs. It will also generate higher revenues for the company. Finally, technological and marketing leadership is crucial as a foundation for UA. 3. The way that the company is shaped currently is mostly in line with the strategic direction that UA needs to follow. However, more focused efforts on marketing the footwear segment are of utmost importance for UA to be able to grow globally. 4. The proposed revised strategies would coincide well with the existing corporate environment and distinctive competencies. UA would continue to leverage its strong culture to focus on R&D on both technology and marketing. One possible area of concern is related to the fact that companies that outsource often entangled to issues related to labor law. UA need to maintain the high standard in its offshore contract manufacturing plant. VII. Implementation A. N/A B. The proposed strategies are financially feasible. If done properly, it would only increase UA’s cost to certain extent as these improvements will reflect on overall sales and increase brand recognition. C. No radical new operating procedures needed to be developed. UA’s mission and objectives clearly resonate with the proposed strategies. Overall, UA needs to increase its effort in what it is best at, technology and marketing initiatives. VIII. Evaluation and Control A. N/A the case does not discuss information systems at Under Armour. B. N/A Exhibit 1—External Factor Analysis Summary (EFAS)

Key External Factor

Weight

Rating

Weighted Score

27-21 .

Comments


CASE 27 Under Armour

Opportunities Huge Global Market

Trend of Synthetic Apparel Advancing Technology

0.15

2

0.3

0.15

5

0.75

UA dominates the performance apparel industry and competing in the gigantic footwear industry. UA competes in the fastest growing segment in sports apparel market.

0.15

4

0.10

2

0.6

0.2

UA owns one of the best technologies, especially in performance apparel industry. Sports products industry is expanding in terms of age range and gender, with more women consuming the products.

Uprising Interest in Exercising

Threats Competitively Priced

0.10

3

0.3

0.15

3

0.45

Outsourcing Labor Issues 0.10

4

0.4

0.10

3

0.3

Unpredictable Industry Customer Perception

UA competes in the higher price segment along with giants like Nike and Adidas. UA has to constantly monitor its contract manufacturers to avoid legal labor-related issues. Sporting products industry is based highly on trends, difficult to manage customers’ preferences. Many customers could not find the values in performance apparel.

Total Scores

1

3.3

Exhibit 2—Internal Factor Analysis Summary (IFAS)

Key Internal Factor

Weight

Rating

Weighted Score

27-22 .

Comments


CASE 27 Under Armour

Strengths Centralized Corporate Structure Strong Corporate Culture Well-planned Marketing Strategies R&D & Technology Driven

0.05

3

0.15

0.10

3

0.3

0.15

4

0.6

0.15

5

0.75

0.10

3

0.3

UA’s strategic decision-making is handled by executives that truly understand the industry. Strong corporate culture and values have guided UA to where it is today. UA has extensive marketing strategies, such as the use of ‘influencers’ to better target customers. UA’s main drive of growth is through innovative technologies such as the microfiber and “Lockertag.”

Lower Overall Manufacturing Costs

UA outsources its manufacturing operations, but at the same time have multiple manufacturers. Weaknesses No Technology Transfer

0.10

2

0.2

Exposed to Labor Issues

0.10

3

0.3

Unfavorable Cash Flow History

0.10

3

0.3

0.15

4

0.6

Long Lead Time for Design and Production

UA keeps its technology at its HQ, So technology sharing with manufacturing plants. With outsourcing, UA is vulnerable to issues related to developing countries’ lenient labor laws. UA has been significantly impacted by decreasing profit margin in the footwear segment. With outsourcing, UA has less control to its manufacturing; it takes longer to convert the design into products.

Total Scores

1

3.5

27-23 .


CASE 27 Under Armour

Exhibit 3—Strategic Factor Analysis Summary (SFAS)

Duration Key Strategic Factors

Weight

Rating

Weighted Score

Short

Inter

Long

Comments

External Environment

Huge Global Market (O)

Trend of Synthetic Apparel (O)

Advancing Technology (O)

Uprising Interest in Exercising (O)

0.08

2

0.08

5

0.08

4

0.05

2

0.16

0.40

0.32

0.10

27-24 .

X

X

X

X

X

X

UA competes in the fastest growing segment in sports apparel market.

X

X

X

UA dominates the performance apparel industry and competing in the gigantic footwear industry.

X

UA owns one of the best technologies, especially in performance apparel industry. Sports products industry is expanding in terms of age range and gender, with more women


CASE 27 Under Armour consuming the products.

Labor-related Outsourcing Issues (T)

Unpredictable Industry (T)

Customer Perceptions (T)

0.08

3

0.05

0.24

4

0.05

X

0.20

3

X

0.15

X

UA has to constantly monitor its contract manufacturers to avoid legal labor-related issues.

X

X

X

UA has to constantly monitor its contract manufacturers to avoid legal labor-related issues. UA has to constantly monitor its contract manufacturers to avoid legal labor-related issues.

X

Exhibit 3—Strategic Factor Analysis Summary (SFAS)

Competitive Pricing (T)

0.05

3

0.15

X

Internal Environment

27-25 .

X

X

UA competes in the higher price segment along with giants like Nike and Adidas.


CASE 27 Under Armour

Centralized Corporate Structure (S)

Strong Corporate Culture (S)

Well-planned Marketing Strategies (S)

Lower Overall Manufacturing Costs (S)

No Technology Transfer (W)

Unfavorable Cash Flow History (W)

Long Lead Time for Design and Production (W)

Total

0.04

3

0.06

3

0.10

4

0.12

X

0.18

0.40

X

X

X

X

3

0.18

X

X

0.06

2

0.12

X

X

3

0.08

4

1

0.24

0.32

X

X

3.28

27-26 .

Strong corporate culture and values have guided UA to where it is today.

X

X

0.06

0.08

UA’s strategic decision-making is handled by executives that truly understand the industry.

X

X

X

X

UA has extensive marketing strategies, such as the use of ‘influencers’ to better target customers. UA outsources its manufacturing operations, but at the same time have multiple manufacturers. UA keeps its technology at its HQ, so technology sharing with manufacturing plants. UA has been significantly impacted by decreasing profit margin in the footwear segment. With outsourcing, UA has less control to its manufacturing; it takes longer to convert the design into products.


CASE 27 Under Armour

Exhibit 4—Financial Ratios Ratios 12 months Dec-31-2007

12 months Dec-31-2008

12 months Dec-312009

15.9% 20.9% 21.2% 21.1%

10.9% 14.3% 12.5% 12.4%

10.3% 13.4% 12.8% 12.7%

Margin Analysis Gross Margin % SG&A Margin % EBITDA Margin % EBITA Margin % EBIT Margin % Earnings from Cont. Ops Margin % Net Income Margin % Net Income Avail. for Common Margin % Normalized Net Income Margin % Levered Free Cash Flow Margin % Unlevered Free Cash Flow Margin %

50.3% 27.9% 16.6% 14.5% 14.2% 8.7% 8.7% 8.6% 9.2% (7.6%) (7.5%)

48.7% 30.0% 13.6% 10.8% 10.6% 5.3% 5.3% 5.2% 6.0% 4.8% 4.9%

47.9% 29.6% 13.3% 10.2% 10.0% 5.5% 5.5% 5.4% 6.0% 13.7% 13.8%

Asset Turnover Total Asset Turnover Fixed Asset Turnover Accounts Receivable Turnover Inventory Turnover

1.8x 14.7x 7.3x 2.4x

1.7x 11.5x 8.3x 2.1x

1.7x 11.7x 10.7x 2.7x

Short-Term Liquidity Current Ratio Quick Ratio Cash from Ops. to Curr. Liab. Avg. Days Sales Out.

3.4x 1.4x NM 49.8

3.0x 1.4x 0.5x 44.1

3.7x 2.2x 1.0x 34.2

Avg. Days Inventory Out. Avg. Days Payable Out. Avg. Cash Conversion Cycle

149.6 46.1 153.2

171.3 60.1 155.3

135.2 62.4 107.0

Long-Term Solvency Total Debt/Equity Total Debt/Capital LT Debt/Equity LT Debt/Capital Total Liabilities/Total Assets

5.1% 4.9% 3.5% 3.3% 28.2%

13.8% 12.1% 4.0% 3.5% 32.1%

5.1% 4.8% 2.7% 2.6% 26.7%

For the Fiscal Period Ending Profitability Return on Assets % Return on Capital % Return on Equity % Return on Common Equity %

27-27 .


CASE 27 Under Armour

i

Under Armour Press Release, July 27, 2010, http://investor.underarmour.com/releases.cfm

ii

Op.cit.

27-28 .


W27060

Teaching Note Case 28 - TEACHING AXIS BANK: CALIBRATING CSR INITIATIVES FOR A SUSTAINABLE FUTURE1 Professor Samir Barua and Mahendra Gujarathi wrote this teaching note as an aid to instructors in the classroom use of the case Axis Bank: Calibrating CSR Initiatives for a Sustainable Future, No. W27059. This teaching note should not be used in any way that would prejudice the future use of the case. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveypublishing.ca. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs Copyright © 2024, Ivey Business School Foundation

Version: 2022-08-04

SYNOPSIS

Axis Bank was the fifth-largest bank in India, one of the world’s fastest-growing economies. In 2006, the bank set up a trust, Axis Bank Foundation (ABF), to manage its corporate social responsibility (CSR) initiatives. In Phase 1 (fiscal year [FY] 2011–2017) of its CSR journey, the Axis Bank had followed three of the Millennium Development Goals (MDGs) of the United Nations (UN) and achieved the mission of “generating one million livelihoods in a sustainable manner,” ahead of schedule. Encouraged by the success of Phase 1, Axis Bank’s CSR Committee discussed the possibility of including three additional Sustainable Development Goals (SDGs) to guide Phase 2 (FY 2018-2025) with the mission of “generating livelihoods in a sustainable manner for two million households.” Rajesh Dahiya, who oversaw Axis Bank’s CSR initiatives, was faced with several key decisions for framing the CSR strategy for Phase 2. In his presentation to the committee scheduled for early April 2018, Dahiya had to perform an evaluation of the performance in Phase 1 and the lessons learned in that phase.

LEARNING OBJECTIVES

By working through the case and assignment questions, students will be able to do the following: • • 1

Understand the rationale for voluntary CSR initiatives, and the pros and cons of making CSR spending mandatory. Evaluate the success of Axis Bank’s CSR initiatives in Phase 1 in promoting the MDGs of the UN.

All case facts and case research that are referenced in this teaching note are supported by the sources and information contained in the associated case document (product No. W27059) unless otherwise specified.


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Recommend changes in the CSR strategy for Phase 2, leveraging the lessons learned from Phase 1 and the development goals embraced for Phase 2. Identify lessons that organizations engaged in sustainable livelihoods can draw from the CSR initiatives of Axis Bank.

POSITION IN COURSE

The case is designed primarily for graduate and executive-level education courses on CSR, and modules on CSR in courses on corporate governance, corporate strategy, sustainable development, business ethics and society, and business and society. It can also be used in an undergraduate corporate strategy course that includes CSR as a topic. Instructors should advise students that careful reading of and reflection on the description of the field visits in the case will help them to gain perspective on the socio-cultural milieu for which the Phase 2 CSR strategy has to be designed and implemented.

RELEVANT READINGS

The following two practitioner-oriented journal articles would be useful to orient students’ before they read the case. The first article argues in favour of CSR, while the second argues against CSR. • •

Archie B. Carroll and Kareem M. Shabana, “The Business Case for Corporate Social Responsibility,” The Conference Board, June 2011, https://www.academia.edu/37827729/The_Business_Case_for_Corporate_Social_Responsibility. Aneel Karnani, “The Case against Corporate Social Responsibility,” The Wall Street Journal, August 23, 2010.

Links to Theoretical and Applied Frameworks

The case is suitable for analyses using the following two theoretical frameworks and precepts: 1. Evolution of CSR and Issues around Making CSR Spending Mandatory There is considerable debate over whether for-profit organizations ought to engage in not-for-profit activities in the form of CSR. Postmodern business organizations are adopting triple-P reporting where in addition to Profit, they report on their performance on People and Planet (environment). Another popular three-factor construct for reporting is ESG (E = environment, S = social, G = governance), which emphasizes that good governance requires companies to fulfill their responsibility towards society and the environment, in addition to earning profits. These perspectives are gaining increasing recognition and acceptance by the corporate world. Instructors may find the following readings useful for a discussion on CSR and its role in the emerging corporate environment.


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Archie B. Carroll, “A History of Corporate Social Responsibility: Concepts and Practices,” Oxford Handbooks Online, February 2008. • Michael E. Porter and Mark R. Kramer, “Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility,” Harvard Business Review 84, no. 12 (2006): 78–85. Available from Ivey Publishing, product no. R0612D. • Michael E. Porter and Mark R. Kramer, “The Big Idea: Creating Shared Value,” Harvard Business Review 89, no. 1–2 (2011): 62–77. One or more of the following readings may be assigned to familiarize students with India’s statutory requirement regarding CSR spending: • •

Aneel Karnani, “India Makes CSR Mandatory: A Really Bad Idea,” The European Financial Review, October 29, 2013, https://www.europeanfinancialreview.com/india-makes-csr-mandatory-a-reallybad-idea/. Nayan Mitra, Debmalya Mukherjee, and Ajai S. Gaur, “Mandated Corporate Social Responsibility in India: Opportunities, Constraints, and the Road Ahead,” in Rethinking Business Responsibility in a Global Context, eds. Bodo B. Schlegelmilch and Ilona Szőcs (Switzerland: Springer Nature, 2018), http://dx.doi.org/10.2139/ssrn.3294352. Manfred Max Bergman, Zinette Bergman, Yael Teschemacher, Bimal Arora, Divya Jyoti, and Rijit Sengupta, “Corporate Responsibility in India: Academic Perspectives on the Companies Act 2013,” Sustainability 11, no. 21 (2019): 5939. https://doi.org/10.3390/su11215939.

2. Challenges in Implementing CSR Initiatives and UN’s Development Goals Businesses need to be sensitive to the traditions and socio-cultural ethos of the people they choose to serve through their CSR initiatives. Properly implemented CSR initiatives can enhance the reputation and stature of a corporation and minimize the negative fallout from the CSR interventions. Instructors may find the following readings useful for discussing Axis Bank’s emphasis on the empowerment of women and its centrality in bringing about social change: • •

Helen M. Haugh and Alka Talwar, “Linking Social Entrepreneurship and Social Change: The Mediating Role of Empowerment,” Journal of Business Ethics 133 (2016): 643–658. François Maon, Adam Lindgreen, and Valérie Swaen, “Designing and Implementing Corporate Social Responsibility: An Integrative Framework Grounded in Theory and Practice,” Journal of Business Ethics 87 (2009): 71–89.

The following reading may also be useful for a discussion on the alignment of SDGs with CSR strategy: •

Mark R. Kramer, Rishi Agarwal, and Aditi Srinivas, “Business as Usual Will Not Save the Planet,” Harvard Business Review, June 12, 2019, https://hbr.org/2019/06/business-as-usual-will-not-savetheplanet. Available from Ivey Publishing, product no. H050AC.

SUPPLEMENTAL MATERIALS


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Instructors may encourage students to view the following two YouTube videos, to arouse their interest in the case: •

Axis Bank, “Axis Bank Foundation | 10 Years of Creating Sustainable Livelihoods,” January 5, 2017, YouTube video, 6:32, https://www.youtube.com/watch?v=SmvfzlF76PA. This video provides a glimpse into the CSR activities of Axis Bank and the lives touched so far.

United Nations, “Sustainable Development Goals: Improve Life All Around the Globe,” August 18, 2017, YouTube video, 2:47, https://www.youtube.com/watch?v=kGcrYkHwE80. This hip-hop music video, produced in co-operation with the UN, addresses the importance of the SDGs and how they can help build peace.

ASSIGNMENT QUESTIONS

Instructors should provide the following questions to students ahead of the class to help them prepare for the class discussion. If the topic of the need and evolution of CSR has been addressed elsewhere in the curriculum, instructors can skip Question 1(a). Assignment Questions 2, 3, and 4 (evaluating the success of Phase 1, recommending changes in Phase 2, and identifying lessons for other organizations engaged in sustainable livelihoods) pertain to the questions that Dahiya was asked in Axis Bank’s CSR Committee meeting. 1. a) Why do corporations voluntarily spend on CSR initiatives? Is such spending consistent with the idea of shareholder value maximization? b) What are the pros and cons of making CSR spending mandatory for corporations? 2. Dahiya must outline to the CSR Committee how the bank’s CSR strategy achieved the goal of sustainable livelihoods in Phase 1 using three of the UN’s MDGs. Citing specific data from the case, what should Dahiya highlight in his presentation? 3. What changes would you recommend for Phase 2 to enhance the effectiveness of the CSR initiatives, given ABF’s experience in Phase 1 and the addition of three development goals? Make sure to address the concerns of the CSR Committee regarding both deepening the engagement with the beneficiaries in Phase 1 instead of simply adding two million households in Phase 2, and the number of nongovernmental organization (NGO) partners to ensure effective monitoring. 4. Dahiya has been asked to present the lessons that can be generalized based on the experience of ABF in implementing CSR projects. Using specific examples from the case, what should Dahiya highlight in his presentation?

TEACHING PLAN

CSR is often understood as an exercise in social philanthropy, one that leverages social context to improve the competitive context of the firm (see Porter and Kramer, 2006), or in shared value creation, one that aims to enhance the competitiveness of a firm while simultaneously advancing the economic and social conditions in the communities in which the company operates (see Porter and Kramer, 2011). However, for most companies in India, CSR represents corporate philanthropy and community giving. We suggest the following time allocation for a class session of 75–80 minutes.


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Segment CSR and CSR funding: discretionary or mandatory? Critical evaluation of the CSR strategy of Phase 1 Recommendations for changes to the CSR strategy in Phase 2 Generalizable lessons for creating sustainable livelihoods Concluding comments

Discussion Topic Time (minutes) The role of CSR as an element in corporate strategy and governance. Arguments for and against CSR 15 and mandatory CSR spending. The design and execution of the CSR strategy in Phase 1. The performance of the CSR strategy visà20 vis the development goals of the UN. Changes to be made in Phase 2, given the experience in Phase 1, and the addition of three 20 more UN development goals. Identify the ingredients of a successful and sustainable CSR strategy and its implementation. 20 Importance of sensitivity to the socio-cultural milieu in which CSR projects are implemented. Summarize takeaways and conclusions. 5

In each segment of the class (with the exception of the first segment), students in groups of three or four may be given about ten minutes to discuss their answers. As Dahiya has been asked to make a presentation to the CSR Committee, it might be useful to ask each group to summarize their presentation in two or three PowerPoint slides. Instructors can share the PowerPoint presentations of a few groups with the class, to initiate discussion. If the case is taught in an online environment, the class may be broken up into groups of three or four, which can be assigned to breakout rooms for each question (except the first one). We recommend that the composition of the breakout rooms (students) be kept the same for each question. This will obviate the need for introductions and warming up each time, and the groups can benefit from their answers to the previous questions. To conclude the class discussion, the quote of ABF’s chairman given on page 3 of the case—“Our pathway towards one million livelihoods is pebbled with immense learning on measurable, communityowned sustainable models”—may be displayed on the board to highlight how Axis Bank interpreted its CSR initiatives. To demonstrate how it remained humble despite its considerable achievements, the chairman’s quote at the end of the case—“The more we achieve, the more is expected of us, simply because so much more remains to be done”—may be displayed on the board. Put together, these two quotes provide a succinct summary of the case lessons.

ANALYSIS 1. a. Why do corporations voluntarily spend on CSR initiatives? Is such spending consistent with the idea of shareholder value maximization?

Voluntary CSR spending has become increasingly common among corporations in many countries. Businesses are being judged based on their accountability not just to the shareholders but also to the stakeholders—and this includes the larger society. They are expected to focus not only on profits but also on people and the planet. The underlying reasoning is that in the long run, serving multiple stakeholders does not conflict with, but rather helps in achieving the objective of shareholder value maximization. As


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stated by academic William George, “There is no conflict between serving all your stakeholders and providing excellent returns for shareholders. In the long term, it is impossible to have one without the other.”2 Scholars Carroll and Shabana point out, “CSR is an important tool to implement cost and risk reductions, gain competitive advantage, develop corporate reputation and legitimacy, and seek win–win outcomes through synergistic value creation.”3

b. What are the pros and cons of making CSR spending mandatory for corporations?

India, with its trillion-dollar economy, is one of the fastest-growing economies in the world. The benefits of this high growth, however, have not trickled down to the bottom of the pyramid. A significant ruralurban divide, poverty, malnutrition, and inadequate access to education and health continue to challenge the policymakers. In such a context, the Indian government believed that mandating CSR spending by corporations could partially address this concern. In making CSR spending mandatory, India is experimenting with a unique and malleable instrument to develop an equitable and sustainable business-society nexus. As noted by Bergman et al., “Whether motivated by benevolence, shared value creation, enlightened self-interest, capturing market share, image building, or a combination of these, the long-term success and sustainability of firms is closely associated with the well-being and prosperity of the societies within which they are embedded.”4 In this way, CSR spending can be of value to corporations. However, the arguments against mandatory CSR spending are also equally persuasive. If mandated, firms might merely spend the required amount without truly engaging with society and the environment in a meaningful manner. Mandatory CSR spending may also be considered an additional tax that would put firms at a disadvantage and perhaps deter foreign investment. Mandatory CSR spending also contradicts the free-market principles and the neo-classical view in which the primary responsibility of a firm is the maximization of shareholder value. As noted by Dharmapala and Khanna, mandating CSR spending could be counter-productive: some firms that had formerly spent more than 2 per cent of their net profit on CSR reduced their CSR spending to the required percentage after the law was enacted.5 Apprehensions have also been expressed that mandating CSR spending could be used to create a conduit to siphon off funds to NGOs or trusts run by relatives and friends of decision-makers in the firm. Author Pushpa Sundar noted that CSR spending may be directed towards projects to serve political purposes rather than towards projects that maximize social benefits.6

2

William W. George, Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value (San Francisco: JosseyBass, 2003). 3 Archie B. Carroll and Kareem M. Shabana, “The Business Case for Corporate Social Responsibility,” The Conference Board, June 2011, https://www.academia.edu/37827729/The_Business_Case_for_Corporate_Social_Responsibility. 4 Manfred Max Bergman, Zinette Bergman, Yael Teschemacher, Bimal Arora, Divya Jyoti, and Rijit Sengupta, “Corporate Responsibility in India: Academic Perspectives on the Companies Act 2013,” Sustainability 11, no. 21 (2019): 5939. https://doi.org/10.3390/su11215939. 5 Dhammika Dharmapala and Vikramaditya Khanna, “The Impact of Mandated Corporate Social Responsibility: Evidence from India’s Companies Act of 2013,” International Review of Law and Economics 56 (2018): 92–104. 6 Pushpa Sundar, “Using CSR Funds for Political Gain,” The Wire, December 22, 2018, https://thewire.in/business/modigovernment-csr-political-gain.


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2. Dahiya must outline to the CSR Committee how the bank’s CSR strategy achieved the goal of sustainable livelihoods in Phase 1 using three of the UN’s MDGs. Citing specific data from the case, what should Dahiya highlight in his presentation?

This question requires students to demonstrate a critical understanding of the goals and the CSR initiatives described in the case to evaluate how ABF achieved “Mission One Million” in Phase 1. Rather than just make financial contributions, ABF actively engaged in the CSR social initiatives it funded. The theme of sustainable livelihoods it embraced was at the intersection of poverty eradication and environmental sustainability, as articulated in the UN development goals. The bank chose an issuebased approach rather than location-based development for its CSR initiatives. ABF achieved the goal of generating one million sustainable livelihoods ahead of schedule and well before the end of FY 2017–18. The focus on the marginalized in society was manifested in every project ABF supported. Of the total beneficiaries, 63 per cent were women. The bank received a national award for its CSR initiatives to empower women. ABF focused on outcomes in addition to outputs in each of the projects. The outcomes (qualitative as well as quantitative) that it intended to achieve for individuals and the society, through its CSR initiatives, are listed in case Exhibit 2. These were derived from the two overarching purposes of generating sustainable rural livelihoods and skill development. The three development goals from the eight UN MDGs adopted by ABF for the Phase 1 CSR strategy were the eradication of extreme poverty and hunger (MDG 1), the promotion of gender equality and empowerment of women (MDG 3), and ensuring environmental sustainability (MDG 7). Dahiya should highlight that it had been challenging to achieve the right balance between economic, social, and environmental goals as enunciated in the three goals that defined the purpose of the CSR initiatives. The three goals that ABF sought to fulfill are listed in Exhibit TN-1 and are explained below.

Eradication of Extreme Poverty and Hunger (MDG 1) The Udaipur Project focused on enhancing income through restoration and sustainable use of the commons, changes in the cropping pattern, and raising small ruminants that are hardier than cattle. It also organized the village women into self-help groups (SHGs) to collectively undertake income-generating activities. In each of the five villages in the Chhindwara Project, income enhancement was the cornerstone of ABF’s efforts, whether it be through the promotion of horticulture in Rangikhapa and Boragaon, forming SHGs in Junapani, growing short-cycle cash crops of vegetables with the help of conserved water in Ramkona, or running a pulping unit in Temni. In addition to enhancing income levels, the diversification of income sources reduced fluctuations in income from year to year. The Dang Project helped improve the livelihoods of 22,000 individuals from the tribal communities (Waghai village) and engaged villagers in income-generating activities including poultry farming and pisciculture (Ahwa village).


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The Youth-for-Jobs (Y4J) Project helped to alleviate the poverty of rural youth with disabilities. It placed over 70 per cent of the trainees into jobs, against a target of 60 per cent. In Phase 1 of the project, the average annual income of the beneficiaries in the Y4J project rose from zero to ₹94,474.7 All of the above interventions resulted in significant improvement in the income levels of the beneficiaries, thereby mitigating extreme poverty and hunger.

Promotion of Gender Equality and Empowerment of Women (MDG 3) In addition to economic empowerment, there were noteworthy indirect benefits of forming SHGs. The women in Junapani village, for instance, earned greater respect at home, and in Ramkona village, the women were successful in forcing the government to rescind liquor licences to deal with the issue of excessive drinking by men in the community. While the Dang and Y4J projects did not specifically aim at empowering women, they contributed to the empowerment of the disadvantaged tribals (see case for definition) in the Dang Project and the differently-abled in the Y4J Project. The above interventions resulted in significantly empowering women and other oppressed groups (the tribals and the differently-abled) in the society, thereby achieving the goal of helping the oppressed in society.

Ensuring Environmental Sustainability (MDG 7) The Udaipur Project helped villagers in the restoration and conservation of biomass in the commons. ABF institutionalized the processes for the management of the commons to ensure that the commons would continue to be healthy even after the project ended. As a result of these initiatives, the biomass in the commons in Chitravas increased by over 70 per cent. In Chhindwara, the villagers in Rangikhapa transformed their barren land into productive assets through their conservation efforts. In the Dang Project, the soil and water conservation efforts contributed to the exploitation of the land in an environmentally sustainable manner. All of the above interventions resulted in significant improvement in the quality of the environment. The institutionalization of the processes ensured that the improvements would be sustained in the future, thereby achieving the goal of environmental sustainability. ABF’s achievements, commendable in and of themselves, become even more praiseworthy when viewed against the findings of relevant research studies. Based on their review of the websites of the 100 largest global companies and on interviews with company executives, Kramer et al. found that the commitment of almost every company to the UN SDGs was merely cosmetic.8 Existing CSR initiatives were simply relabelled with the relevant goals, while companies did nothing new or different to advance the goals. In view of these findings, ABF’s achievement of the goals stood out.

₹ = INR = Indian rupee; the average exchange rate in 2018 was US$1 = ₹72. Mark R. Kramer, Rishi Agarwal, and Aditi Srinivas, “Business as Usual Will Not Save the Planet,” Harvard Business Review, June 12, 2019, https://hbr.org/2019/06/business-as-usual-will-not-save-the-planet. Available from Ivey Publishing, product no. H050AC. 7 8


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3. What changes would you recommend for Phase 2 to enhance the effectiveness of the CSR initiatives, given ABF’s experience in Phase 1 and the addition of three development goals? Make sure to address the concerns of the CSR Committee regarding both deepening the engagement with the beneficiaries in Phase 1 instead of simply adding two million households in Phase 2, and the number of non-governmental (NGO) partners to ensure effective monitoring.

A critical constraint for the success of Phase 2 would be the availability of resources. Under The Companies Act, 2013, companies are required to spend 2 per cent annually of the average net profits of the preceding three financial years. If those profits are lower, the funds available would be lower. This will call for flexibility in deciding goals for Phase 2 and approaches to attain them.

Implications of Adding Three Development Goals ABF must consider the implications of adding three new development goals (of the UN’s SDGs) proposed to be added to guide the CSR strategy for Phase 2. These were SDG 2: end hunger, achieve food security, improve nutrition, and promote sustainable agriculture; SDG 4: ensure equitable and quality education and promote lifelong learning opportunities for all; and SDG 10: reduce inequality within and among countries. A listing of the 17 SDGs adopted by the UN is presented in Exhibit TN-2. The overlap between the development goals in Phase 1 and Phase 2 of Axis Bank’s CSR initiatives is presented in Exhibit TN3. The new goals would require changes in the project implementation. The most significant impact of SDG 2 would be the requirement that agriculture should become “sustainable.” This will require promoting farming practices that are environmentally sound and yet contribute to the immediate welfare of the community. Sustainable agriculture will require a reduction in the use of chemical fertilizers and pesticides for environmental preservation. In Phase 1, the Udaipur Project was the only project where sustainability was interpreted as implied by SDG 2. Alleviating poverty will become far more challenging if the interventions are to meet the interpretation of sustainability implied by SDG 2. It would require much greater efforts in the institutionalization of processes so that short-term considerations do not become dominant in times of stress. The significant implication of SDG 4 would arise from the requirement of providing lifelong opportunities for learning. ABF provided training to differently-abled youths in Phase 1. There was no arrangement for the youths to return to the program for enhancement of their skills in the future. In Phase 2, the skillbuilding program would require the reallocation of resources such that funds are available for re-training and reskilling of youths who had already been trained. SDG 10 aims to eliminate all types of inequalities. The projects in Phase 1 paid special attention to helping women, tribals, Dalits (see case for definition), and the differently-abled. The definition of inequality would have to be broadened in Phase 2. For example, in Indian society there is significant discrimination based on sexual orientation and religion. Phase 2 should attempt to achieve greater diversity of beneficiaries based on these two criteria. In sum, ABF will have to adopt project implementation processes where it has to specifically identify components of processes to serve the new goals. In view of the demonstrated experience of ABF and its NGO partners, tweaking the processes on the lines discussed above should be possible. It may be necessary for ABF to realize that every CSR project may not be able to achieve all the development goals.


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Instead, ABF should take a portfolio approach and assess whether the goals are being achieved through all the projects taken together.

Deepening Engagement with Beneficiaries from Phase 1 It is possible (and not uncommon) for the benefits brought about by CSR projects to disappear after the projects are over. ABF should be concerned about the potential backslide of Phase 1 beneficiaries to the situation they were in prior to the start of the intervention. To make the benefits last longer, the institutionalized processes must be robust. It would also help to allocate a certain percentage of funds in Phase 2 to projects already completed in Phase 1 to sustain and strengthen the benefits to the existing beneficiaries. Adoption of SDG 4 (ensure equitable and quality education and promote lifelong learning opportunities for all) indicates the direct benefits of continuing with the existing beneficiaries and improving their livelihoods. Similarly, the goal of food security and improved nutrition (SDG 2) would not be served well if the beneficiaries in Phase 1 are not helped in Phase 2. This suggests that ABF should allocate a part of the funding for Phase 2 to engaging with beneficiaries from Phase 1. In finalizing the CSR strategy for Phase 2, Dahiya should consider the possibility that some of the Phase 1 beneficiaries, who had crossed a threshold level of income, may aspire for better education for their children and better health and hygiene for their families. For instance, Laxmi Bai, a beneficiary from Temni village (the Chhindwara Project) said, “We need to find a way of using the facility for pulping other fruits such as mangoes that grow at different times of the year.” This points to the unmet need of the beneficiaries in Phase 1 once they master the activity sponsored by the CSR intervention. Similarly, a comment from the women in Boragaon village (the Chhindwara Project) is telling: “They make us aware of newer ways of managing our resources. That has helped in increasing our income. We can now think of educating our children.” This speaks for continuing engagement with the existing beneficiaries. It is also consistent with the hierarchy of needs9 articulated by Abraham Maslow. Once immediate (mostly physical) needs are reasonably met, human beings start aspiring for changes in the future. There is no clear answer to this question. Dahiya will have to judge whether the CSR projects completed in Phase 1 are continuing to deliver benefits consistent with the three goals added in Phase 2. The decision will have to be evidence-based. Dahiya should therefore assess whether the Phase 1 project beneficiaries are managing the change on their own, before deciding on the reallocation of Phase 2 resources.

Fewer NGO Partners Dahiya has correctly recognized the significant contribution of the NGO partners, who not only helped execute the CSR projects but also helped to identify governmental and non-governmental resources for the projects. While ABF acted as the catalyst funding agency, the NGO partners provided expertise in design and execution. Maslow’s 1943 work “A Theory of Human Motivation,” a classic in the management literature, argues that once physical needs are satisfied, human beings set higher-level goals to motivate themselves. Abraham H. Maslow, “A Theory of Human Motivation,” Psychological Review 50, no. 4 (1943): 370–396. 9


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In Phase 1, ABF partnered with over two dozen NGOs. On first impression, the number of partners appeared large. However, the project descriptions indicate that even if the nature of the intervention were to be similar, the socio-cultural setting in which the interventions were to be implemented might be different across locations. In addition to distinct expertise in the area (sustainable farming, for example), the partner NGO should be acceptable to the community it intends to work in. Such “acceptance,” a key attribute for the success of social projects, is built by NGOs through long association with the communities they work with. In discussing emancipatory social entrepreneurship, Haugh and Talwar conclude that innovative business processes that facilitated women’s economic activity and at the same time complied with local social and cultural norms contributed to changing the social order.10 Therefore, there is no clear answer for the correct number of NGOs the bank should partner with. Dahiya should ask his team to evaluate the possibility of working with fewer NGOs but not insist on the reduction, especially because the project monitoring systems of ABF are robust.

4. Dahiya has been asked to present the lessons that can be generalized based on the experience of ABF in implementing CSR projects. Using specific examples from the case, what should Dahiya highlight in his presentation?

This question requires students to critically read and reflect upon the four project visits described in the case. The eight generalizable lessons are listed in TN Exhibit 4 and are explained below. A Clear Statement of Purpose and Execution Approach The setting up of ABF was a key decision taken by Axis Bank to enhance the effectiveness of the implementation of its CSR strategy. The management structure created a separate set of dedicated employees, unconnected to the business of banking, with an exclusive focus on CSR projects. ABF was governed by a board of five trustees, each with extensive experience in social development. ABF was set a well-articulated purpose (“generating sustainable livelihoods for the poorest in society”) to frame its implementation plan. The mission was articulated by seeking inputs from several experts in the social sector. The next critical decision was to undertake the CSR initiatives in collaboration with NGO partners, thereby ensuring the availability of the required expertise in the implementation of social projects. As the first step, ABF listed the benefits from the fulfillment of the mission to all three stakeholders—the beneficiaries, ABF, and the NGO partners (see case Exhibit 1). This ensured that the CSR projects chosen benefited all stakeholders. The bank also capped the cost of management and administration of the CSR projects at 7 per cent of the total CSR funds.

Multiple Pathways Are Possible for Generating Sustainable Livelihoods ABF recognized that there were multiple pathways to generate sustainable livelihoods. Different pathways were needed for benefiting different communities. Educating the beneficiaries on the benefits of cooperation (Udaipur Project), reducing income fluctuations (Chhindwara Project), undertaking nonHelen M. Haugh and Alka Talwar, “Linking Social Entrepreneurship and Social Change: The Mediating Role of Empowerment,” Journal of Business Ethics 133 (2016): 643–658. 10


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farming activities (Dang Project), and skilling (Y4J Project) are examples of different pathways that ABF pursued to achieve the stated mission of the CSR strategy.

Measurable Goals, Streamlined Processes, and Effective Monitoring Systems ABF translated the CSR mission into actionable and measurable outcomes (see case Exhibit 2). It used a rigorous process to evaluate and select partners for different projects. It adopted a well-defined method— which included visits to project sites for first-hand assessment—for monitoring the projects’ progress. ABF thus achieved effective implementation of the projects despite outsourcing their execution to NGO partners. The mid-term impact assessment by a third party also provided an unbiased assessment of the progress of the projects, and an opportunity for mid-course correction if needed.

Sustainability Entails Income Generation and Reducing Income Variability ABF realized that a key component of the projects should be risk reduction of the income stream through economic activities that were uncorrelated with the income stream from traditional agriculture. The low incomes of the target beneficiaries meant that even a single instance of crop failure (generally due to drought) would send them into indebtedness to the local moneylender and result in a financial burden they would be unable to get out of for years—sometimes for generations. With this insight, ABF chose CSR projects at Udaipur, Chhindwara, and Dang that in addition to traditional agriculture of growing staple crops included raising cattle and small ruminants, raising poultry, raising fish, basket weaving, gathering and processing forest produce, and growing fruits and vegetables.

SHGs Are Effective Instruments to Enhance Income and Effect Social Change ABF realized that economic independence would be a prerequisite for empowering women. It therefore deliberately focused on income-generating activities for women by forming SHGs that engaged in these activities. This enhanced the respect for women within their families and communities. The SHGs in the Udaipur program helped women generate income from forest produce. Over time, the women in the SHGs developed the confidence to negotiate better prices with the buyers of the custard apples they collected. The SHGs in the Chhindwara program operated a pulp processing unit, to add to the family income. The true empowerment of women was reflected in the protests organized by the women in the SHGs in Chhindwara against licences given by the government to set up liquor shops in their area. Not only were the licences cancelled as a result of the protests, but also the men in the community were made to take a pledge in public to give up drinking. Thus, the empowerment of women resulted in the emancipation of the community from a social problem.

Demonstrating the Benefits of Intervention with the Success of Early Adopters ABF realized that the proliferation of a new idea was determined by the success of the early adopters. The projects, therefore, took care to select the right individuals to introduce new ideas and practices in every project. The benefits derived by the early adopters Tirgum and Sangeeta Bai (of the Chhindwara Project) and Nathu Ram and Jitan Ram (of the Dang Project), chosen for their enterprise, led to the adoption of the initiatives by the rest of the community. In the Chitravas Project, several women in the SHG said that


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residents of the neighbouring villages had become curious about the progress of Chitravas and had begun seeking the women’s advice.

Need for Institutionalization for Long-Term Success The biggest question faced in implementing social change is whether the change would continue beyond the intervention period. ABF realized that the institutionalization of new processes was necessary for their continuance beyond the project life. In the Udaipur Project, the processes were institutionalized by educating the community on the benefits of maintaining the health of the commons, accepting rules for equitable exploitation of the commons, and transferring the administration of the commons to the community.

Importance of Employee Involvement, and Advocacy and Communication The often unstated but critical goal of CSR initiatives is to change the mindset of people in the organization so that decision-making in the organization becomes sensitive to the needs of the society and the planet. ABF proactively used several mechanisms to engage Axis Bank’s employees in the CSR projects. It also held annual conferences on themes of relevance to society in order to advocate and publicize the achievements of the CSR projects in promoting development through the generation of sustainable livelihoods.

Giving Is a Two-Way Street (Generosity at the Bottom of the Pyramid) The “human” side of CSR interventions is often not realized by the implementers, at least initially. The “widow’s generosity” was experienced by Dahiya and his team, which included staff from ABF, in all the programs. It was evident in the warmth of the greetings the team received, in the food offered to them, and in the fruits offered by villager Sangeeta Bai (which she could have sold in the market for a decent price).

WHAT HAPPENED

• • • • • •

Axis Bank’s CSR Committee accepted Dahiya’s proposal to add three SDGs in Phase 2. The CSR spending of Axis Bank in FY 2019, 2020, and 2021 was ₹13.8 billion, ₹10.1 billion, and ₹9.1 billion. respectively. ABF maintained the goal of generating sustainable livelihoods for two million households in Phase 2. The proposal to allocate funds in Phase 2 to Phase 1 beneficiaries was not implemented. ABF was satisfied with the quality and commitment of the NGO partners. While the existing process of rigorous checks on execution capabilities, domain expertise, governance, etc., was decided to be continued, no decision was made to reduce the number of NGO partners. It was decided that the project duration would typically be five years. Independent external agencies will evaluate each project twice (a baseline study and end-term study). The success in Phase 1 was judged as impressive. It was agreed that the earlier success has generated higher expectations for success in Phase 2 by the beneficiaries and the trustees of ABF.


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EXHIBIT TN-1: THE THREE MILLENNIUM DEVELOPMENT GOALS (MDGS) TO BE FULFILLED IN PHASE 1 • • •

Eradication of extreme poverty and hunger (MDG 1) Promotion of gender equality and empowerment of women (MDG 3) Ensuring environmental sustainability (MDG 7)

EXHIBIT TN-2: SUSTAINABLE DEVELOPMENT GOALS OF THE UNITED NATIONS GOAL 1: GOAL 2: GOAL 3: GOAL 4: GOAL 5: GOAL 6: GOAL 7: GOAL 8: GOAL 9: GOAL 10: GOAL 11: GOAL 12: GOAL 13: GOAL 14: GOAL 15: GOAL 16: GOAL 17:

No Poverty Zero Hunger Good Health and Well-being Quality Education Gender Equality Clean Water and Sanitation Affordable and Clean Energy Decent Work and Economic Growth Industry, Innovation, and Infrastructure Reduced Inequality Sustainable Cities and Communities Responsible Consumption and Production Climate Action Life Below Water Life on Land Peace and Justice Strong Institutions Partnerships to Achieve the Goal

Source: “The 17 Sustainable Development Goals (SDGs) to Transform Our World,” United Nations, accessed July 5, 2022, https://www.un.org/development/desa/disabilities/envision2030.html.

EXHIBIT TN-3: MILLENNIUM DEVELOPMETN GOALS IN PHASE 1, SUSTAINABLE DEVELOPMENT GOALS IN PHASE 2, AND THEIR LINKAGES


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Phase 1 (2011-17)

Phase 2 (2018-25)

Millennium Development Goals (MDGs)

Sustainable Development Goals (SDGs)

MDG Number

Goal

SDG Number

Goal

1

Eliminate extreme poverty and hunger

1

End extreme poverty in all forms

3

Empower women and promote gender equality

5

Achieve gender equality and empower all women and girls

7

Promote environmental sustainability

15

Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

2

End hunger, achieve food security and improved nutrition and promote sustainable agriculture

4

Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

10

Reduce inequality within and among countries

Source: Company documents and “The 17 Sustainable Development Goals (SDGs) to Transform Our World,” United Nations, accessed July 5, 2022, https://www.un.org/development/desa/disabilities/envision2030.html.

EXHIBIT TN-4: THE EIGHT GENERALIZABLE LESSONS • • • • • • • •

A clear statement of purpose and execution approach Multiple pathways are possible for generating sustainable livelihoods Measurable goals, streamlined processes, and effective monitoring systems Sustainability entails income generation as well as reducing income variability Self-help groups are effective instruments to enhance income and effect social changes Demonstrating the benefits of intervention with the success of early adopters Need for institutionalization for long-term success Importance of employee involvement, and advocacy and communication

Source: Created by the case authors.


CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model? I. CASE ABSTRACT Best Buy is the largest consumer electronics retailer in the United States, accounting for 19% of the market. Globally, it operates around 4,000 stores in the United States, Canada, Mexico, China, and Turkey. Its subsidiaries include Geek Squad, Magnolia Audio Video, Pacific Sales, and Future Shop. Best Buy distinguishes itself from competitors by deploying a differentiation strategy rather than a low price strategy. In order to become a service-oriented firm, it changed the compensation structure for sales associates and applied a customer-centric operating model to provide end-toend services. It also heavily invested in the training of sales professionals so they can better understand products and better assist customers. As a result, the company is widely recognized for its superior service. Best Buy still faces competition, however, from large brick-and-mortar stores like Wal-Mart, and as well as e-commerce stores like Amazon. The economic downturn and technological advances (the frequent introduction of new products) have also put stress on its financial strength and the quality of its customer service. The key challenge for Best Buy is to determine the correct path to improve its differentiation strategy. The main question is: How can Best Buy continue to have innovative products, top-notch employees, and superior customer service while facing increased competition, operational costs, and financial stress? Decision Date: 2010

FY Sales: $45 million FY Net Income: $1 million

II. CASE SUBJECTS AND ISSUES Industry Analysis Strategy Formulation Strategy Implementation Core Competencies Diversification

International Growth Competitive Advantage Competitive Strategy Market Segmentation

29-1 ©2024 Pearson Education, Ltd.


CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss Best Buy’s Business Level Strategy versus Amazon Wal-Mart.

and

2. To discuss Best Buy’s change from a low-price strategy to a differentiation strategy. 3. To discuss Best Buy’s move from commissioned based sales to noncommission sales force.

a

4. To discuss Best Buy’s multi-level market segmentation (Best Mobile, Geek Squad, Magnolia, etc.).

Buy

5. To discuss Best Buy’s opportunity when Circuit City declared bankruptcy. 6. To discuss Best Buy’s global growth opportunities. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. Do customers care about sales force knowledge or do they care more about low prices? 2. How will Wal-Mart’s decision to ramp up its in-store electronics sales affect Best Buy? 3. How will Best Buy compete against Internet giant Amazon?

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

4. How will Best Buy expand globally? 5. How can Best Buy capitalize on Circuit City’s demise? 6. Does a knowledgeable workforce result in higher wages? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT

I. Current Situation A. Current Performance: 1. Best Buy is the largest consumer electronics retailer in the United States, accounting for 19 percent of the total market share and 1,100 domestic stores. 2. Current employee strength—155,000. 3. Global presence with around 4,000 stores spread across the United States, Canada, Mexico, China, and Turkey. 4. Acquired remaining 25 percent of Jiangsu Five Star (2009). 5. Sales increased by 12 percent in year 2009 from 2008, Net Income and operating margins decreased. 6. Established strategic alliance with Carphone Warehouse Group, Best Buy Europe now has 2,414 stores. 7. Acquired Napster (2008). 8. Opened 285 new stores in addition to European acquisition of 2,414 Best Buy Europe stores (2009). 9. Relocated thirty-four stores and closed sixty-seven stores. 10. New CEO Brian Dunn took over Best Buy in 2009. B. Current Performance: 1. Mission: a. In the consumer electronics retailing business. b. To make technology deliver on its promises to customers. 2. Objectives: a. Sustaining growth and earnings. b. Increasing revenues. c. High customer satisfaction through employee knowledge and service. d. Provide consumers the right knowledge regarding products and services. e. To portray the company’s vision and strategy on an everyday basis. f. To educated the employees on the ins and outs of new products and services. g. Market various products on the customer centricity model. h. To address the needs of customer lifestyle groups. i. To be at the forefront of technological advances. j. Meet customer needs with end–to–end solutions. k. The objectives are consistent with the mission of the company. 3. Strategies: a. Differentiation strategy—moved from being a discount retailer to service oriented firm (customer centricity model) with end-to-end product support enabled through employee knowledge. 29-3 ©2024 Pearson Education, Ltd.


CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

b. Group strategy—it expanded in various areas through acquiring firms like Geek Squad, which is in line with their serviceoriented strategy. c. Strategic alliances—it established strategic alliances with related firms (Carphone Warehouse Group) in international markets to quicken development and reach large customer base. d. Continuous change in strategy to remain competitive: they plan to change store designs and provide customers with products and services which are in line with helping customer’s desire for constant connectivity. e. Competitive advantage through employee knowledge. f. Global Strategy: a. Increase international expansion and market share. g. Brand Strategy: a. Wide range of brands for different types of customer lifestyles. h. The strategies are consistent with the overall mission. 4. Policies: NA II. Corporate Governance: NA

III. External Environment: Opportunities and Threats (SWOT) A. Societal Environment 1. Economic: a. Economic downturn (T). b. Global expansion (O). c. New markets in developing countries (O)/ d. “Lowest ownership rate for gadgets” in developing countries. (O) e. Analysts predict high growth in China (22 percent), Middle East (20 percent), Russia (20 percent) and South America (17 percent) (O). f. Operating margins decreasing (T). 2. Technology a. Smartphones (O). b. LCD TV’s (O). c. Rise of purchases through e-commerce (T/O)/ d. Information about products or pricing on the Internet (T). e. Technological change leads to lower product life cycles result in higher training costs (T). 3. Political—Legal a. Lawsuit about misrepresented warranties (T). b. Lawsuit “Price match” policy (T). 4. Sociocultural a. Changes in buying behavior—rise of online shopping (T). b. Demand for brick-and-mortar stores to see the product (O). B. Task Environment 1. Threat of new entrants: Moderate-High a. Internet made it easy to enter the market. b. Low capital requirements (Internet). c. Low customer loyalty. d. The bankruptcy of Circuit City gives space for new competitors.

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

e. Economics of scale. f. High amount of advertising. g. Brick-and-mortar stores to see the product. 2. Bargaining power of buyers: High a. Mature market. b. Strong competition. c. Buyer can choose to look for the lowest price online and buy online. d. In regard to service, buyers have low bargaining power due to lack of alternatives. 3. Threat of substitute products: Low a. Wide range of products. 4. Bargaining power of suppliers: Low a. Economies of scale. b. Suppliers are dependent on Best Buy and need them for a significant amount of sales. 5. Rivalry among competing firms: High a. Strong competition with brick-and-mortar competitors as well as online retailers. b. Low customer loyalty leads to increased company competition for customer acquisition. c. Large price rivalry among competing firms.

IV. Internal Environment: Strengths and Weaknesses (SWOT) A. Corporate Structure 1. Presently, the retail hierarchy is structured by territories. Domestic stores are divided into eight territories and each territory is divided into districts. Store managers report to District Managers, who report to the Retail Field Officer responsible for the territory (S). 2. Corporate and strategic decisions are generated from top management (S). 3. Compared to similar corporations, the organizational structure of Best Buy is similar to many major retailers (S/W). B. Corporate Culture 1. Best Buy’s culture is well defined and committed to ethics and knowledge (S). 2. The culture is consistent with knowledge based HR objectives (ethics, knowledge), portraying company vision and strategy (S). 3. Regarding important issues, the culture is aligned to ethical behavior and a knowledgeable employee force. a. Also, the culture has adaptability to changing conditions, due to ever changing technological market. b. Finally, Best Buy successfully fulfilled change from becoming a commission based company to a fully integrated customer-centric company (S). 4. Being a global company, Best Buy successfully integrated employees from other acquired companies deriving from knowledge based culture. Best Buy shows a high expertise in acquiring companies and integrating employees into the company’s beliefs and values (S). C. Corporate Resources 1. Marketing 29-5 ©2024 Pearson Education, Ltd.


CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

a. Objectives include: i. Marketing various products based on customer centricity operating model. ii. Addressing the needs of customer lifestyle groups. iii. Being at the forefront of technological advances. iv. Meeting customer needs with end-to-end solution. b. Strategies include: i. Continuing to be a service-oriented firm. ii. Addressing needs of customers. c. Policies include: i. “Price Matching Policy.” d. Programs include: i. Loyalty programs (S). e. These objectives are assumed, not clearly stated. However, objectives can be seen through database of customer information, used to construct a diversified portfolio of product offerings in different demographic areas, matching customer needs (S). f. The marketing objectives align with the corporate mission, strategy, and internal environment (S). g. Best buy has 19 percent market share in consumer electronics within the United States. h. Price: i. Does not compete strictly on price structure. i. Place: i. 1,100 domestic brick-and-mortar retail stores, 2800 international brick-and-mortar retail stores j. Product: i. (Highest percent revenue) televisions, LCD units, game consoles, games, accessories, mobile phones, Blue-Ray players. k. Promotion: i. Private label credit cards 16 percent to 18 percent domestic revenue, loyalty program, new product introductions (S/W-Price). l. Trends emerged from the marketing mix has shown that it was a good business model in the past. The current marketing mix may affect future performance either positively or negatively determining how consumers prefer to purchase consumer electronics in the future as well as the health of the consumer electronic market (S). m. Marketing provides Best Buy competitive advantage by acquiring firms with aligned strategies and then targeting affluent suburban families, trend-setting urban dwellers, and closely knit families of Middle America with their defined marketing mix and strategic marketing decisions (S). n. It is implied that marketing adjusts to different countries in which it operates (S). 2. Finances a. The current financial objectives of Best Buy are sustained growth and earnings. b. Global expansion is underlining the objectives by growing revenue and earnings through entering new markets. c. Trend: i. Sales and long-term debt rising net income and operating profits decreasing.

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

d. Current trend suggests lower margins because of downward pricing pressure due to increased low-cost competitors and higher cost structure. e. A higher financial risk due to acquisitions of Best Buy Europe and Napster residing in high long-term debt (80 percent increase) and a reduced amount of available cash (65 percent decrease). f. High debt and low cash can result in liquidity problems in the future. g. Current financial weakness resulted through the current business objectives of global expansion but could increase revenues in the future. h. Plans for future expansion will be difficult to be financed due to the current financial capabilities. i. New debt would be needed which in turn comprises higher risk in liquidity j. Key facts and ratios: i. Long-term debt increasing from $528 million to $1,126 million (80 percent increase). ii. Huge decline in cash from $1,438 million (2008) to $498 million (2009) (65 percent decrease). iii. Revenues increased between 2005 and 2010 (>10 percent) largely because of acquisitions. Five-year average growth in Sales 13 percent. iv. Operating margin decreased from 5 percent (2007) to 4.1 percent (2009). v. Net income decreased from 20 percent growth (2007) to 2 percent (2008) to negative growth -29 percent (2009). vi. D/E ratio increased from 0.12 to 0.24. vii. Risk of bad debt is rising through sharp increase in Accounts Receivable ($1,868 million in 2009 from $549 million in 2008). 3. Research and Development—NA 4. Operations & Logistics 1. Current manufacturing or service objectives and strategies: a. Differentiation through high-quality service and knowledgeable staff. b. Maintaining a high service record and reputation for staff knowledgeable of latest technology. c. Extensive employee training that gives the company a high competitive advantage. 2. Domestic versus International Operations: a. Have over 1,000 stores nationally. b. Strives to gain more market share internationally (has 2,414 stores within Europe). c. Outsourcing is negligible. 3. Performance Compared to Competition: a. If referring to competition as other stores selling similar merchandise, Best Buy has higher prices which place them at a significant disadvantage when customers use the Internet to shop. b. If referring to competition that includes the high level of service element, other competitors do not exist. In this case, they perform extremely well compared to the competition with this distinguishing feature. 4. Competitive advantage through operations:

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

a. Differentiation through high levels of customer service within its operations distinguishes the company from others and gives them an advantage over competitors. 5. Human Resources 1. HR objectives include: a. To provide consumers knowledge of products and services. b. Portray company’s vision and strategy on an everyday basis. c. Educate employees on the ins and outs of new products and services. d. Every employee must have the company’s vision embedded in their service and attitude. e. The objectives are clearly stated and are consistent with their strategy and mission. f. Importance of training and creating ethical and knowledgeable employee force. 2. The HR objectives and strengths indicate a trend of maintaining consumer-centric model and knowledge and serviced based employees. This has helped them differentiate from competitors. For example, in the past, Best Buy moved from a sales driven approach to the service oriented customer centricity model, which has allowed them to excel in their strategy. 6. Information Systems (IS) 1. IS is reducing operation costs and decreasing distribution channel costs. 2. IS has developed a database of consumer information to construct a portfolio of product offerings. This system allows Best Buy to offer the proper products to specific customer segments (location based) and also reduce shipping costs by providing the right products to the right locations. 3. Trend is shifting toward e-commerce to reduce costs while becoming more accessible to consumers.

V. Analysis of Strategic Factors (SWOT) 1. See Table 3. 2. Current mission and objectives are aligned with the strategic factors and problems. Best Buy successfully places an emphasis on the customer by implementation of the customer centricity model. Best Buy also achieves sustained growth and earnings through global expansion. 3. Due to Best Buy’s global presence and expansion, a recommended addition to the mission statement should include sustaining the customer centricity model and other beliefs globally. Also, due to lower margins and an increasingly saturated consumer electronics market, if Best Buy is to diversify into additional markets, additions to the objectives will be needed regarding these markets. 4. If changed, Best Buy will need to become consistent with their service, prices and customer centricity model across the world.

VI. Strategic Alternatives and Recommended Strategy A. Strategic alternatives 29-8 ©2024 Pearson Education, Ltd.


CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

1. Strategic alliance with cable Internet and television providers. Pros: • Increased revenues and providing customers with “end-to-end services.” Cons: • If other service providers form strategic alliances with competing retailers (Wal-Mart, Target, etc) Best Buy’s customer base may decrease due to service provider preferences. • Assumption: Best Buy can only create alignment with one service provider. 2. Global expansion in developing nations. Pros: • High growth potential, obtain new markets, and market share. May receive first mover advantage due to retail presence. Cons: • High capital requirements and high levels of risk. 3. Increase presence of Napster online music. Pros: • May capture additional market segments and increase revenues. Cons: • Difficulty in entering market due to already established competition (iTunes, Amazon, etc.). 4. Increase home furniture offerings and delivery. Pros: • Complements home electronic sales and provide customers with “end-to-end services”. Cons: • Home furniture is not Best Buy’s core business and also does not fit into Best Buy’s current product offerings, charging a premium for services and knowledge. 5. Investing funds directly to suppliers and manufacturers by creating manufacturing plants, etc. Pros: • Lower costs for products increased sale margins. Could offer lower prices with higher profit margins. Cons: • Investment at this time may be risky and difficult due to current financial capabilities. B. Recommended Strategy 1. Global expansion in developing nations: a. Short-term would not help the current financial situation. b. Long-term, a significant increase in revenues and margins is possible, three-to-five year range. i. Large market potential to acquire new customers (ex. China, India, 2.5 billion people).

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

c. Providing similar products and services globally while customizing offerings to individual geographic market segments. d. Entering new geographic markets would align with the already established strategy of global expansion. VII. Implementation 1. Global integration would require addition of trained employees in a large number. Also, the international presence would need to align with Best Buy’s current mission and values becoming “one face, one company”. 2. New financial debt and investment would be required to establish these retailers globally. However, analyst forecasts and current trends of other industries entering these markets suggest a high return from establishing Best Buy retail stores in these developing nations. 3. Current standard operating procedures must be communicated effectively throughout the company to maintain the competitive advantage of the consumer centricity model and other factors. VIII. Evaluation and Control 1. The current information system needs to be expanded by establishing new means of communication via national and regional headquarters. 2. A decentralized model would be necessary because strategies would need to be aligned geographically rather than the same globally. 3. Need to continue employee training in regard to sustaining the image of being a knowledgeable service-oriented firm. Therefore, consistent training and evaluation must be enforced globally. IX. EFAS, IFAS, and SFAS EXHIBITS Table 1: Internal Factor Analysis Summary (IFAS) Key Internal Factors

Weight

Rating

Weighted Score

Comments

Strengths Extensive Product/ Service Offerings

0.1

4

0.4

Highly Trained Employees

0.2

5

1

Customer Centric Operating Model

0.25

4

1

Offer a large variety of products and services under seven distinct brands More training than competitors forced to learn new products with higher frequency, extensive product knowledge. Caters to specific customer needs and behaviors, providing endto-end services.

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

Global Presence

0.15

3

0.45

Stores located in the United States, Canada, Mexico, China & Turkey

Weaknesses Cannot Match Low Competitor Pricing

0.2

2

0.4

Potential Financial Risk

0.1

3

0.3

Overhead & high employee training lead to lower margins. Do not compete entirely on a low price structure. Current financial situation shows a risk of bad debt, decreasing trends in net income and potential liquidity problems.

Total Scores

1

3.65

Table 2: External Factor Analysis Summary (EFAS) External Strategic Factors

Weight

Rating

Weighted Score

Comments

Global Expansion

0.1

5

0.5

Through the acquisition of Best Buy Europe, Best Buy provides opportunity for expansion into the global market.

New Markets in Developing Countries

0.15

3

0.45

The use of technology like cell phones is not as mature as in other developed countries with a significant potential for growth.

Opportunities

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

Smartphone and LCD TVs & Gaming Industry

0.1

2

0.2

A new era of mobile phones and TV technology opens up new markets and rise in demand of a previously matured industry. Enables Best Buy to acquire new customer through the Internet without personnel & other costs.

Rise of E-commerce

0.15

4

0.6

Economic Downturn

0.2

5

1

Consumer electric products are considered discretionary and, therefore, are less desired as customers have less disposable income.

Increased Competition

0.15

3

0.45

Low price strategy of competitors leads to downward price pressure and hence lower operating margins.

Internet

0.15

3

0.45

Information technology enables customers to compare prices and to order online instead of driving to the shop.

Threats

Total Scores

1

3.65

Table 3: Strategic Factor Analysis Summary (SFAS) Key Internal Factors

Weight

Rating

Weighted Score

Customer Centric Operating Model

0.17

4

0.68

Global Presence

0.10

3

0.30

Smartphone and LCD TVs & Gaming Industry

0.10

3

0.30

Comments Caters to specific customer needs and behaviors, providing end-to-end services. Stores located in the US, Canada, Mexico, China, & Turkey. A new era of mobile phones and TV technology opens up new markets and rise in demand of a previously matured industry.

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

New Markets in Developing Countries

Cannot Match Low Competitor Pricing

0.15

0.20

5

0.75

4

0.80

Economic Threat

0.15

3

0.45

Increased Competition

0.13

2

0.26

Total Scores

1.00

The use of technology like cell phones is not as mature as in other developed countries with a significant potential for growth. Overhead & high employee training lead to lower margins. Do not compete entirely on a low price structure.

Consumer electric products are considered discretionary and, therefore, are less desired as customers have less disposable income. Low price strategy of competitors could lead to downward price pressure and hence lower operating margins.

3.54

X. FINANCIAL ANALYSIS A. FINANCIAL RATIOS YEARS 2009

1. Liquidity Ratios

2008

2007

Current Ratio

0.97

1.08

N/A

Quick (Acid Test) Ratio Inventory to Net Working Capital

0.41

0.39

N/A

-19.56

8.22

N/A

0.06

0.21

N/A

Cash Ratio 2. Profitability Ratios Net Profit Margin

2.23%

3.52%

3.83%

Gross Profit Margin

24.43%

23.85%

24.40%

Return on Investment (ROI)

6.34%

11.03%

N/A

Return on Equity (ROE)

21.60%

31.38%

N/A

$3.12

$2.79

Earnings Per Share—Diluted

$ 2.39

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

3. Activity Ratios Inventory Turnover

9.47

8.50

N/A

Days of Inventory

51.00

56.38

N/A

-185.25

69.85

N/A

Net Working Capital Turnover Asset Turnover

2.84

3.14

N/A

Fixed Asset Turnover

10.78

12.11

N/A

Average Collection Period

15.15

5.01

N/A

Accounts Receivable Turnover

24.10

72.90

N/A

Accounts Payable Period

N/A

N/A

N/A

Days of Cash

4.04

13.11

N/A

Debt to Asset Ratio

70.66%

64.85%

N/A

Debt to Equity Ratio Long-term Debt to Capital Structure

240.86%

184.52%

N/A

0.48

0.33

N/A

19.09

36.94

69.71

4. Leverage Ratios

Times Interest Earned Coverage of Fixed Charges

N/A

N/A

N/A

181.67%

150.96%

N/A

Price/Earnings Ratio

N/A

N/A

N/A

Dividend Payout Ratio Dividend Yield on Common Stock

N/A

N/A

N/A

N/A

N/A

N/A

2009

2008

2007

Revenue

100.00%

100.00%

100.00%

Cost of Goods Sold

75.57%

76.15%

75.60%

Gross Profit Selling, General, and Administrative Expenses

24.43%

23.85%

24.40%

19.96%

18.45%

18.84%

Restructuring Charges Goodwill and Tradename Impairment

0.17%

0.00%

0.00%

0.15%

0.00%

0.00%

Operating Income

4.15%

5.40%

5.56%

Current Liabilities to Equity 5. Other Ratios

*N/A—Key information Not Available B. COMMON SIZED STATEMENTS CONSOLIDATED STATEMENT INCOME STATEMENT Year Ending December 31 INCOME STATEMENT

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

Other income (expense) Investment Income and oOther

0.08%

0.32%

0.45%

Investment Impairment

-0.25%

0.00%

0.00%

Interest Expense Earnings Before Income Tax, Minority Interests, & Income (loss) of Affiliates

-0.21%

-0.15%

-0.09%

3.78%

5.57%

5.93%

Income Tax Expense

1.50%

2.04%

2.09%

Minority Interest in Earnings

-0.07%

-0.01%

0.00%

Equity nterests in Earnings

0.02%

-0.01%

0.00%

Net Earnings

2.23%

3.52%

3.83%

BALANCE SHEET Year Ending December 31

2009

2008

Cash and Cash Equivalents

3.15%

11.27%

Short Term Investments

0.07%

0.50%

Receivables

11.80%

4.30%

Merchandise Inventories

30.03%

36.90%

Other Current Assets

6.71%

4.57%

Total Current Assets

51.76%

57.55%

Current Assets

Property and Equipment Land and Buildings

4.77%

5.74%

Leasehold Improvements

12.72%

13.73%

Fixtures and Equipment

25.65%

23.96%

Property under Capital Lease

0.71%

0.53%

Total Gross Property and Equipment

43.85%

43.96%

Less Accumulated Depreciation

17.48%

18.04%

Net Property and Equipment

26.37%

25.91%

Goodwill

13.92%

8.53%

Tradenames

1.09%

0.76%

Customer Relationships

2.03%

0.04%

Equity and Other Investments

2.50%

4.74%

Other Assets

2.32%

2.47%

Total Assets

100.00%

100.00%

Accounts Payable

31.57%

33.68%

Unredeemed Gift Card Liabilities Accrued Compensation and Related Expenses

3.03%

4.16%

2.90%

2.92%

Liabilities and Shareholders’ Equity Current Liabilities

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CASE 29 Best Buy Co., Inc.: Sustainable Customer Centricity Model?

Accrued Liabilities

8.73%

7.64%

Accrued Income Taxes

1.78%

3.17%

Short-Term Debt

4.95%

1.22%

Current Portion of Long-Term Debt

0.34%

0.26%

Total Current Liabilities

53.30%

53.06%

Long-Term Liabilities

7.01%

6.57%

Long-Term Debt

7.11%

4.91%

Minority Interests

3.24%

0.31%

Preferred Stock

0.00%

0.00%

Common Stock

0.26%

0.32%

Shareholders’ Equity

Additional Paid in Capital

1.30%

0.06%

Retained Earnings

29.79%

30.83%

Accumulated other Loss Income

-2.00%

3.93%

Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity

29.34%

35.15%

100.00%

100.00%

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach I. CASE ABSTRACT Target is a US mass-market discount store catered to shoppers seeking high-quality products. In a crowded market, Target was eager to grow its business outside the US and online. It expanded to Canada in 2011 by acquiring a failed retailer. A move that seemed prudent actually saddled Target with inconveniently located stores and strained its logistics and infrastructure. Closing down its Canadian stores, Target focused on strengthening its online presence. But two massive data breach incidents in 2013 and 2014 affected over 100 million of its customers and weakened Target’s sales significantly. In order to keep its market share on a par with competitors such as Wal-Mart and Amazon, Target clearly has challenges to be met. Decision Date: 2015

FY Sales: $72.6 billion FY Net Loss: $1.6 billion

II. CASE SUBJECTS AND ISSUES CEO Transition Strategy Formulation Strategy Implementation Core Competencies Global Expansion Online shopping

First Mover Advantage Competitive Advantage Logistics Inventory Management Marketing Strategy Competitive Strategy

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

IV. CASE OBJECTIVES 1. To discuss Target’s challenges surrounding global expansion.

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach 2. To discuss Target’s business level strategy with regard to online shopping. 3. To discuss the competitive landscape of the retail discount industry. 4. To discuss Target’s logistical challenges. 5. To discuss data security today. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. How did Target compete with online giants Amazon and WalMart? 2. Why did Target fail in Canada? 3. How was Target effected by the Great Recession of 2008? 4. What did Target learn from the massive data breach? 5. How can Target improve data security going forward? 6. Discuss the pros and cons of Target’s limited store inventory situation. VII. CASE AUTHOR’S TEACHING NOTE—Not Available

VIII. STUDENT STRATEGIC AUDIT

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach I. Current Situation A. Performance •

History o

George Dayton founded Fairfield Language Technologies (1902).

o

George Dayton passed away, newer generations took the reigns (1938).

Economic Performance o

Sales increased $1.34 billion (2015)

o

Seventy-four locations across U.S. (1979)

o

1,790 locations across U.S. (2015)

Rankings and Accolades o

2012 ▪

Fortune magazine ranked Target No. 25 on its list of “World’s Most Admired Companies.“

DiversityInc magazine ranked Target No. 30 on its list of “Top 50 Companies for Diversity.“

DiversityBusiness.com ranked Target No. 28 on its list of “America’s Top 50 Organizations for Multicultural Business Opportunities.“

Forbes magazine and the Reputation Institute ranked Target No. 22 on the list of “America’s Most Reputable Companies.“

Universum ranked Target No. 38 on its “Ideal Employer List“ as surveyed by American MBAs, and No. 28 as surveyed by American undergraduates.

Working Mother Media ranked Target among its 2012 Best Companies for Hourly Workers.

The Hispanic Association on Corporate Responsibility gave Target a score of 70 on its Corporate Inclusion Index (HACR CII).

Corporate Responsibility Magazine ranked Target No. 64 on its list of “100 Best Corporate Citizens.“

The National Conference on Citizenship and Points of Light, in partnership with Bloomberg LP, ranked Target No. 16 on the first comprehensive ranking of “The Civic 50.“

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach

o

Newsweek Magazine ranked Target No. 85 out of 500 on its U.S. Green Rankings 2012.

Target was named a member of the United States Hispanic Chamber of Commerce 2012 Million Dollar Club for its commitment to supplier diversity and Hispanic Business Enterprises.

Ethisphere Institute named Target one of the “World’s Most Ethical Companies.“

The Women’s Business Enterprise National Council named Target a “Top Corporation for Women’s Business Enterprises.“

.“

2013 ▪

Target ranked No. 5 on the 2013 list of “America’s 25 Most Inspiring Companies,“ based on a survey conducted by Performance Inspired, Inc.

The Human Rights Campaign gave Target a score of 100 on its 2013 Corporate Equality Index.

Diversity, Inc. magazine ranked Target No. 20 on its list of “Top 50 Companies for Diversity.“

Fortune magazine ranked Target No. 22 on its list of “World’s Most Admired Companies.“

Fast Company named Target No. 10 on its 2013 list of the 50 Most Innovative Companies.

The National Association for Female Executives named Target one of the Top 50 Companies for Executive Women for 2013.

The Hispanic Association on Corporate Responsibility gave Target a score of 80 on its Corporate Inclusion Index (HACR CII).

Corporate Responsibility Magazine ranked Target No. 62 on its list of “100 Best Corporate Citizens.“

Ethisphere Institute named Target one of the “World’s Most Ethical Companies.“

Target scored a 91 B on the 2013 Carbon Disclosure Project S&P 500 Report, an increase over our 2012 score of 87 B.

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach

o

The Chronicle of Philanthropy recognized Target as No. 9 on its list of most generous companies, according to its annual corporate giving survey.

Target was named a member of the United States Hispanic Chamber of Commerce 2013 Million Dollar Club for its commitment to supplier diversity and Hispanic Business Enterprises.

2014 ▪

No. 3 America’s 20 Most Inspiring Companies.

100 percent Corporate Equality Index by Human Rights Campaign.

No. 29 World’s Most Admired Companies (Fortune Magazine).

No. 36 50 Best Companies for Latinas to Work for in the U.S (Latina Style, Inc.).

Top 50 Companies for Executive Women (The National Association for Female Executives).

No. 18 Top 50 Organizations for Multicultural Business Opportunities (DiversityBusiness.com).

DiversityInc magazine ranked Target No. 22 on its list of “Top 50 Companies for Diversity.“

The Hispanic Association on Corporate Responsibility gave Target a score of 85 on its Corporate Inclusion Index (HACR CII).

The Council of Urban Professionals presented Target with its Corporate Diversity & Inclusion Leadership Award.

The League of American Bicyclists named Target a Platinum Bicycle Friendly Business.

Corporate Responsibility Magazine ranked Target No. 61 on its list of “100 Best Corporate Citizens.“

Newsweek Magazine ranked Target No. 194 out of 500 on its U.S. Green Rankings and No. 284 out of 500 on its World Green Rankings.

The Northern California Minority Supplier Development Council named Target Corporation of the Year.

Target was named a member of the United States Hispanic Chamber of Commerce 2014 Million Dollar

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Club for its commitment to supplier diversity and Hispanic Business Enterprises. o

2015 ▪

Fortune magazine ranked Target No. 48 on its list of “World’s Most Admired Companies.“

Diversity Inc magazine ranked Target No. 25 on its list of “Top 50 Companies for Diversity.“

The National Association for Female Executives named Target one of the Top 50 Companies for Executive Women for 2015.

Corporate Responsibility Magazine ranked Target No. 75 on its list of “100 Best Corporate Citizens.“

B. Strategic Posture 1. Mission a. We fulfill the needs and fuel the potential of our guests. That means making Target your preferred shopping destination in all channels by delivering outstanding value, continuous innovation, and exceptional experiences— consistently fulfilling our Expect More. Pay Less.® brand promise. 2. Objectives a. Create a more customer-centric experience. b. Grow in-store revenues by 2 percent to 3 percent annually. c. Grow online revenue by 40 percent annually. d. Realize a $2 billion cost savings over a two-year period. 3. Strategies a. Offer differentiated products at discount prices. i. Design partnerships ii. Exclusive products (e.g. Justin Timberlake CD) iii. Price matching iv. RedCard discounting of 5 percent b. Create a shopping experience like no other—be the upscale discount retailer. i. Better designed, more spacious stores ii. Higher quality products iii. Premium perception c. Generate alternate in-store revenue streams. d. Foster strong community relations. i. Give back to the communities 5 percent of income. ii. Encourage employees to volunteer time. e. Foster strong employee relations. i. Diversity of hires

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach ii. “Team Member“ treatment of all employees iii. Development opportunities f. Develop a strong omnichannel presence. i. Catch-up online experience with that of competitors. ii. Build an increased mobile app presence. iii. Connect channels better with one and other to provide more personalized experience. 4. Policies a. Blend teamwork amongst all levels of the corporation. b. Continue to give back to the community (locally and nationally). c. Community Engagement i. United Way d. A customer’s experience is always enjoyable and exciting. II. Corporate Governance A. Board of Directors •

Twelve embers o Eleven external ▪ Roxanne S. Austin (Austin Investment Advisors)

Vast experience in top level management

Target Corporation Board since 2002

Douglas M. Baker, Jr. (Chairman/CEO Ecolab Inc.) •

Past CEO Ecolab Inc.

Target Corporation Board since 2013

Calvin Darden (Chairman Darden Putnam Energy & Logistics, LLC) •

Long-term, top level management in real estate development

Target Corporation Board since 2003

Henrique De Castro (Former COO Yahoo! Inc.) •

President Google Inc.

Target Corporation Board since 2013

Robert L. Edwards (Former President/CEO AB Acquisition LLC) •

Safeway Inc.

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach • ▪

Donald R. Knauss (Former Executive Chairman The Clorox Company) •

o

Target Corporation Board since 2015

Mary E. Minnick (Partner Lion Capital LLP) •

Consumer-focused private investing

Target Corporation Board since 2005

Anne M. Mulcahy (Chairman of the Board of Trustees Save The Children Federation, Inc.) •

Chairman of the Board Xerox Corp.

Target Corporation Board since 2000

Derica W. Rice (EVP/CFO Eli Lilly and Company) •

Former SVP/CFO Eli Lilly and Company

Target Corporation Board since 2007

Kenneth L. Salazar (Partner WilmerHale) •

U.S. Secretary of the Interior

U.S. Senator—Colorado

Target Corporation Board since 2013

John G. Stumpf (Chairman of the Board/President/CEO Wells Fargo & Company •

Thirty year Wells Fargo veteran, strong expertise with a focus on operations and management.

Target Corporation Board since 2010

One internal ▪

Target Corporation Board since 2015

Brian C. Cornell (Chairman of the board/CEO Target Corporation) •

CEO PepsiCo, Inc

President/CEO Sam’s Club

EVP Wal-Mart Stores, Inc.

Target Corporation Board since 2014

Yes, they all own a large amount of stock (some more than others).

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach B. Top Management o Eleven members o Brian Cornell CEO o John J. Mulligan EVP/COO o Timothy R. Baer EVP/CLO/Corporate Secretary o Casey Carl Chief Strategy & Innovation Officer o Jeffrey J. Jones II EVO/CMO o Jodeen A. Kozlak EVP/Chief HR Officer o Michael E. McNamara EVP/CIO o Jackie Hourigan Rice Chief Risk & Compliance Officer o Cathy R. Smith EVP/CFO o Tina M. Tyler EVP/Chief Stores Officer o Laysha L. Ward EVP/Chief Corporate Social Responsibility Officer • All Members collectively share these talents: o Bilingual o Multilingual o Global Business leadership o Corporate Security o Marketing o Top level management practices o Asset Protection o Legal o Supply chain management o Corporate communications o PR o HR o Risk Management o Accounting o Philanthropy o Community engagement ▪ All serve on sought after boards. III. External Environment: Opportunities & Threats A. Economic o

Opportunities and Threats (both) ▪

o

Distribution channels

Threats ▪

New entrants

Transportation costs

Sourcing

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach

o

The economy itself

Lending constraints

Opportunities ▪

Product Design

Product Development

International market stabilization

Sustainability efforts

42 million jobs pumped into U.S. economy

Diversity

Give back to the communities •

Locally

Technological o

o

o

Opportunities & Threats (both) ▪

Pricing

Promotion

Inventory Management

Electronic Fund Transfers (EFT) online/website

Supply chain management

Threats ▪

IT innovation

Competing to gain competitive advantage in the marketplace.

New innovations

Added values

Opportunities ▪

Online advertising

Manage digital assets properly

Merchandising

Data collection

Continuously update •

POS (Point of Sale Systems)

TFS (Target Financial Services)

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach •

Political/Legal o

Opportunities/Threats (both) ▪

Threats o

Data breaches

Opportunities o

Donations must support and be in Target’s best interest as a business.

o

Support/donate in-state retail associations

o

Political Balance ▪

Support Political Action Committee’s (PAC’s)

Internally and externally

Sociocultural o

Opportunities/Threats (both) ▪

o

Threats ▪

o

Glass ceiling theory Trends that bring spending to other stores or competitors. •

Friends follow friends

Fads

Opportunities ▪

Diversity

Holiday shopping

B. Task Environment -

Threat of new entrants (low) o

-

Bargaining power of buyers (high) o

-

Buying products from another retailer

Threat of substitute products or services (high) o

-

High entry barriers

Competition controls product price points

Bargaining power of suppliers (moderate) o

Service are rather different

o

Controlling switching costs

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach -

-

Rivalry among competing firms (high) o

Competitors are of equal size or higher

o

Diversity

o

Distinguish yourself from the competition

Relative power of unions, governments, special interest groups, etc. (low).

C. Summary of External Factors See EFAS Table IV. Internal Environment: Strengths and Weaknesses (SWOT) A.

Corporate Structure •

• • •

Centralized corporate structure o Organized on the basis of functions at corporate level: human resources, logistics. o Organized on the basis of functions and product types at store level: store team leader, soft lines, hard lines, asset protection, guest services/front end, logistics, human resources. Structure is clearly understood by everyone in the corporation (implied but not stated by case). Structure is not consistent with Target’s objectives, strategies, policies, and programs. Target offers educational opportunities for employees to build on their skills, o Yet only 10 percent of its Executive Team Leadership were promoted from within without four-year college degrees. o This places it in the bottom 15 percent of Fortune 500 companies for promoting from within. Wal-Mart o Hires both graduates and non-graduates with equivalent management experience as leadership personnel for their stores.

B. Corporate Culture •

Values o Positive employer/employee relations for positive employee attitudes o Diversity

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach o

• •

In team membership, supply chain, and the communities Target operates in. o Strong community relations through corporate giving. o 5 percent of its income to local groups. Compatible with current objectives, strategies, policies, and programs. o Instituted specific recruiting efforts to hire diverse teams. o Benefits offered employees Culture is compatible with employees diversity of backgrounds. Diversity at Target incorporates race, gender, sexual orientation, education and life experiences, and physical ability.

C. Corporate Resources •

Marketing o Overview ▪ Strategy: attract the whole family ▪ Slogan: “Expect More. Pay less.“ Ties in with mission clearly. o Advertising ▪ 2014: $1.7 billion (increased by $0.3 billion from 2013) ▪ Majority of budget spent on newspaper circulars, internet ads, and broadcast media. o Policies ▪ Price-matching ▪ REDcard loyalty program • 5 percent discount (S) o REDcard program took a hit due to the 2013 hacking incident (W). o New REDcard members spend 50 percent to 150percent more than typical customers and made eight to ten more visits per year. ▪ Perks (S) • Free WiFi in store • In-store pickup of online orders • In-store concierges ▪ On-line presence (S) • Shifted focus to pricing and value • Growing market of customers opting for lowerpriced merchandise.

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach ▪

• •

Branding (S) • Positioned as a high-style brand despite low prices. • Partnered with high-profile designers.

Finance o Q1 FY15 ▪ Sales $21.75 billion (4.1 percent increase from Q4 2014) (S) ▪ Annual growth 1.9 percent (S) ▪ Income margins 1.32 percent (W) • Stock prices rose 37 percent after announcement of termination of the Canadian operations (S). Research and Development (R&D) Operations and Logistics o Canadian operations (W) o Voluntary cash contribution of $59 million to an Employee Trust. o Realigned to a primary objective to operate as a single segment throughout U.S (S). ▪ Each store had seven managers each with a strategic department of expertise (S). ▪ Hired logistic operational experts to streamline process (S). • Saved Target $475 million in expenses from 2012– 2014. • Operational size could not be scaled down fast enough during recession (W). o Decline in net profit growth in 2008 • Inventory System Software (W). Human Resources Management (HRM) o Goal: offer a wide variety of job opportunities. ▪ Diversity (S) • Intrinsic to every aspect of Target’s business. ▪ Community Giving (S) • Pledge 5 percent of income to local groups. ▪ High Employee Satisfaction (S) ▪ Educational opportunities (S) • Attracted many new college graduates as a stepping stone for their career. ▪ Promoting from within (W) • Bottom 15 percent of Fortune 500 companies. ▪ Meetings/red tape (W) • Decisions needed to go through many levels. ▪ Rising labor costs (W) 30-14 ©2024 Pearson Education, Ltd.


CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach ▪

Information Systems (IS) • Credit card system hacked in 2013 (W) • Energy efficient (S) • Award-winning mobile application (S) • Flawed Inventory system (W) o Inefficient, costly o Led to empty shelvesD. Summary of Internal Factors

See IFAS Table V. Analysis of Strategic Factors A. Situational Analysis

See SFAS Table

B. Review of Mission and Objectives

Mission and objectives are appropriate in terms of the key strategic factors and problems. • This will require a substantial investment of money and resources to update Target’s online presence given the goal of growing online revenue by 40 percent annually.

VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 1. Objectives seem like they may be challenging to hit with the current strategies for growth but seem like the objectives necessary to remain competitive in the market. a. Not a huge focus on IT excellence despite the omnichannel focus. b. A focus on connecting customer experience between channels may help enhance the effectiveness of the channel-neutral approach. 2. Alternative Strategies a. Cost Leadership—not currently employed i. Pros 1. Possible increase in market shares against entrenched, brick-and-mortar competitors. 2. Easier to compete against online-only competitors. ii. Cons 30-15 ©2024 Pearson Education, Ltd.


CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach 1. Lessen the brand image of “discount luxury.“ 2. Diminished margins 3. May cause Target to maximize in-store space causing diminished customer experience. b. Differentiation—part of current strategy i. Pros 1. Provides a more positive experience to customers. 2. Allows Target to be competitive against larger organizations. 3. Provides higher margins on certain items. ii. Cons 1. Harder to gain market share in less affluent regions. 2. Harder to sell commodity goods—a large portion of their goods. c. Stability—not currently employed i. Pros 1. Ability for company to recover from Target CA losses. 2. Focus on growing margins may help company prepare for future expansion. 3. Ability to employ this strategy can project strength. ii. Cons 1. Challenging market may impact perception absent steady growth. 2. Already smaller than some competitors, lack of growth may demonstrate lower vendor leverage. 3. Lessened employee morale. d. Growth—currently employed, focus on channel growth as opposed to regional. i. Pros 1. Continue to grow revenues. 2. Better able to keep pace with competitors. ii. Cons 1. Costs associated with continued growth. 2. Unsuccessful growth can damage brand image. e. Retrenchment—currently employed, vacating Canadian market i. Pros 1. Withdraw from unprofitable markets. 2. Higher margins. ii. Cons 1. Smaller territory coverage. 2. Smaller potential market. 3. Lower potential revenues. 4. Costs associated with market withdrawal. 30-16 ©2024 Pearson Education, Ltd.


CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach f. Functional—IT Excellence as a Differentiator. i. Pros 1. Long-term cost savings. 2. Competitiveness in the online space. 3. Extended logistical capabilities. ii. Cons 1. Large, upfront investment. 2. Not a current competency. B. Recommended Strategy 1. Growth/Retrenchment/Differentiation a. Target should continue its strategy of differentiation at the business level. It has proven successful for them so far and is a large part of their positive brand perception. b. Both Growth and Retrenchment strategies should be continued at Target, with the growth focused domestically and retrenchment portion focused on a continued exit from Canada. i. Expansion into Canada was not handled well and ultimately proved to be largely unsuccessful. Retrenchment will help to lessen losses by moving quickly out of the market. ii. Target has utilized a growth strategy for years domestically and should continue to look for growth in new locations and new offerings (e.g. online, Target City, etc). c. A key functional strategy that needs to be adopted in support of business and corporate strategies is one of IT excellence. Target has current challenges in IT that have caused issues over the past several years and a key competitor, Walmart, is able to use IT as a differentiator. i. Lack of IT strength has led to major cost implications, primarily around logistics and missed opportunities in digital channels. ii. Will help the organization scale effectively up and down with the economy. 2. Policies a. New market expansion. i. Keep market expansion relegated to domestic markets for the short-term future. Focus on growth in urban areas. b. IT Integration for omnichannel support i. When evaluating and implementing all digital marketing technologies, data integration

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach capabilities must be accounted for. New systems cannot be added unless user data can be integrated into existing systems in a way that creates a stronger omnichannel experience for customers. c. IT Excellence i. IT should be considered as mission-critical in all cases. All business decisions should include an IT component to investigate how technology could help the adoption of new policies, rollout of new stores and any other value-generating activity. Future risk of legacy systems should be evaluated as part of each and every IT decision. 3. Impact on Core Competencies a. The new changes should not have a negative impact on existing core competencies however, IT should eventually be a resulting addition to core competencies. VII. Implementation A. Changes Required a. Organizational Structure: i. Restructuring is not necessary. ii. The strategies discussed in the previous section should not require any massive restructuring. b. Programs i. IT: challenges with current logistics and inventory software as well as online marketing or e-commerce channels. Centers of excellence should be established around digital and logistics that allow for crossfunctional support of these growth areas. B. Feasibility c. Financial i. The budgets should be feasible as Target has already put aside money for IT and supply chain improvements. d. Budgets i. An estimate of $1 billion has been made for IT and supply chain improvements. Since these dollars were estimated based on establishing leaner operations, it can be assumed that no additional dollars put aside for the channel-neutral transformation. Based on prior experience with this work, it is estimated that a $25– $50 million accelerator budget would make a large impact.

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach ii. Funds have already been put aside to finish the Canadian wind-down and total $59 million. e. Priorities and Timetables i. Tying up any loose ends in CA should be the number one priority as this is almost complete. ii. Channel-neutral experiences should be accelerated as the second priority because of the relative size of the effort. These efforts could be incrementally accelerated through the injection of funds. The associated technologies require less effort and dollars to realize value than do logistic changes. 1. Major impact should be realized within two years. f. Standard Operating Procedures i. Standard operating procedures are generally effective and should remain unchanged with few exceptions. ii. SOPs in marketing should be investigated with specific focus on adjusting to new technology in the digital realm. iii. SOPs will need to be constantly evaluated with regards to logistics when these projects begin. VIII. Evaluation and Control A. Performance measurement is only mentioned briefly throughout the course of the case. It does appear that these systems will need to be supplemented in some capacity as the organization rolls out the plans for improvement. Measuring the impact of changes in omnichannel digital solutions may be an inexact science as the goal of this approach is to both directly generate revenue through cross-channel purchasing, but also to influence revenue in store. Advanced data analysis techniques will need to be employed to gauge the impact of changes. B. While no formal reward system is mentioned in the case, it is recommended that one be conceived in order to emphasize IT as an enabler. a. Tying incentives to marketing and operations programs that effectively integrate IT is recommended. C. There is no discussion of corrective action given in the case.

External Factors EFAS Table Key External Factor

Weight

Rating

Wgt Score

Comments

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Opportunities Demand for Organic/EcoFriendly Products

0.05

4

0.2

Target has made substantial commitments in this area.

Prevalence of Online Shopping

0.15

2

0.3

Target has set a goal of increasing online sales by 40 percent, partly through acquisitions.

Economic Boom

0.1

3

0.3

Consumers are willing to buy Target’s quality/exclusive products as the economy grows.

High Barriers to Entry

0.15

4

0.6

To compete with Target and its competitors, prices requires massive capital investment and prime locations.

Increased Diversity of American Society

0.025

5

0.125

Target instituted specific recruiting efforts to hire diverse teams.

Bargaining Power of Buyers

0.05

4

0.2

Consumers can use Target as a “showroom,“ although Target will match Amazon’s prices.

Discount Retailing Highly Competitive

0.15

3

0.45

Great downward pressure on prices, Target stays competitive through enhanced customer services.

Threats

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Data Breaches

0.025

3

0.075

Target offered a free year of credit monitoring and identity theft protection and $10 million settlement.

Prevalence of Online Shopping

0.2

2

0.4

Target’s improvements to its website and mobile app have not offset its struggles with online shoppers.

Economic Downturn

0.1

1

0.1

Target cannot respond effectively to dramatic drops in demand due to scale of operation.

Total Score

1

2.75

Internal Factors IFAS Table Key Internal Factor

Weight

Ratin g

Wgt. Score

Comments

0.1

5

0.5

Described as its greatest strength.

Strengths Ability to Do Outbound Logistics

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Widely Recognized Brand in the U.S.

0.1

5

0.5

96 percent of Americans recognize Target logo.

Differentiation Through Private Brands/Designer Products

0.05

4

0.2

Represent a significant portion of overall sales.

Strong Product/Service Assortment

0.1

4

0.4

Leads to wide spectrum of customers.

Ability to Attract Customers from A Wide Spectrum of Demographics

0.05

3

0.15

Target’s customers will purchase a wide range of products.

Pleasing Shopping Experience Compared to Competitors

0.05

3

0.15

Differentiates Target in highly competitive industry.

Successful Mobile App

0.025

3

0.075

Counteracts Target’s weak online presence.

High Employee Satisfaction

0.025

2

0.075

Important for customer satisfaction.

0.15

1

0.15

Has a direct negative impact on customers/brand perception.

Weaknesses Inefficient and Costly Inventory Management System

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Inability to Scale Inventory Up/Down in Response to Demand

0.15

1

0.15

Prime reason for the failed expansion in Canada.

Weak Online Presence

0.1

3

0.3

Especially relevant as Amazon is one of Target’s primary comp.

Difficulty Accurately Forecasting Consumer Demand

0.05

2

0.1

Leads to lost sales and disappointed customers.

Tarnished Brand and Reputation Due to Data Branch/Canada Expansion

0.05

4

0.2

Represents huge loss for the company but Target responded effectively.

Total Score

1

2.95

Key Strategic Factors

Weight

Ratin g

Wgt Scor e

Short Dur.

Med. Dur.

Ability to Do Outbound Logistics

0.15

5

0.75

x

x

Long Dur.

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Comments

Targets greatest strength could evaporate if its inventory management system isn’t improved.


CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Prevalence of Online Shopping

0.15

2

0.3

x

x

x

The importance of online shopping will only increase over the long term.

High Barriers to Entry

0.1

4

0.4

x

x

x

The massive capital investments required for discount retailers will not disappear.

Discount Retailing Highly Competitive

0.15

3

0.45

x

x

x

Increased competition from online discount retailers will make industry more competitive.

Widely Recognized Brand in the U.S.

0.05

5

0.25

x

x

A widely recognized brand is a key advantage, but no guarantee of long-term success.

Inefficient and Costly Inventory Management System

0.15

1

0.15

x

x

While a key disadvantage in the short-term, target can replace or improve its system.

Inability to Scale

0.1

1

0.1

x

x

Target can learn from Wal-Mart

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CASE 30 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach Inventory Up/Down in Response to Demand

and become more flexible in inventory.

Strong Product/Ser vice Assortment

0.05

4

0.2

x

x

This is less of an advantage long-term, as online shopping grows.

Weak Online Presence

0.1

3

0.3

x

x

Target has the ability to greatly enhance its online presence over the long-term.

Total Score

1

2.9

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CASE 31 STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES I. CASE ABSTRACT Staples was the world’s largest office supplies retailer with a focus on convenience and a wide range of product offerings. The office supply sector had almost no barriers to entry as capital costs were low compared to other retail industries. No licensing requirements were necessary, easing the burden on new entrants. The low level of differentiation of goods between one office supply store and the next forced new entrants to provide either niche or specialty products to compete and often in the online realm. As the retail industry had been trending towards e-commerce, Staples’ traditional brick-and-mortar stores were costing it dearly. The global office supplies leader found it increasingly difficult to compete on the Internet. Decision Date: 2015

FY Sales: $23 billion FY Net Income: $620 million

II. CASE SUBJECTS AND ISSUES Low Barriers to Entry Strategy Formulation Strategy Implementation Core Competencies Diversification Stages of Corporate Development

Online Shopping Competitive Advantage Sustainability Supply Chain Management Marketing Strategy Competitive Strategy

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES IV. CASE OBJECTIVES 1. To discuss Staple’s challenge to compete online with Amazon.com. 2. To discuss what to do about Staple’s large investment in brick and mortar retail stores. 3. To discuss the competitive landscape of the office supply industry. 4. To discuss the challenges surrounding selling commodity products. 5. To discuss Staples strategic alternatives. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. Should Staples close stores and focus more on “online sales?” 2. How can Staples differentiate itself rather than competing on price with Amazon and Wal-Mart? 3. How can Staples better compete with WB Mason with a strong focus on customer service? 4. Should Staples have its own delivery network like WB Mason and Amazon? 5. How can Staples grow its printing, shipping, and service businesses? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT

I.

Current Situation A. Current Performance

• •

Tom Stemberg and Leo Kahn founded Stapes, Inc in November 1985 and raised $36 Million in its IPO in 1989. Staples is the largest office supplies superstore in the world with over 2,200 stores across four continents, but in May 2014 it announced it will be closing 225 stores in 2015.

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES • • •

Staples stock price has dropped 52 percent since March 2010. In 2013 sales were down 5.2 percent and gross profit was down .5 percent. Ranked #2 among retailers and #10 overall in the Newsweek Green Rankings for 2012, which ranks the environmental efforts of the largest 500 companies in the U.S. For the third straight year, earned 100 percent score on the Human Rights Campaign’s Corporate Equality Index.

B. Strategic Posture

1. Mission • To offer every product a business needs in an ‘easy’ one-stop shopping fashion. 2. Objectives • Maximize profit • Dominate the office supplies market. • Accelerated growth in online business. • Improve profit margins in international markets. • Protect the environment and benefit the community. 3. Strategies • Focus on convenience • Offer an extremely wide range of products at a large number of locations. • Increase brand awareness. • Maximize efficiencies in purchasing and distribution. • Focus on sustainability. Offer recycling solutions. • Successfully transform their in store clients to be online customers. • Separate sales channels for three buyer segments. • More ways to shop: online, apps, reserve online, etc. • More ways to save: price match guarantee, coupons, rewards programs, business discount. 4. Focus on corporate responsibility and corporate values. • Diversity at work • Environmental, sustainable products • Financial support for education, teachers, and schools

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES

II.

Corporate Governance A. Board of Directors • Eleven total members, ten external • Ronald L. Sargent is Chairman and Chief Executive Officer started with Staples in 1989. Has been Chairman since 2005 • Basil L Anderson has been a director since 1997. Focus is corporate finance, also has strategic planning and international experience. • Robert Nakasone has been a director since 1986. Former CEO of Toys R Us led expansion into Europe, Asia, and the Middle East. • Rowland Moriarty has been a director since 1986. Experience as CEO of public and private companies. • Board and Executive Management combined own 2 percent of outstanding publicly trades shares (SPLS). • Board has strong past board experience Hasbro, Becton Dickinson, Charles River Associates, Yankee Candle, Progress Financial, and Moody’s. • Directors have management experience at CBRE, Bain, TJX, Sainsbury, NAK Enterprises, Hormel Foods, and Harvard University. • International experience with Walmart Hagen Daz, Mars, Pepsi, and Proctor Gamble. B. Top Management • Seven total officers, two officers focus on North American Sales and the third focuses on European sales. • Ronald Sargent, CEO joined Staples in 1989 has been CEO since 2002. • Demos Parneros, President North American Sales. He has worked in US Operations since 1987, becoming president of operations in 2002. • Except for the President of European sales, John Wilson and General Counsel Michael Williams, all officers have been with Staples since at least the late ‘90s. • Recent changes like downsizing and efforts to gain efficiencies have been viewed as reactive efforts.

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES III.

External Environment: Opportunities and Threats (SWOT) A. Societal Environment 1) General Environmental Forces: 1. Economy a. Global Recession (T) i. Decreasing profits across European and Australian stores (T). ii. Businesses cutting back on goods hurts low margin sales (T). iii. Decreased consumer spending (T). 2. Technology a. Online shopping (O) i. Increasing numbers of online shoppers looking for supplies (O). ii. Low overhead due to lack of store costs (O). iii. Mobile orders from phones and apps (O). iv. Competitors with no stores, Amazon (T). b. Amazon drones (T) i. Revolutionize delivery of items (T). ii. Make traditional stores obsolete with same day delivery (T). 3. Political—Legal a. Products are not patented. i. Office supplies are easy to reproduce, creating low entry barriers (T). b. Government contracts in Australia and the US(O). i.

FSSI two exclusive agreement for US government office supplies.

ii.

Contracts for office supplies with Australian and New Zealand governments.

c. EPA Green Power Partner (O) i.

Savings from power reduction (O.)

ii.

Reputation as green company (O).

d. Ability One Employer (O) i.

Largest employer for blind and disabled workers in the US.

4. Sociocultural

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES a. Increasing number of shoppers do all their shopping online (O/T). i.

Stores suffer decreasing profits with less traffic (T).

ii.

Costs of retail stores no longer worth the expense, margins already low (T).

iii.

Can turn stores into portal to direct customers to online staples.com (O).

iv.

Can close unnecessary stores to streamline and reduce costs (O).

b. Green Company (O) i.

Reputation as environmentally friendly (O). Solar power lowers building costs (O).

2) These forces are consistent worldwide. B. Task Environment (Industry)

1. Threat of New Entrants: Moderate a. Low barriers to entry. i. Low capital costs. ii. No licensing fees. b. Brand recognition i. Difficult to succeed against established brands. ii. New entrants usually take a niche or specialty. iii. Many entrants are online only. c. Shrinking market i. Global recession ii. Decreased demand from consumers and businesses. 2. Bargaining Power of Buyers: High a. Market Share 36.5 percent i. Competitors such as Office Depot and Amazon as alternatives. ii. Increasing niche stores such as WB Mason and online sellers. b. Sales breakdown i. Office Supplies 44.0 percent ii. Services 5.3 percent iii. Office machines and related 29.9 percent iv. Computers and related 15.6 percent v. Office furniture 5.2 percent

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES 3. Threat of Substitute Products: Low a. Basic office supplies are always needed. i. Toner, paper, staples, etc. b. Office machines are present at all offices, it is a steady sustainable market. 4. Bargaining Power of Suppliers: Low a. Common products that can be bought from many suppliers. b. Products sourced from Asian manufacturers. c. Lack of patents means that identical goods can be purchased elsewhere. d. Low margin goods require low prices from suppliers. 5. Rivalry Among Competing Firms: High a. Direct Store Competitors: Office Depot/Office Max, Lyreco, W.B. Mason, Walmart, Target,and BestBuy. b. Online Competitors: Amazon, online retailers. i. Lack of store overhead leading to increasing online merchants. 6. Relative Power of Unions, Governments, Interest Groups, etc. : Low a. Attempts by employers to unionize strongly rebuffed. i. One store unionized, received 2 percent wage increase ii. Abiding by US green and disability laws gained staples an exclusive office supply contract with the US Government. iii. Eco-friendly policies in stores, lower carbon monoxide, recycled paper, and solar power. EFAS (External Factor Analysis Summary) Key External Factor

Weight

Rating

Weighted Score

Comments

Opportunities Internet Shopping

.5

3

1.5

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More and more customers are going online for their shopping needs. By increasing online


CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES presence, Staples can reduce overhead in stores. Government Contracts

.3

5

1.5

Government contracts provide massive amounts of sales

Green Technology

.2

4

.8

Savings from green tech and a positive reputation

Online Shopping

.5

3

1.5

Online only competitors . like amazon, have no overhead and can sell at lower prices. Less traffic in stores

No Patents on Products Sold

.1

5

.5

Easy for new entrants to get in the business if they can find a

Threats

Low Entry Barriers

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES niche that they do better than Staples (i.e. W.B. Mason)

IV.

Low Margin Products

.2

3

.6

In order to make profits , Staples needs to sell massive quantities of its goods. Any decrease in sales is very bad.

Global Recession

.2

4

.8

Consumers are cutting back on the amounts of supplies they purchase, hurting Staples bottom line.

Internal Environment: Strengths and Weaknesses (SWOT) A. Corporate Structure • Founders: Tom Stemberg and Leo Kahn • Chairman and CEO: Ronald Stargent • Board of directors: eleven directors elected annually : ten independent directors.

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES

B. Corporate Culture

Staples updated its corporate values policy in 2012 to engage its employees and provide guidelines for associate interactions with customers and each other. “Staples Soul” aimed to articulate how the company’s success translated to the well-being of the community (employees, society, and environment). Key components of Staples Soul: a) Ethical business practices, ability of employees to voice their opinion without fear of reprisal. b) Sustainable business practices such as selling recyclable products and green services and improving energy efficiency. i. Staples ranked among the top 25 of EPA’s Green Power Partner List. c) Encouraging the recruitment of diverse associates to spur new opportunities for innovation and growth. d) Career development opportunities to associates and donations and grants to Staples foundation for education and training of disadvantaged youth.

C. Corporate Resources

1. Marketing a) Three distinct customer segments: i. Small or home office ii.

Mid-size businesses (20-500 office employees)

iii.

Large businesses (500+ employees)

b)

Separate sales channels for each market segment:

i. Retail stores and Staples.com targeted small and home office. ii. Staples catalogue and Staples Advantage program addressed mid-large businesses. Staples branding strategy was built around the phrase “That was easy” to emphasize the large product portfolio, in-stock product availability, and hassle-free shopping experience.

c)

d)

Marketing Stapes’ online presence: 31-10 ©2024 Pearson Education, Ltd.


CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES i. Lacked consumer-facing marketing to direct consumers to its website. ii. Strategy to encourage in-store website.

promote shoppers

Staples online to go to the

was to Staples’

iii. Stores were equipped with “business lounges” and associates had tablets that would direct customers to its website rather than its retail outlets. 2. Finance a) Global sales revenues flat around $24 billion from 2011—2014. i. Office supplies count for approximately 44 percent of

sales. Losses in Europe dragging the financials down.

ii.

• In 2012, goodwill impairment of $771.5 million attributable to European retail and Europe catalogue units caused a net loss of $210 million to the company. b)

Ratio Analysis:

i. Staples had a net loss of $210 million in 2012 (ROE 10.1

percent) and turned a profit of $620 million in 2012 (ROE -3.4 percent). The improvement in ROE was due to an increase in the profit margin, and an increase in the Asset Turnover.

ii.

Staples reduced its Financial improving its Current Ratio as well.

iii.

Leverage,

thus

Financial Ratio Analysis: Liquidity Ratios

2013

2012

Current Ratio

1.56

1.40

Quick (acid test) Ratio

0.86

0.88

Inventory to Net Working Capital

1.24

1.30

Cash Ratio

0.15

0.30

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES Financial Ratio Analysis: Profitability Ratios

2013

2012

Net Profit Margin

2.68%

-0.86%

Gross Profit Margin

26.10%

26.62%

Return on Investment (ROI)

5.55%

-1.72%

Return on Equity (ROE)

10.10%

-3.43%

Earnings per Share (EPS)

$0.94

-$0.31

Financial Ratio Analysis: Activity Ratios

2013

2012

Inventory Turnover

9.93

10.54

Days of Inventory

49.75

47.21

Net Working Capital Turnover

12.35

13.68

Asset Turnover

2.07

1.99

Fixed Asset Turnover

12.36

12.42

Average Collection Period

29.04

27.18

Accounts Receivable Turnover

12.57

13.43

Accounts Payable Period

42.68

38.69

Days of Cash

7.78

19.98

Financial Ratio Analysis: Leverage Ratios

2013

2012

Debt to Asset Ratio

45.0%

50.0%

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES Debt to Equity Ratio

82.0%

100.1%

Long-Term Debt to Capital Structure

27.1%

28.1%

Times Interest Earned

9.91

2.63

Same as above (lease charges not listed)

Coverage of Fixed Charges Current Liabilities to Equity

54.85%

72.01%

Financial Ratio Analysis: Other Ratios

2013

2012

Price/Earnings Ratio

$12.72

Notes: based on current stock price and 2013 EPS.

Dividend Payout Ratio

51.1%

-139.7%

4.0%

Notes: based on current stock price and 2013 dividends.

Dividend Yield on Common Stock

c)

Risk Factors:

i. Large long-term debt and obligations: $1.7 billion in

2013. • Mitigated to some extent by large cash on hand: $1.3 billion in 2013. ii. Sluggish growth: improvement in ROE attributed to improvement in efficiencies including closure of unprofitable stores. d) Comparison to competitors: the office supplies industry as a whole is plagued with problems like low-profit margins and competition from online stores like Amazon.

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES i. In 2014, Staples announced 225 store closures while

Office Depot announced 400 store closures. 3. Research and Development (R&D) a) Staples is lagging behind in the online retail category, with its focus on brick-and-mortar stores, as opposed to mobile technologies and e-commerce. b)Staples’ re-invention strategy was focused on reducing its physical footprint and investing heavily in its online retailing business. c) The company appears to be catching up to online competitors rather than coming with new and innovative products and services to increase growth and profitability. 4. Operations and Logistics a) Staples vision is clearly stated to provide every product that a business would need to be successful. Its main objectives were to provide superior value by offering a large selection of products and services in a convenient manner. Convenience changed over time as new opportunities presented itself and Staples evolved with the market to continue to provide the most convenient way of offering its products. For example, early in the corporation’s life, they implemented different sized stores for different areas. Staples created smaller more convenient stores in the city and larger stores outside the city. As the Internet became prevalent, convenience changed to online ordering, so it adapted with online trends. Therefore, the company remained in line with their corporate mission, objective, and strategy, in both internal and external environments. While Staples had both domestic and international presence, its domestic operation capabilities are superior to its foreign operations. Domestically, the company established facilities and offerings not just based on location, but by the purchasing tendencies of its large, midsize, and small clients. While in foreign markets it had a more “vanilla” service offering in that it wasn’t as strategically targeted for specific areas or company needs due to size.

b)

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES Since Staples has so many brick-and-mortar stores all over the world, as well as many fulfillment centers, it does not appear to be vulnerable to natural disasters. In addition, its product offerings were diversified enough in the office supply market that price increases and suppliers did not appear to pose significant threats.

c)

Staples has primarily low wage earning associates employed due to the nature of the business. There is not a large mix of support staff and professionals due to its product offerings.

d)

Staples appears to be performing well against its competition. Staples overtook Office Depot in 2005 as the number one office supply superstore and remained on top through 2013. Staples sheer number of store locations has created an incredible distribution channel, which has allowed it to leverage marketing, distribution, and supervising costs. The North American commercial segment has been structured to accommodate customers by segment (large, medium, small) since office needs vary. Over time they have also evolved to support Internet sales and deliveries. The trend Staples has been following, which entails leveraging new opportunities such as the Internet, is in line with its strategic objective and mission, which is to provide easy and hassle free office supply shopping in the most convenient way. These trends certainly portray the company’s future trends and performance. Since most competitors have also strategically aligned themselves in similar ways, for example, Amazon with its online presence and Office Depot competing in both the brick-and-mortar and online services, the one competitive advantage that Staples has over the competition is the ability to keep its prices low through its logistics and supply channels.

e)

The article does not explicitly discuss operation managers efforts to evaluate and improve current performance. The case speaks more to how Staples has aligned itself to offer low prices and convenient access to supplies. However, it can be inferred that operation managers are evaluating the external environment and leveraging opportunities, such as the Internet.

f)

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES It does not appear that Staples adjusts to international conditions. They have been successful in Australia and New Zealand due to large government contracts.

g)

The article does not go into detail on how operation managers contribute in the strategic management process.

h)

5. Human Resource Management a) Staples updated its corporate values policy in 2012, which provided guidelines for associates’ interaction with customers and each other. This was implemented because the majority of associates were low-wage earners, which can cause HR issues through employee apathy and high turnover rates. This new implementation was called “Staples Soul,” which aimed at encouraging ethical behavior, establishing sustainable business practices, and diversity. Diversity was discussed as part of Staples success through employees diverse individuals, which claimed to spur new opportunities for innovation and growth. This appears in line with the company’s mission, objectives, and strategy. The article does not go into great detail about how employees contribute to a competitive advantage since they are mostly low-income earners. Having low-income employees does help keep costs low, which is a competitive advantage of Staples, but employee skills do not appear to provide any competitive advantage.

b)

Article does competitors.

c)

not

discuss

how

HRM

compares

to

its

The “Staples Soul” corporate values policy is a technique that was discussed, but there was no mention of how successful it has been. Staples HRM is addressing how HR can improve corporate performance, but it doesn’t appear to be an area that has much to leverage, other than low cost.

d)

Through the “Staples Soul” program one of the intentions is to generate diversity in its workforce and thus, generate new opportunities and innovation for growth; however, there are no examples of how this is accomplished.

e)

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES The article does not mention if working conditions are different country to country.

f)

It appears that the role of the HR manager is more on public perception of the company. The “Staples Soul” program talks about diversity and sustainability, but does not link how that is a competitive advantage; it seems to be a more public relations strategy than an operations strategy.

g)

6. Information Systems (IS) a) The article does not explicitly discuss the company’s information systems, however, due to Staples’ “in stock guarantees” and its convenience of finding products in store and online, one can determine that they must have a robust information systems infrastructure around inventory. This clearly fits their objective in being the “easy” and convenient choice by comparison to its competitors. The article does not discuss Staples’ database, however, it does talk about its website and how it makes strides to continue to find products easier through web apps and doing price matching with competitors. This falls in line with its strategy of offering the most convenient and cheapest option for office supplies. It does not appear that IS is a competitive advantage.

b)

The company appears to be leveraging the Internet appropriately; however, it does not appear to be pioneering any innovative technology with it.

c)

d)

Does not appear to be discussed in the article.

The company does have a global Internet presence, however, it does not discuss getting data across national boundaries.

e)

D. Summary of Internal Factors (See IFAS Table)

IFAS—

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES Key Internal Factor

Weight

Rating

Weighted Score

Comments

Operational Logistics

.20

5

1.0

Their logistics keeps costs down which is a core competency and a primary reason why they have done so well.

Strong Brand Perception

.15

4

0.6

This distinctive competency has been very successful at building a brand name. This is very important since switching costs for consumers is next to nothing, and to be profitable and grow the company needs large sales volumes.

Large and Diversified Market Segmentatio n

.15

4

0.6

This core competency has allowed them to maintain high sales volumes by making it easier for each of their customers market segments to buy what they need, thus making it easy and convenient for the consumer.

.10

2

0.2

This core competency is important because low wages drives prices down, however, it hurts brand name perception.

Strengths

Weaknesses HRM

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES

V.

Foreign Operations

.20

1

0.2

This core competency is very important because it can have a large impact on total sales volume, but the company appears to be struggling in certain markets like the European market.

Internet Presence

.20

2

0.4

This core competency is very important because it is the future of doing business and is what Staples should focus on, however, they appear to adopt a defensive strategic philosophy.

Analysis of Strategic Factors (SWOT) A. Situational Analysis: SFAS (Strategic Factor Analysis Summary)

Key Strategic Factors

Weight

Rating

Weighted Score

Duration

Online Shopping

.20

3

.60

L

Increasing trends to shop online, more competitors online, increasing global market size.

Economic Environment (Recession)

.10

3.5

.35

I

Shrinking consumer spending, particularly in Europe.

Low Margin Products

.10

4

.40

L

Large volume sales required to

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Comments


CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES return a good profit. Government Contracts

.10

5

.50

L

Huge sales contract provides stability. Dependency on large contracts is a risk.

Green Technology

.05

4

.20

I

Reinforces the company’s strong brand perception, which is a core competency.

Logistics

.15

4

.60

L

Key factor considering low margins and keeping costs down as a core competency.

HRM

.05

2

.10

S

Potential threat to their brand name public perception, however, key factor in keeping costs down.

Brand Name

.10

4

.40

L

Largest global retailer.

Highly Competitive Market

.15

3

.45

L

Threat due to new entrants online can sell cheaper due to no brickand-mortar overhead.

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES B. Review of mission and objectives

1. The current mission is appropriate to be the largest retailer. Objectives need to be focused towards online sales. Online sales are the single largest growing market for Staples, and their strategy and focus on expanding their online presence reflects this. 2. The mission (“to be the one-stop-shop for all office supplies”) should stay the same, but the objectives need to be changed to make online shopping their number one priority. 3. Staples will be able to reduce the costs associated with brick-and-mortar stores, allowing them to compete more effectively on price with online-only retailers. VI.

Strategic Alternatives and Recommended Strategy A. Strategic Alternatives

1. Yes, by successfully implementing an online strategy Staples will be able to meet its objectives. 2.

A few alternate strategies:

a. Take the company private: Pros: •

It will allow the company to focus on operations and earnings rather than Wall Street’s demands and expectations.

Cons: • •

Difficulty raising capital in the future (can’t issue shares at will). Leadership power struggle between executives and owners.

b. Change senior management and/or chief executive: Pros: •

Fresh ideas, a better understanding of the current business climate, and industry experience from outside Staples.

Cons: •

Loss of current expertise, possible loss transitional difficulties (HR challenges).

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of

morale,


CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES B. Recommended Strategy

1. Corporate/business level: Taking the company private will alleviate the importance of meeting Wall Street earnings and growth expectations, which are currently driving the stock price down. An additional executive should be named as “President of Online Sales” to support the initiative. 2. Functional level: Focus on online shopping. This will allow the company to reduce operational costs through brick-and-mortar store overhead, thus increase margins and allowing them to better compete on price with online-only retailers. In order to support the focus on online sales, policies should be instituted to expand investment in the IT systems. 3. By implementing these recommended strategies, the company’s core competencies (extensive product offerings, competitive pricing, large diversified market segmentation, and strong brand perception), should not be adversely affected. Competitive pricing should be improved due to lower brick-and-mortar costs through a stronger online presence. Online presence should also provide easier access to product offering by market segment. VII.

Implementation 1. Revised logistical operations would be required with the expansion of online sales since the brick-and-mortar distribution centers will be reduced (but not eliminated). Large investments in IT would be required to develop a better online shopping experience in driving sales. Staples should leverage external consultants or new leadership to oversee the online sales initiative. Existing leadership has not done enough to date, which could be due to lack of experience or other factors. Staples would be wise to hire from a competitor, like Amazon, that has built its business as on online retailer. 2. The program to revise and expand online sales should be feasible since it shouldn’t require large amounts of capital. Bringing the company private again might be a bigger challenge since they would have to find private investors that are willing to take the company private. This would require the company to prove to these investors that they have a plan and that going private would be a profitable investment. Prioritizing and creating timetables for going private would certainly be required as part

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CASE 31

STAPLES: THE FIERCE BATTLE BETWEEN BRICK-AND-MORTAR VERSUS ONLINE SALES of the plan to sell to private investors. A timetable would also be required to remove brick-and-mortar presence as online presence increases. 3. Existing logistic operating procedures would most likely need to be reviewed to ensure that they can support the online expansion of sales. It is very possible that the company would have to increase distribution centers as local brick-and-mortar stores are reduced since the inventory is no longer in the local stores. Bringing the company private might require changes in operating procedures, but not as significant as concentrating on shifting to a greater online presence. VIII.

Evaluation and Control Since the article does not discuss the company’s information systems it is tough to determine whether it would be sufficient in providing feedback on implementation activities and performance. It can be inferred that they have a relatively strong information systems because they have very good inventory tracking, and they already do online sales. For example, they currently have systems sophisticated enough to track down where inventory is when shopping online and reserve for in-store pickup. If the information systems are not already capable of supporting the larger online presence, part of implementing the newly revised online strategy should entail ramping up information systems that would support the new strategy.

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CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 I. CASE ABSTRACT Tesla Motors, Inc. is in the business of developing, manufacturing, and selling technology for high-performance electric automotives and power train components. Hoping to develop a greater worldwide acceptance of electric vehicles as an alternative to the traditional internal combustion, petroleum based vehicles that dominate the market, Telsa is the first company that commercially produced a federally compliant electric vehicle with the design styling, and performance characteristics of a high-end performance automobile. Telsa currently offers one vehicle, the Roadster, for sale, as well as supplying electric power train components to Daimler for use in its Smart EV automobile. Additionally, Tesla has a partnership with Toyota Motors to develop and supply an electric power train for Toyota’s Rav4 SUV. Founded by Martin Eberhard and Marc Tarpenning in 2003, Tesla went public in June 2010 with IPO at $17 a share, raised $226.1 million in its first stock debut. Since Elon Musk took over as the CEO, Tesla has been one of the most innovative automotive producers in the world, earning recognition through the Global Sustainability Innovation Award in 2009. Tesla purchased former NUMMI factory in Fremont, California, the most advanced and cleanest automotive production plant in the world. Both Daimler and Toyota have also invested $50 million each to form strategic alliances. Tesla will provide electric vehicle (EV) expertise for their car development, while Toyota and Daimler will provide opportunities for Tesla to diversify its revenue streams, network, and access to extensive supply chains.

Decision Date: 2011

FY Sales: $116 millions FY Net Loss: ($154,328) millions

II. CASE SUBJECTS AND ISSUES Industry Analysis Strategy Formulation Strategy Implementation Core Competencies Retail Marketing Marketing Strategy Competitive Strategy

Competitive Advantage New Product Development Market Segmentation International Growth Manufacturing Direct Sales

III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

32-1 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

IV. CASE OBJECTIVES 1. To discuss product innovation: all electric automobiles. 2. To discuss new product development. 3. To discuss domestic and international growth opportunities. 4. To discuss licensing proprietary technology. 5. To discuss retail sales. V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is an excellent case for instructor-led discussion. 2. This is an excellent case for an exam or written case analysis. 3. This is an excellent case for a team presentation. 4. This is an excellent case for an individual or team strategic Audit. VI. DISCUSSION QUESTIONS 1. How effective is Tesla’s direct sales model? 2. Should Tesla consider other channels of distribution? 3. Should Tesla focus on domestic or international growth? 4. Can Tesla make more money selling cars or licensing their technology? 5. Will Tesla need to issue more stock? 6. Can Tesla convince consumers to buy all electric cars? 32-2 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

7. Should Tesla produce more models? VII. CASE AUTHOR’S TEACHING NOTE—Not Available VIII. STUDENT STRATEGIC AUDIT

32-3 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

I. Current Situation A. Current Performance Founded by Martin Eberhard and Marc Tarpenning in 2003, Tesla went public in June 2010 with IPO at $17 a share, raised $226.1 million in its first stock debut. Since Elon Musk took over as the CEO, Tesla has been one of the most innovative automotive producers in the world, earning recognition through the Global Sustainability Innovation Award in 2009. Tesla purchased former NUMMI factory in Fremont, California, the most advanced and cleanest automotive production plant in the world. Both Daimler and Toyota have also invested $50 million each to form strategic alliances. Tesla will provide electric vehicle (EV) expertise for their car development, while Toyota and Daimler will provide opportunities for Tesla to diversify its revenue streams, network, and access to extensive supply chains. Toyota also has formed a partnership with Panasonic to collaborate on battery cell development. B. Strategic Posture 1. Tesla’s current mission, objectives, strategies, and policies are both clearly stated and can be seen from its performance. 2. Tesla is in the electric automobile business. Its mission is “to develop alternative energy vehicles for people who love to drive.“ It is an appropriate statement for Tesla because its EVs are stylish and provide high-end performance for driving enthusiasts. 3. The corporate, business, and functional objectives are to 1) achieve both growth in sales and profits; 2) provide technological leadership in the field of electric vehicles; and 3) foster sustainability and social responsibility. These objectives are consistent with its strategic postures. 4. The corporate, business, and functional strategies are to pursue 1) growth through innovation and increased product offerings with development and sale of the Model S is to create higher demand and revenue; 2) expansion through strategic alliances, from partnerships with Toyota and Daimler to supplying electric power trains to use in their electric vehicle design; 3) sustainability and social responsibility efforts through development of nonpetroleum products and producing very little carbon emissions; 4) product differentiation with focus on a high-priced, highperformance electric vehicles that compete against traditional performance cars; 5) highly integrated marketing, sales, and distribution efforts through its Tesla stores; and 6) increase international market share through its international expansion. These strategies are consistent with its strategic postures 5. The policies are to focus on utilizing green energy and technology, and on producing luxurious, high performing EV. Tesla 32-4 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

has extensive portfolio of intellectual properties from its proprietary technologies and software that are used to manage efficiency, safety, and controls. They are consistent with its strategic postures of producing high-performance automobiles that use clean, environmentally friendly sources. Tesla’s current strategic postures reflect its international expansion plan. Tesla currently does not have international operations, all operations are based in its HQ in Palo Alto, California. It is on its way to opening a number of stores worldwide to increase customers’ knowledge of Tesla’s EV. II. Corporate Governance A. Board of Directors 1. The eight members of BOD are Elon Musk, Brad Buss, Ira Ehrenpreis, Antonio Gracias, Steve Jurvetson, Prof. Dr. Herbert Kohler, Kimbal Musk and Larry Sonsini. They are all external directors, except Elon Musk, the Chairman, Product Architect, and CEO of Tesla. 2. In total, the BODs own less than 10 percent shares of stock. 3. The stock is publicly traded. 4. The directors have diverse work experiences in industries such as design, engineering, finance, investment, software, law, and corporate governance. They also have international experience necessary to support its international expansion. 5. Most of them have been Tesla’s board members since its IPO. 6. These board members are actively involved in Tesla’s strategic management. They actively participate and suggest its future directions. B. Top Management 1. The top management consists of Elon Musk (Chairman, Product Architect and CEO), JB Straubel (CTO), Deepak Ahuja (CFO), Franz Von Holzhausen (Chief Designer), George Blankenship (VP, Sales and Ownership Experience), Gilbert Passin (VP, Manufacturing), Eric Whitaker (General Counsel), Diarmuid O’Connell (VP, Business Development), Arnnon Geshuri (VP, HR), Peter Carlsson (VP, Supply Chain), and Jerome Guillen (Director of Model S Programs). 2. The eleven executives have diverse work experiences, with backgrounds in different industries including technology, consulting, design, sales, and marketing. They are international experts in countries such as Japan, Germany, and other parts of Europe. 32-5 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

3. The top management has been responsible for Tesla’s performance over the past few years. They helped Tesla to strive in EV automobile industry. 4. It has established a systematic approach to strategic management only to a certain extent, due to Tesla’s nature of using innovation as its main drive of growth. 5. The executives have been heavily involved in the strategic management process. 6. N/A 7. Strategic decisions are made ethically in a socially responsible manner. Being socially responsible is part of Tesla’s corporate culture. Its principle of developing nonpetroleum-based vehicles clearly shows its commitment to foster sustainability. 8. N/A 9. Top management is sufficiently skilled to cope with likely future challenges. They have directed Tesla into the right direction towards overall growth. III. External Environment (EFAS refer Exhibit 1) A. Societal Environment (PESTEL Analysis) 1. Economy a. Competing in an industry that is expanding (O). i. Absolut market share is less relevant than how fast it is growing its market share. b. Massive budget deficit (T). i. Members of Republican Party have focused their demands for budget cuts in the “discretionary spending“ arena, which is where alternative energy funding falls. ii. EV industry has very few lobbyists and is more vulnerable to being targeted in budget cuts. c. The economic recovery has created more demand for higher priced, luxury vehicles (O). d. Much more stable costs of electricity make an electric vehicle more desirable (O). i. The variability of oil prices, most of the times increasing oil price, means that traditionally powered vehicle owners cannot predict their fuel costs. e. EVs cost significantly more than traditional vehicles of similar style and performance (T). 32-6 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

2. Technological a. Industry-related technology is always advancing in EV industry (O). The technologies can be used to improve the EVs. They are related to intellectual properties, battery cell design and knowledge and skills of the workforce. Some are available for general use, however, most technologies are proprietary. Many companies own patents of technologies that they developed in-house. These IPs will provide the companies with a competitive advantage. Development of new battery technology, by companies like Planar Energy, for EVs could also potentially provide more energy for a lower cost. 3. Political—Legal a. Various federal and state governmental agencies are currently supporting loan programs through the Department of Energy and the California Zero Emission Vehicle (ZEV) program (O). b. Focus on decreasing the U.S. dependence on petroleum products (O). c. Global economic policies supporting usage of environmentally sustainable products such as EVs (O). d. Many regulations compliance required to develop EV (T). i. Numerous safety requirements governed by the National Highway Traffic Safety Administration. ii. Battery safety and testing is heavily regulated by the Pipeline and Hazardous Materials Safety Administration. iii. Automobile manufacturer and dealers regulations issues. iv. New regulation of minimum noise requirements, mandated by the Pedestrian Safety Enhancement Act of 2010. 4. Sociocultural a. Continuous shift towards green energy (O). i. President Obama committed to funding “green“ initiatives through various vehicles. ii. Setting a goal of getting 1 million electric cars on the road by 2015. b. Customer perceptions of EV being underpowered, clunky looking, hard to change, quirky, and undependable vehicles (T). c. Absence of public infrastructure for recharging electric vehicle batteries (T). i. High reliance on a network of available power sources. ii. Limit EV driving range. iii. Negative impact on the image of EV. All these forces are different in other regions of the world. The US being one of the most developed countries in the world has one of the leading EV markets along with countries, such as Germany, UK, and Japan. Other less 32-7 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

advanced countries such as China, India, and Russia have not reached the stage where the market is geared towards green technology. B. Task Environment 1. Threat of New Entrants: Low a. Hybrid technology is well understood by major automobile companies. i. They developed and marketed their own version of electric/gasoline hybrid vehicles. b. All-electric and hydrogen fuel-cell automobiles are unique technologies that need resources to develop. c. Energy storage and motor technologies are barriers to new competitors. d. Rechargeable battery systems and fuel cells are newer technologies that require large investments in R&D. e. A competitor needs to develop its own technologies or partner with another company. 2. Bargaining Power of Buyers: Moderate a. Fragmented industry, customers are highly influenced by trend. b. Target market are people that make over $75,000 a year that are sensitive to environmental change. 3. Threat of Substitute Products: Low a. Substitutes are traditional cars, train, bus, bicycle,and motorcycle. b. EV is the most environmentally friendly mode of transportation that satisfies high-end customers. 4. Bargaining Power of Suppliers: Moderate a. Parts are sourced from many suppliers that often are the single source of vendor. b. Companies are vulnerable to delays and increased cost. 5. Rivalry Among Competing Firms: High a. Primary competitors are Mitsubishi i-MiEV, Nissan LEAF, Chevy Volt, Toyota Prius, BMW Hydrogen 7, Honda Clarity. b. Price of EVs is very competitive among them. Costs of production are very high due to no economies of scale. There is also no standardization in the process of development because EVs are a newer technology. 6. Power of Other Stakeholders: Moderate a. Environmentalists typically have certain degree of influence in the government. Especially as the new Presidential election is coming up. C.

Summary of External Factors

Based on the PESTEL Analysis and Porter’s Five Forces, Tesla Motors, as an incumbent, is in an attractive global electric car producer industry. Due to the current part delays, and to keep up with intense competitive rivalry, Tesla has to try pushing down its fixed cost as low as possible. Tesla has to find ways to be less dependent on its vendors and accelerate its parts production. As the industry is in growth stage, Tesla also has to find ways to differentiate and reduce costs of its EV so that it would perfectly meet consumers’ demand in different parts of the world. Satisfied consumers will 32-8 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

lead to long-lasting brand loyalty, and this will ensure that Tesla will maintain its position as one of the most innovative EV producers in the world. IV. Internal Environment (IFAS refer Exhibit 2) A. Corporate Structure 1. Tesla’s current corporate structure is centralized, with all the decisions made in the HQ. Tesla also relies heavily on its intellectual property and its patents. It is organized on the basis of functions which can be clearly seen from the role of the top-level executives (S). 2. The structure is clearly understood by everyone in the corporation (implied by case). 3. Currently structure is consistent with its corporate strategies (S). 4. Not typically comparable to other companies of this type and size as most of similar operations that focus on EV is a department within a large company (S). B. Corporate Culture 1. There is a shared belief of employing innovation in works, its environment is fast-paced and culturally unstructured (S). 2. The culture of innovation is consistent with its corporate strategies (S). 3. The culture holds the central role in solving problems faced by the corporation (S). 4. The culture is compatible with the employees’ diversity of backgrounds. Tesla employs techies and business hybrid employees to operate the company (S). 5. Tesla’s current operation, from production to delivery, is based in Palo Alto, California. The only operation abroad is the Tesla stores that are meant to educate the future customers (W). C. Corporate Resources 1. Marketing a. Tesla’s brand is heavily tied to the environment or green movement, generating a lot of free media publicity. The promotion strategy is a clear strength for Tesla, especially considering that recommendations from friends and relatives, along with wordof-mouth, are the most influential factors for luxury or sport car’s key demographic (S). 32-9 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

i. Marketing strategy is not clearly stated, they are merely implied from the performance. ii. They are consistent with the corporation’s overall strategic postures. b. Tesla’s current marketing outreach is limited due to its infancy and lack of resources. The marketing mix (4Ps) is targeted at the luxury vehicle markets. Tesla focuses on a very narrow segment of early adopters and environmentalists that have resources to afford their car. Along with its minimal product offering, Tesla is limited by its distribution and fulfillment infrastructure. It has dealerships in premium locations, regional sales representatives, and online ordering. Its sales representatives are usually in charge of arranging test drives and vehicle delivery to the customers (S/W). i. Trends emerge as that customers are becoming more sensitive to green technologies and aware about energy conservation due to rise in oil prices. ii. The trend has significantly impacted past performance and will definitely boost future performance. iii. This analysis supports the corporation’s past and pending strategic decisions. iv. Marketing does not provide Tesla with significant competitive advantage. Its current advantages in price are through $7,500 government tax credit for buying fuel efficient vehicles and the low cost of maintenance and fuel. c. Tesla’s marketing performance compared to other corporations is not as advanced and rigorous. Tesla is much smaller than other EV producers that are part of larger automotive corporations. However, being one of the first to market high-performance EV, Tesla has a first-mover advantage in branding and customer experience. d. N/A e. The only marketing initiatives that Tesla has outside of the United States are through its own stores. f. N/A 2. Finance a. Main objectives are to increase growth in profits and sales by creating and selling new models, in addition to their only model that is currently being sold, the Roadster, as well as providing technology leadership with its innovative electric batteries and related products. The next model is a four-door sedan, named the 32-10 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Model S, and was due to be completed and ready for sale in 2012. Tesla’s other means of revenue is derived from sales of their patented electric power train components to other companies. Sales of the Roadster also provide income in the form of Zero Emission Vehicle Credits, which can be sold to other car manufacturers that don’t sell electric cars (S). i. The objectives are clearly stated. Tesla is building a new factory with a capacity of 20,000 cars per year to be ready to build the new Model S. Their proprietary technology includes thirty-five issued patents and 280 patents pending and the new Model S will have three battery options with different mileage ranges and prices. ii.

The objectives are consistent with their goals of building alternative energy vehicles. Tesla is tied to the environmental movement, which has given them free publicity due to their leadership status in the industry. b. Tesla’s cash position isn’t ideal. They were able to raise $226 million in an IPO in June 2010. They received a loan from the US Department of Energy of $465 million in 2010. The company has suffered a net loss every year, but revenues have been improving each year. Their liquidity ratios are solid, but debt levels are high as with any young company that is in a new industry and selling a new technology (W).

i. The company is an industry leader and has the best technology in the business and has many patents to protect their products. Their negative earnings and debt levels are areas of concern as well as the unknown demand for electric vehicles, as electric battery technology is their main business and source of income. ii.

N/A

iii. Tesla has suffered a net loss each year and has mostly negative profitability ratios due to the company and industry still being in its infancy and with the new technology, which brings uncertain demand and risk for the future. Tesla’s future financial success and possibly their existence depends on the future demand for electric vehicles and the infrastructure to support them. iv.

Yes, the company is building a new plant to support future growth and investing in new car models. They are spending to protect their proprietary technologies as they are crucial to future success.

v. Finance doesn’t provide the company with a competitive advantage as they are not very stable financially at the moment. c. Tesla’s financial performance is comparable to other young companies with new technologies. It takes time to build up economies of scale to become profitable in a brand new industry.

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CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

d. Yes, they are public company that is required to follow GAAP and SEC regulations. e. N/A f. N/A 3. Research and Development (R&D) a. Tesla is focused on continuing to improve on their existing electric battery technology and will offer three different battery options with varying mile ranges in the new Model S. They continue to purchase patents to protect their unique technology (S). i. The R&D objectives are implied by the business they operate in (their proprietary software) and their financials with the operating expenses heavily weighted to R&D. ii. Yes, it is consistent with their objective to provide technological leadership in the field of electric vehicles and promote environmental sustainability. iii. Technology is critical to corporate performance. The company’s revenue stream is contingent on developing superior electric battery and vehicle technology. For example, the company’s cars have diagnostic systems that link up to Tesla’s headquarters, which enables the technicians to have an idea of what’s wrong with the car even before they go out to the customer. iv. Yes, they are focused on technology innovation and education and put the appropriate resources toward that objective. v. Yes, their biggest competitive advantage is their proprietary technologies that are patented or patent pending. b. They are earning revenues from the sales of the cars (currently the Roadster) and through sales of their electric power train components. Tesla is also partnering with other automakers such as Toyota and Mercedes-Benz to help them build electric vehicles with Tesla’s technologies for a fee (S). c. Tesla believes in teamwork and wants employees from all departments to work together to share knowledge and ideas. Employees work in an open room with no walls to encourage collaboration (S). 32-12 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

d. The company’s software is designed to be updatable and work on future models (S). e. Their investment in R&D is consistent with other companies heavily invested in technology innovation. f. N/A; only factory(s) in the United States. g. N/A 4. Operations and Logistics a. In order to produce the new Model S debuting in 2012, Tesla is building a new factory that will have a production capacity of 20,000 cars. Their main operating strength is in the company’s intellectual property and patents. Their software is designed to be updatable and many aspects of their vehicle architecture are designed in order to be used again in future models, which will save time and costs. Tesla distributes using its own stores and sales staff; the company doesn’t want to sell through other dealers (S). i. They are clearly stated in the case. ii. Yes, Tesla wants to build their brand, in addition to creating the new electric vehicle technologies, so they don’t want to be associated with other automakers by having them sell their cars (S). b. As stated, the company prefers to keep its distribution in house but needs to rely on over 150 suppliers for more than 2,000 parts. Many of the vendors are a single source which limits the company’s flexibility and increases supply chain risk (S/W). i. Tesla is building a new factory to meet production needs of the new Model S car. ii. Tesla currently sends out maintenance workers called “Rangers“ out to the customer’s location to service the car. Current process could be improved upon with focus on infrastructure. c. The new factory is located in Fremont, California. California is known for wildfires and earthquakes, which could pose some risk (W). d. N/A e. Tesla’s costs are higher than its competitors in the automotive industry because the company hasn’t reached economies 32-13 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

of scale. Service costs are high due to their lack of dealerships (W). i. Tesla needs to increase production or sales of the Roadster and new Model S cars to reach economies of scale and lower costs. Adding service facilities will increase costs in the beginning but save costs later on and into the future. ii. The high costs resulted in a net loss in every year it has been in business. iii. Yes, the company is trying to increase growth and earnings through new joint ventures and new product offerings (Model S car). iv. The operations don’t yet provide the company with a competitive advantage except for their proprietary technologies. f. Tesla’s software was created to be easy to update and the architecture of the company’s vehicles was built to be transferable to future models (S). g. N/A h. N/A 5. Human Resources Management (HRM) a. Tesla operates similarly to a software company. The executive team is comprised of people that are a mix of technology and business savvy. Employees are encouraged to think creatively and challenge the status quo. The company operates collaboratively with all departments working together, often in one open room. Tesla attempts to hire and retain top talent through competitive salaries, benefits, and a comfortable working environment (S). i. The HRM objectives and strategies are clearly stated in the case even going as far to use the phrase “meaningful equity“ when describing the employees benefit structure. ii. Yes, the company stresses the importance of their intellectual capital and makes sure that their employees are happy. Happy employees tend to work harder and have a clear mind to think creatively. b. Tesla maintains an aesthetically pleasing office space and hires employees that are innovative thinkers to create their next great product. The company does all it can retain its top employees (S).

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CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

i. Tesla operates similarly to Google and other software companies in how it hires and retains employees as well as the culture, which is fast passed and innovative. ii.

The corporation’s HRM practices have led to Tesla becoming a leader in the electric vehicle industry and creating proprietary technology that provides them with a competitive advantage over their competitors.

iii. Yes, the company’s focus is on innovation and there HRM practices coincide with that focus. iv.

Yes, the HRM gives the company a competitive advantage by hiring and retaining the best talent in the industry.

v. Yes, Tesla’s employees are highly creative and develop industry leading software and products. c. N/A d. Yes, Tesla is looking to hire more graduating engineering students and sales staff with a focus on those that already have hands-on experience to help grow the company (S). e. N/A f. N/A; company’s operations based in the United States. g. The HRM manager is responsible for seeking out and hiring the best talent in the marketplace and retaining those employees through their benefit structure. This process is critical to the company’s success as the employees are the ones that develop the innovative technology (S). 6. Information Systems and Technology a. The case does not describe the role of the Information System as a whole; however, it does describe different ways that the company has used aspects of its IS to add value to the customer experience (S). i. The goals of the IS are vaguely implied through the different applications described in the case. The main use that Tesla seems to be focused on is Customer Relationship Management, through their website, and various support functions, in the form of the diagnostic software used for performing maintenance on the vehicles. ii. The use of their Information System fits well with the strategic direction of the company because they are focusing on providing “technological leadership in the field of electric vehicles“ (Hoffman, 2011). Accordingly, 32-15 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

the demographic that they are targeting tends to both value and expect high-quality service. Through the process of sending company controlled mechanics to work on customer’s cars, not only are owners receiving friendly, knowledgeable staff that are trained in customer service, they also don’t have to deal with the hassle and worry of bringing their car to an unknown mechanic. b. N/A i. N/A ii. N/A iii. N/A iv. From the information provided in the case, it does not seem that the IS provides much of the competitive advantage for Tesla. The testimonials on the website such as: “driving the Roadster Sport felt like having sex while being sprayed with champagne,“ while intriguing marketing tools, do not provide a distinct advantage for Tesla over the competition. c. The performance of the IS overall is not nearly as well developed as the other companies within the car industry. Tesla is still in the early stages of development compared to other car companies so it has not had the capital to invest in a strong IS. Tesla has utilized the Internet in effective ways; however, and is attempting to broaden the scope of its customer base through their presence on the web (W). d. N/A e. Tesla currently has a global Internet presence, but it is unclear from the case whether or not they have had difficulty getting data across national boundaries. f. N/A D. Summary of Internal Factors Currently, R&D is Tesla’s core competency. Within the burgeoning industry of electric vehicles, it is important to continue to fund and develop technologies that will give the company an edge over the competition. Tesla’s current advantages are the range of its vehicles and the acceleration that they have been able to create out of an electric motor. As a high-end car maker, it is paramount to Tesla’s success that they continue to stay ahead of the pack, by continuing to develop leading edge technology. Tesla’s distinctive competency is derived from their HRM. The way in which Tesla recruits, retains, and allows its employees to work creates an environment that fosters creativity and innovation. In order to create breakthrough products and components in the EV industry, it is critical that Tesla separates 32-16 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

itself from the hierarchical structure and incrementalist mindset that plagues most car manufacturers. This is the area that sets Tesla apart from other car manufacturers moving forward and will be crucial to the development and advancement of the Electric Vehicle industry. V. Analysis of Strategic Factors (SWOT) A. Situational Analysis (SFAS refer Exhibit 3) One of Tesla’s internal strategic factors that provide great strength for the company is the collaborative corporate environment that they have created. In any company that relies heavily on innovation, it is important to be able to collaborate across functional silos in order to work toward a common goal. Another strength that Tesla possesses is its autonomy. Most of Tesla’s competitors are simply divisions or project groups within a larger corporation. These companies are forced to compete for resources and may not receive the funding or human capital that they deserve. In contrast, Tesla’s sole focus is creating alternative energy electric vehicles that are fun to drive, and this goal allows them to focus all of their resources on creating the best product they can imagine. A huge weakness for Tesla is their narrow niche of customers that they currently appeal to. The price tag alone significantly limits the number of people capable and willing to foot the bill. The release of the model S will help expand the company’s customer base; however, at close to $60,000, it is still extremely high. A final internal weakness that poses a significant threat is the limited physical presence that Tesla has outside of California. Aside from representatives across North America, England, and Asia, Tesla only has the Internet for interested customers to access information on their brand. The limited amount of dealers is significant because this significantly influences the availability to the general public. One of the major external strategic factors is the threat or opportunity to the future of Tesla is the upcoming election. If Barack Obama remains in office, Tesla will continue to benefit from government subsidies and regulations that will aid in their success. However, if Mitt Romney wins the election, many of the green energy policies that President Obama put into place are likely to be repealed. Another major strategic factor is the stability of electricity prices. This opportunity is key to Tesla’s success because it is a major contrast to the instability of oil prices. As the price of oil creeps toward $200 a barrel, this opportunity grows in importance. A critical factor that Tesla must guard against is the threat that internal combustion vehicles are becoming more efficient and affordable. EVs cost significantly more than internal combustion cars of similar style and performance. A pivotal aspect of Tesla strategy will be to lower the costs associated with electric vehicles or to 32-17 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

increase public knowledge of the tangible savings that these cars can offer. Another crucial strategic factor that cannot be ignored is the public perception of EVs. A distinct threat to Tesla is the misnomer that all EVs are underpowered, clunky looking, and undependable. Changing public perception of EVs will be critical to Tesla’s success moving forward. B. Review of Mission and Objectives 1. The current mission at Tesla is “to develop alternative energy electric vehicles for people who love to drive“ (Hoffman, 2011). This mission fits well with the key strategic factors and problems as they stand currently; however, if government subsidies and grants cease to exist following the presidential election, it may be difficult to continue to operate under this mission. Tesla’s current objectives are “to achieve both growth in sales and profits, provide technological leadership in the field of electric vehicles, and foster sustainability and social responsibility“ (Hoffman, 2011). These objectives fit perfectly with both the niche market that they target, as well as the distinctive competencies that the company possesses. Tesla’s collaborative work environment fosters creativity and innovation, which is crucial in developing technology that leads any industry. 2. The mission and objectives should only be changed if the country experiences drastic policy changes with regards to “green energy.“ If this happens, it would create near insurmountable obstacles for a company already struggling to turn a profit. Under such circumstances, it would be advantageous for Tesla to change its focus from the manufacturing of EVs to the development of proprietary parts and technologies for use in electric vehicles. The capital requirements needed to manufacture cars are extremely high, so selling these assets to a company with greater economies of scale could help Tesla continue to advance the technology of EVs, while significantly reducing its cost structure. 3. This shift in strategy would have a significant effect on Tesla because this would change them from a car manufacturer to purely a supplier. Under this new model, Tesla could attempt to partner with Lotus to develop a Tesla model under the Lotus name, because the company already uses Lotus vehicle bodies. This would be an inexpensive way to continue to produce the Tesla brand and leverage the enthusiastic following that Tesla has. Tesla could also continue to leverage its distinctive competency in HRM because the need for innovation in the EV sector would remain high. VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives 32-18 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

1. The current objectives of Tesla can be met if the company continues to focus on a collaborative work environment that emphasizes creativity. As oil prices continue to climb and demand for EVs increases, Tesla will be well positioned to deliver a wider range of vehicles to satisfy different consumer needs. It must be noted, however, that Tesla relies heavily on governmental subsidies and funding, which create a significant threat that cannot be overlooked. 2. The major alternative strategy that is available to Tesla is to transform into more of a collaborator than a vehicle manufacturer. Under this strategy, different manufacturers could co-brand with Tesla to produce long range, high-performance models of their cars. This strategy would significantly reduce costs to Tesla. While the company would not recognize the same scale of profits, this would be a feasible alternative. a) Cost leadership would be a difficult strategy for Tesla to implement due to the high costs associated with improving EV technologies. Additionally, the mission of Tesla is to “create alternative energy electric vehicles for people who love to drive“ (Hoffman, 2011). It would be difficult to develop a cost leadership strategy that fit into the company’s mission. In contrast, a differentiation strategy would fall more in line with the mission at Tesla. Many other car companies have their own alternative energy vehicles on the lower end of the price range, and BMW is the only other luxury car manufacturer that makes a similar product (although they are not for sale to the general public). This gives Tesla a distinct competitive advantage because there are no other readily available alternative products to the Tesla Roadster. As such, Tesla is able to justify the hefty price tag of their luxury electric vehicle. b) It would be difficult for Tesla to adopt a stability corporate strategy because the last thing they want is to remain stagnant. Of the three corporate strategies, this seems to be the least applicable to Tesla because it limits their ability to expand revenues and develop economies of scale. A horizontal growth strategy is the best option for Tesla because now that they have multiple products that serve different demographics, the next logical step is to expand their presence in order to reach out to potential owners across the United States and the globe. As Tesla grows and acquires more resources, economies of scale will allow them to reduce their unit costs and will hopefully shrink the percentage of revenues spent on R&D. Entrenchment is another viable corporate level strategy for Tesla to take if they are concerned with changes in policy brought on by the upcoming election. By shrinking their resources and focusing more on the technology development behind the electric cars, Tesla could generate a healthy 32-19 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

profit. They would significantly lower their costs and focus their money on developing technologies, which suits their corporate environment well. c) A clear functional strategy that would fit well with current business and corporate level strategies at Tesla would be a technological leader R&D strategy. This strategy focuses funds on developing innovative new ideas so that the company can stay ahead of its competition. This is the type of strategy that Tesla is attempting to utilize. A marketing strategy could also suit Tesla well. This type of strategy focuses heavily on how the product itself is marketed, in an attempt to generate hype and demand. B. Recommended Strategy 1. We believe that Tesla should pursue a differentiation business level strategy. This strategy allows Tesla to break away from what its competitors are doing in order to create a high-quality product at a premium price. For a corporate level strategy, we feel that a growth strategy suits Tesla well. There is a growing interest in alternative fuel cars throughout the US and parts of the globe, and if Tesla decides to pursue dealerships throughout the United States, they will have a greater opportunity to capture a portion of this large market. Finally, we believe that a technological leadership functional strategy fits well with the company’s mission to make alternative energy electric vehicles that are fun to drive (Hoffman, 2011). 2. The differentiation strategy at Tesla is made possible because of the strategic factors relating to their autonomy and the external opportunity of green energy subsidies. These two factors allow Tesla to put as much of their capital in R&D as needed and allow for government incentives to help pay for some of the research and manufacturing. The long-term plan for an alternative fuel that reduces its need for petroleum-based fuels serves this strategy well. The corporate level growth strategy addresses two internal strategic weaknesses: the limited presence that Tesla has outside of California, and the narrow market segment they serve. Growing their presence will allow them to capture a larger customer base because being able to buy vehicles at a dealership is a large part of the consumer’s decision. Additionally, growing the scope of products that Tesla develops will allow them to provide consumers with a larger amount of options to fit customers’ varying needs. The importance of appealing to a wider range of customers will allow them to generate higher revenues in the future due to their ability to “cast a wide net.“ Finally, the technological leaders functional strategy mitigates the effect that petroleum based cars are becoming more fuel-efficient and affordable. Improving the effectiveness and range of EVs will have a long-term impact on the sales and adoption of EVs throughout the US and the globe. If Tesla is able to develop a great leap forward, the adoption of EVs will skyrocket. 32-20 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

3. The way that the company is shaped currently is mostly in line with the strategic direction we would like to continue to see them follow. However, a major policy change that would help Tesla fit more into a horizontal growth strategy would be to develop a presence within another luxury car brand in order to expand their dealership presence across the United States. Associating with another luxury brand, while remaining separate, would allow Tesla to gain access to customers within the income range they are marketing to, giving them an eco-friendly luxury option. 4. The proposed revised strategies would coincide well with the existing corporate environment and distinctive competencies. The company would continue to leverage its collaborative culture in order to focus more highly on R&D. The one area of concern may be difficult to overcome would be convincing management to give up some of the control surrounding the actual sales process. VII. Implementation A. N/A B. With the current sources of funding and government subsidies, increased focus on R&D is feasible. The horizontal growth strategy will be much less capital-intensive than building a network of dealerships around the country. Although Tesla would probably have to pay some sort of fee to secure this type of relationship with a luxury car dealership, the expanded presence would give Tesla a significant boost and increase brand recognition. C. A major operating procedure that will need to be developed will be creating a systematic training program to train partnered dealerships on how to market and sell Tesla cars. Due to the type of customer that Tesla sells to, the program will need to train sales reps on how to focus on concerns of customers that they are selling their products to. This will require sales staff to have knowledge on the environmental impact of Tesla’s cars, the gas consumption savings, as well as the network of charging stations, among other things. This will require a comprehensive training program that is easy to follow and easily implemented across the country. VIII. Evaluation and Control A. N/A the case does not discuss information systems at Tesla. N/A Exhibit 1—External Factor Analysis Summary (EFAS)

Key External Factor

Weight

Rating

Weighted Score 32-21

.

Comments


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Opportunitie s 0.15

3

0.75

Tesla will be getting a larger portion of market share in EV industry.

0.05

4

0.2

Tesla benefits from significantly less volatile electric prices.

0.15

5

0.75

Tesla owns many proprietary technologies and IPs due to the very new technology.

0.15

4

0.6

Expanding EV Market

Increasing Oil Price

Advancing Technology

Tesla’s overall concept of providing EV is based on the trends that customers are well aware of conserving energy.

Continuous Shift Towards Green Energy Threats Budget Deficit

0.05

1

0.05

0.15

3

0.45 EVs are much more expensive to produce due to lack of economies of scale, standardization, and large R&D investments.

High Production Costs 0.1 Highly Regulated Industry Customer Perception

Massive budget deficit could lead to decrease in spending by the target market.

0.15

0.05

5

4

1

0.5

0.6

Tesla is being compliant to many driving safety-related regulations are required by governmental agencies.

0.05

Many customers still perceive EVs being underpowered and unreliable. Customers may not be attracted to commit on EVs due to lack of infrastructure to support their cars.

Lack of Infrastructu re for EVs 32-22 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Total Scores

1

3.95

Exhibit 2—Internal Factor Analysis Summary (IFAS)

Key Internal Factor

Weight

Rating

Weighted Score

0.05

3

0.15

Comments

Strengths Centralized Corporate Structure Alignment Between Corporate Structure and Strategy Focus R&D Solely on Development of EVs

0.15

4

0.6

0.15

4

0.6

0.15

5

0.75

Collaboration, Innovationbased Culture 0.1

4

0.4

Diverse and Valuable Human Capital

Tesla’s strategic decision-making is handled by executives that truly understand the industry. BODs, the Cs, and other stakeholders’ strategic postures are aligned to each other.

Tesla is putting all of its resources to development and improvement of its EVS, unlike other companies. Tesla’s main drive of growth is through innovative collaboration within its own organization, as well as with other corporations such as Toyota and Daimler. Tesla has extensive sources of valuable human capital needed to drive the company towards growth.

32-23 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Weaknesses 0.1

2

0.2

0.05

3

0.15

Limited Presence Outside California

Narrow Target Market 0.15

4

0.6

Deficit in Cash Flow 0.1

5

0.5

Limited Outreach for Supply Chain Channels.

Total Scores

Tesla’s product recognition may be hindered by lack of presence outside California. Limited potential revenue due to narrow target market. Tesla is trying to widen its customer based through its stores nationwide and globally. Large amount of cash are invested back to the company as it is in a new technology-based industry. Tesla has been extending its supply chain reach out through in-house development and strategic alliances.

1

3.95

Exhibit 3—Strategic Factor Analysis Summary (SFAS)

Duration Key Strategic Factors

Weight

Rating

Weighted Score

Short

Int er

Long

Comments

External Environment

Expanding Industry (O) 0.08 .

3

0.24 32-24

x

As demand increases for EVs, Tesla will be well positioned


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Massive Budget Deficit (T)

0.08

1

0.08

x

0.02

2

0.04

x

Stable Electricity Costs (O)

0.11

4

0.44

x

High Cost of EVs Compared to Petroleum Cars (T)

0.06

3

0.18

x

Decreasing Dependence on Foreign Oil (O)

0.08

5

0.4

Economic Recovery (O)

32-25 .

x

to capture a portion of the luxury market. The massive budget deficit in the US could impose spending cuts. The (slow) economic recovery means that consumers will have additional discretion ary income. Costs of electricit y are significan tly less volatile than oil prices. Due to large R&D investment s, electric vehicles cost more than regular cars. A focus on decreasing our reliance on foreign oil has led to subsidies for green


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

energy companies.

Customer Perceptions of EVs (T)

0.08

4

0.32

Absence of Public Infrastructure (T)

0.1

1

0.1

x

x

Customers still perceive electric vehicles as clunky and unreliable . The lack of infrastruc ture for EVs lowers the attractive ness of these cars.

Internal Environment

Centralized C Structure (S)

0.01

3

0.03

x

Corporate Structure Aligned With Strategy (S)

0.03

4

0.12

x

32-26 .

Decisionmaking is in the hands of visionarie s that have a good sense of what will benefit the company. There is strong alignment throughout the company.


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Primary Focus of to Build EVs (S)

Collaborative Corporate Culture (S) Diverse and Valuable Employee Backgrounds (S)

0.03

4

0.12

x

0.1

5

0.5

x

0.03

4

0.12

x

Limited Presence Outside California (W) 0.1 Markets Its Cars to a Narrow Segment of Early Adopters (W) Total

0.09

2

0.2

3

0.27

1

x

This limits the physical presence that Tesla has and impedes product recognition.

x

Selling to a narrow customer group limits potential sources of growth through its revenues.

3.16

32-27 .

This autonomy allows for greater freedoms in R&D and greater attention to detail. This collaborative environment fosters creativity, along with strategic alliances with Daimler and Toyota Diverse employee background allows the company to leverage different perspectives of employees.


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Exhibit 4—Financial Ratios December 31, 2011

December 31, 2010

December 31, 2009

1.95 1.69

2.76 2.23

1.75 1.35

0.28 1.46

0.30 2.02

0.54 1.21

-124.56% 30.16% -35.66% -113.55% -2.53

-132.19% 26.32% -39.97% -74.54% -3.04

-49.79% 8.52% -42.74% 21.99% -7.94

Inventory Turnover

4.08

2.58

4.82

Days of Inventory Net Working Capital Turnover

128.15

191.73

82.77

1.13

0.78

2.60

Asset Turnover

0.29

0.30

0.86

Fixed Asset Turnover

0.60

0.78

3.75

Financial Ratio Analysis Liquidity Ratios Current Ratio Quick Ratio Inventory to Net Working Capital Cash Ratio Profitability Ratios Net Profit Margin Gross Profit Margin Return on Investment (ROI) Return on Equity (ROE) Earnings per Share (EPS) Activity Ratios

Average Collection Period Accounts Receivable Turnover Accounts Payable Period

17

21

11

N/A N/A

N/A N/A

N/A N/A

Days of Cash

498

541

227

68.60% 218.44%

46.37% 86.47%

49.62% -25.53%

121.03% -5904.16 -63.45

34.93% -154.40 -86.24

-0.32% -21.01 -14.39

85.40%

41.33%

-22.68%

-11.29

-8.76

N/A

Leverage Ratios Debt to Asset Ratio Debt to Equity Ratio Long-Term Debt to Capital Structure Times Interest Earned Coverage of Fixed Charges Current Liabilities to Equity Other Ratios Price/Earnings Ratio

32-28 .


CASE 32 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956

Dividend Payout Ratio Dividend Yield on Common Stock

32-29 .

N/A

N/A

N/A

N/A

N/A

N/A


PART B

CHAPTER NOTES


CHAPTER ONE BASIC CONCEPTS OF STRATEGIC MANAGEMENT This chapter sets the stage for the study of strategic management and business policy. It summarizes research supporting the conclusion that those corporations that are able to learn from their experiences and manage strategically perform at a higher level than corporations that do not. It describes a number of triggering events that act to initiate strategic change in most organizations. A normative model of strategic management is presented as the basic structure underlying the book. Key concepts are defined and explained as part of the discussion of the model. The chapter also introduces the strategic audit as a method of operationalizing strategic decision making. LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. 8. 9.

Discuss the benefits of strategic management. Explain how globalization, innovation, and environmental sustainability influence strategic management. Discuss the differences between the theories of organizations. Discuss the activities where learning organizations excel. Describe the basic model of strategic management and its components. Identify some common triggering events that act as stimuli for strategic change. Explain strategic decision-making modes. Use the strategic audit as a method of analyzing corporate functions and activities. Explain the employment opportunities in Strategic Management. TOPICS OUTLINE COVERED 1. The Study of Strategic Management a. Phases of Strategic Management b. Benefits of Strategic Management 2. Globalization, Innovation, and Sustainability: Challenges to Strategic Management a. Impact of Globalization b. Impact of Innovation c. Impact of Sustainability 3. Theories of Organizational Adaptation 4. Creating a Learning Organization 5. Basic Model of Strategic Management a. Environmental Scanning b. Strategy Formulation c. Strategy Implementation d. Evaluation and Reassessment e. Feedback/Learning Process 6. Initiation of Strategy: Triggering Events 7. Strategic Decision Making a. What Makes a Decision Strategic? b. Mintzberg’s Modes of Strategic Decision Making c. Strategic Decision-Making Process: Aid to Better Decisions 8. The Strategic Audit: Aid to Strategic Decision Making 9. Employment in Strategic Management SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1-1.

How do the three elements of globalization, innovation, and sustainability impact your understanding of strategy?

Globalization is the integrated internationalization of markets and corporations. As more industries become global,

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strategic management is becoming more important in keeping track of international developments and positioning a company for long-term competitive advantage. Innovation is meant to describe new products, services, methods, and organizational approaches that would position a company to achieve strong returns. Sustainability refers to a set of business practices that focus on the triple bottom line for an organization. Each of these is a new frontier that is impacting the way in which businesses develop and implement strategy. 1-2.

Organizational strategy can be divided roughly into two categories: a) formulation and b) implementation. Although there is legitimate crossover between the two, how would you characterize the issues involved in each effort?

There are four basic phases of strategic management. Phase 1 is basic financial planning, phase 2 is forecast-based planning, phase 3 is externally oriented strategic planning, and phase 4 is strategic management. Phases 1, 2, and 3 are all considered part of the formulation category. Each of these stages suggests the need to scan the internal and external environment and develop a plan adapting to projections and forecast. The last phase, strategic management, is about the choices an organization makes to implement the planned strategy. In this stage, everyone across the organization is enlisted to support the strategic goals.

1-3.

Why is strategic management considered important for global market competition?

Effective strategic management can ensure that an organization is adaptive and flexible enough to respond to environmental challenges and changes. The business environment in most economies, irrespective of whether they are developed or developing, is becoming increasingly complex and the needs of customers across the world are changing rapidly. To be successful in the global market, organizations must not only be able to execute current activities to satisfy an existing local market but also adapt those activities to satisfy new and changing international markets. The attainment of an appropriate match between an organization’s external environment and its strategy, structure, and processes has positive effects on the organization’s long-term performance. Thus, strategic management becomes increasingly important as the international environment becomes more volatile. 1-4.

How does strategic management typically evolve in a company?

Strategic management in a corporation appears to evolve through four sequential phases according to Gluck, Kaufman, and Walleck. Beginning with basic financial planning, it develops into forecast-based planning, then into externally oriented planning, and finally into a full-blown strategic management system. The evolution is most likely caused by increasing change and complexity in the corporation’s external environment. The phases are thus likely to be characterized by a change from primarily an inward-looking orientation in the first phase to primarily an outward-looking orientation in the third phase, and to a more integrative orientation in the final strategic management phase with equal emphasis on both the external and internal environments. 1-5.

Define strategic flexibility and explain its implications. Why is organizational learning important to the long-term development of the strategic flexibility of organizations that intend to enter overseas markets?

Corporations need to develop strategic flexibility, which is the ability to shift from one dominant strategy to another. Strategic flexibility requires an organization to commit to the long-term development of important and critical resources. It requires that the company become a learning organization. Such an organization is skillful in creating, innovating, and transferring knowledge, and readjusts its behavior to reflect new knowledge and ideas. Organizational learning is a critical component of competitiveness in a dynamic environment. It is particularly important to innovation as well as new product development. Strategic management through continuous self-improvement is essential for learning organizations to avoid sluggishness. Employees at all levels participate in strategic management by helping the organization study and analyze the environment for useful information. They suggest changes to strategies and programs so that they can take advantage of environmental changes. They can then work effectively with each other to continuously improve

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work methods, procedures, and evaluation techniques. 1-6.

Why are strategic decisions different from other kinds of decisions?

Strategic decisions deal with the long-run future of the entire organization and have three characteristics that differentiate them from other types of decisions: (1) they are rare—strategic decisions are unusual and typically have no precedent to follow; (2) they are consequential—strategic decisions commit substantial resources and demand a great deal of commitment; and (3) they are directive—strategic decisions set precedents for lesser decisions and future actions throughout the organization. See Top Decisions: Strategic Decision-Making in Organizations by Hickson, Butler, Cray, Mallory, and Wilson for further discussion. 1-7.

What is the most preferred planning mode of strategic decision making for organizations competing internationally?

Typically, global markets are considered to be highly volatile, ever-changing, and unstable. James Brian Quinn coined the phrase “logical incrementalism” in 1980, referring to the synthesis of all the other three modes (the planning mode, the adaptive mode, and, to a lesser extent, the entrepreneurial mode) of decision making. Logical incrementalism is considered to be the most effective method of strategic planning. Rather than learning through formulations of stable and fixed strategies, global organizations using logical incrementalism learn through an interactive process of probing into the future and testing and learning from a series of incremental operations and commitments. This mode of decision making is very useful when the global environment is changing rapidly and it is important to build consensus and develop the needed resources before committing the organization to a specific strategy. 1-8.

What are the potential employment opportunities available to graduates with a solid understanding of strategy design and implementation?

Graduates with a solid understanding of strategy design and implementation are in a stronger position to be successful in any organization, but their skills are particularly valuable in internal strategy groups, business analysis, mergers and acquisitions (M&A), consulting, and business development (BD). While these areas exist in many large organizations, graduates may also pursue opportunities with organizations that are exclusively focused on the application of strategy design and implementation. According to The Economist, consulting firms and strategy consulting firms are hiring record numbers of undergraduate business majors. New hires typically work with more senior consultants in strategy and operation fields. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A1-1. Describe the triple bottom line. The term used to describe a business’ sustainability is the triple bottom line. John Elkington coined the phrase in 1994 to suggest that organizations do pay attention to three different bottom lines. These include: (1) Traditional profit/loss; (2) People Account—social responsibility of the organization; and (3) Planet Account—the environmental responsibility of the organization. This has become increasingly important for organizations today. For instance, companies seek LEED certification for their buildings and mold a reputation for being friendly to the world. LEED certification is available to buildings that are created to be self-sustaining, with little impact on the environment. A1-2. What is meant by a hierarchy of strategy? A hierarchy of strategy is a term used to describe the interrelationships among the three levels of strategy (corporate, business, and functional) typically found in large business corporations. Beginning with the corporate level, each level of strategy forms the strategic environment of the next level in the corporation. This means that corporate level objectives, strategies, and policies form a key part of the environment of a division or business unit. The objectives,

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strategies, and policies of the division or unit must therefore be formulated so as to help achieve the plans of the corporate level. The same is true of functional departments that must operate within the objectives, strategies, and policies of a division or unit. A1-3. Does every business firm have business strategies? Every business firm should have a business strategy for every industry or market segment it serves. A business strategy aims at improving the competitive position of a business firm’s products or services in a specific industry or market segment. Firms must therefore have business strategies even if they are not organized on the basis of operating divisions. Nevertheless, it is still possible that some business firms do not have clearly stated business strategies. If they hope to be successful, however, they must have at least some rudimentary (even though unstated) position they take in terms of getting and keeping customers or clients. A1-4. What information is needed for the proper formulation of strategy? Why? In order to properly formulate strategy, it is essential to have information on the important variables in both the external and internal environments of the corporation. This includes general forces in the societal environment as well as the more easy-to-identify groups such as customers and competitors in the task environment. A corporation needs to have this information in order to identify a need it can fulfill via its corporate mission. It is also important to have information on the corporation’s structure, culture, and resources. A corporation needs to have this information in order to assess its capabilities to satisfy a customer’s need by making and/or distributing a product or service. Information on both the internal and external environments can also help a corporation predict likely opportunities and threats. Long-term strategies can be designed with these in mind. A1-5. Reconcile the strategic decision-making process depicted in Figure 1–5 with the strategic management model depicted in Figure 1–2. The strategic management model depicts the key input variables (internal and external environments) and the key output factors (mission, objectives, strategy, and policies). It shows how strategy formulation, implementation, and evaluation and control are related, and how a change in any one factor (e.g., corporate objectives) affects other factors (e.g., strategies, policies, programs, budgets, procedures, evaluation and control techniques). This model, however, does not depict how these output factors are generated. In contrast, the strategic decision-making model depicts how the process of strategic management happens in the form of strategic decisions. It is a series of interrelated activities depicted as eight distinct steps. These two models therefore complement each other and are very useful in increasing one’s understanding of strategic management. STRATEGIC PRACTICE EXERCISES Advanced economies are contending with one of the worst financial recessions in modern times. Many industrialized nations respond with austerity measures to adjust the deficit caused by greater spending during the years of cheap and available credit facilities. New industrial policies are also implemented at national and regional levels to police banks and financial institutions as a means of avoiding further economic problems in the future. Austerity measures and policy changes have forced industries and business practices to change. How do you think these act as strategic change stimuli? 1-9. What changes do you think this might cause in the immediate task environment for a business operating within the financial service industry? Look at the Financial Times online for information. 1-10. How do these changes impact on corporate, business, and functional level strategies of financial service businesses? Are these changes going to affect you as a customer? 1-11. How do you think a learning organization would act in this dynamic environment? What survival chances do stagnant organizations have?

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This end of chapter exercise is a good way to motivate students to apply some of the concepts in the chapter, particularly those from the strategic management model. Decisions are made every day, but not all decisions are seen as strategic ones. The text states that strategic decisions are (1) rare, (2) consequential, and (3) directive. These decisions deal with the long-term future of the entire organization. To aid in decision making, the authors suggest an eight-step decision-making process. Found on page 25 in the text, these include the following: (1) evaluating current performance results; (2) reviewing corporate governance; (3) scanning and assessing the external environment; (4) scanning and assessing the internal corporate environment; (5) analyzing strategic factors; (6) generating and selecting the best alternative strategy; (7) implementing selected strategies; and (8) evaluating implemented strategies. These guidelines for making and evaluating decisions at a strategic level can be important for leaders.

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CHAPTER TWO CORPORATE GOVERNANCE This chapter describes the basic governance mechanisms of the corporation: the board of directors and top management. These are the people who are primarily tasked with the strategic management process if the corporation is to have long-term success in accomplishing its mission. The responsibilities of both are described and explained. It proposes a board of directors’ continuum on which boards can be placed in terms of their involvement in strategic management. Agency theory is contrasted with stewardship theory. The chapter explains how the composition of the board can affect both its performance and that of the corporation. It also describes the impact of the Sarbanes–Oxley Act on corporate governance in the United States and trends in corporate governance around the world. Top management is discussed in terms of executive leadership, strategic vision, and managing the strategic planning process. LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Describe the role and responsibilities of the board of directors in corporate governance. Explain how the composition of a board can affect its operation. Describe the impact of the Sarbanes–Oxley Act on corporate governance in the United States. Discuss trends in corporate governance. Explain how executive leadership is an important part of strategic management. TOPICS OUTLINE COVERED 1. Role of the Board of Directors a. Responsibilities of the Board 2. Board of Directors Composition a. Nomination and Election of Board Members b. Organization of the Board 3. Impact of the Sarbanes–Oxley Act on U.S. Corporate Governance a. Improving Governance b. Evaluating Governance c. Avoiding Governance Improvements 4. Trends in Corporate Governance 5. The Role of Top Management a. Responsibilities of Top Management SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

2-1.

What are the roles and responsibilities of an effective and active Board of Directors?

The board of directors is required by law to direct the affairs of the corporation, but not to manage them. Stuart has written that a board is responsible for (1) effective leadership, (2) strategy of the organization, (3) the balance of risk and initiative, (4) succession planning, and (5) sustainability. The role of the board is to carry out three basic tasks: (1) monitor; (2) evaluate and influence; and (3) initiate and determine. 2-2.

What are the issues that suggest the need for oversight of a particular company’s management team?

The board of directors holds the top management team responsible for implementing and guiding the strategy set forth. There are several red flags that would indicate the need for oversight of a management team. When the corporate objectives are not being met, management teams may be at fault. When a clear vision is not articulated, the CEO must be responsible. Also, when the strategic planning process is not being monitored by the top management team, oversight may be called for.

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2-3.

What is the role of a board of directors?

By law, when a company incorporates, it must have a board of directors—even if the stock is held only by the founder and his/her spouse. However, the rationale for the board of directors seems to be changing from simply one of safeguarding stockholder investments to a broader role of buffering the corporation from its task environment and forcing management to manage strategically. This change is the result of increased pressure from institutional investors and other shareholders together with society in the form of special interest groups. Each stakeholder seeks to maximize their objective, whether it be greater profits, a special environmental or sustainability goal, or some other agenda. In response to this pressure, boards of directors are taking more active roles in the strategic management of corporations, and in some cases are actively involved in shaping company strategy. For shareholders, good corporate governance increases the likelihood of greater profitability, however special interest groups expect that boards of directors will balance the desire for higher profits with the social needs of society. The board’s connections to key stakeholders in the corporation’s task environment can also provide invaluable information for strategic decision making. This is the main reason why advisory boards are often used by companies that are not incorporated and thus have no shareholders. If nothing else, the board can do the corporation a great service by simply offering top management a different point of view. 2-4.

Is there a close relationship between the composition of a board of directors and organizational performance?

The relationship between corporate performance and the composition of a board of directors has been well documented in management literature. Organizational outcomes, such as strategies and performance, are expected to reflect the characteristics of the organization’s leaders. It is known that pressure from institutional investors who participate as outside directors of a board can cause corporate boards to become increasingly critical of management performance. A board of directors is in a position to establish the parameters within which strategic decision making occurs. Capable outside directors on a board can exert effective control over managerial performance with respect to strategic decisions in the form of strategic control, which measures performance against strategic plans, and financial control, which is measured against financial targets. A board of directors may also directly intervene in an organization’s strategic planning and decision-making process. In voluntary organizations, such as hospitals and state universities, that have a relatively small management component, the boards of directors are likely to be as concerned with strategic direction as with monitoring managerial performance. Governing boards with a significant number of independent directors can play a particularly important and direct role in influencing strategic change, especially when an organization is in an early stage of its development or when it encounters crises. 2-5.

Why is the combined chair/CEO position being increasingly criticized by most management scholars?

Many studies on management show that boards of directors tend to be more effective when an individual does not simultaneously occupy the positions of Chief Executive Officer (CEO) and Chair. Such a situation, where a CEO is also the Chair of the governing board, is referred to as CEO duality. A Chair of a governing board may not necessarily be the leader of the board; in certain instances, the Chair simply conducts the meetings of the board and sets the tone for the board. However, their strength as a leader may well determine the effectiveness of the board. The separation of the position of Chair of a governing board from the position of CEO can significantly help directors prevent crises, act swiftly and effectively in the event of a crisis, and objectively evaluate the impact of crises. CEO duality usually has an adverse effect on organizational performance. For example, it has been observed that the bankruptcy rate tends to be positively correlated with CEO duality. 2-6.

What would the impact be if the CEO was also the Board Chair?

Members of a board of directors who are outsiders tend to be more objective and critical of corporate activities. In that capacity they may provide greater oversight as compared to insiders, thereby encouraging better corporate governance and better performance. However, stewardship theory makes the case that senior executives identify with the corporation and its success and are thereby more focused on ensuring its future. In either case, it would seem that a clear danger exists in firms where the CEO is also the Board Chair in that necessary oversight could be compromised especially when there is no time limit for board members. In a staggered board situation, there would

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be little means of limiting the power of the CEO when the CEO is also the Board Chair. 2-7.

How should a board of directors be involved in the executive leadership of an organization?

A board of directors can actively play the executive leading role in an organization. A governing board is mainly responsible for setting strategies and, in many cases, is able to influence numerous strategy-related decisions. The role of a board of directors is to be actively involved in guiding the management to achieve the corporate mission and corporate objectives. The existence of an active and participative board will make the management analyze and articulate their plans, proposals, and suggestions in greater depth by generating high-quality discussions on submissions for decisions. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A2-1. What recommendations would you make to improve the effectiveness of today’s boards of directors? The following are among the many suggestions often made: • Add more outsiders (people not affiliated with the corporation) to the board of directors. Keep the percentage of insiders (typically top management) to less than 50% of board membership. • Separate the positions of CEO and Chairman so that top management cannot unduly influence the board’s meetings and agenda. This should improve the board’s ability to properly evaluate top management. If the Chair can’t be separated from the CEO, select a Lead Director from among the outside directors. • Use a committee composed of outsiders to nominate potential new directors. This will help to ensure that potential members are not friends of top management who may owe more allegiance to the CEO than to the shareholders. • Nominate people to the board who have knowledge valuable to the board and who have expertise of value to top management. These should be people who will have the respect of top management and who can both advise and criticize top management as needed. Make sure that they are diverse in terms of background and experience. • Require board members to own substantial amounts of stock in the corporation to ensure that they have a personal as well as professional stake in the welfare of the corporation. • Allow shareholders to nominate people for election to director. A2-2. Is there a conflict between agency theory and the concept of organizational stakeholders? Agency theory is concerned with problems that occur in relationships between principals (owners) and their agents (top management). Because agents are, in effect, “hired hands,” their interests are not usually aligned with those of the owner (stockholders) of a corporation. Consequently, agency theory is primarily interested in ways to better align these two sets of interests, such as management owning significant shares of stock or having a strong financial stake in the long-term performance of the corporation via long-term incentive plans. This helps to ensure that management looks beyond selfish short-term benefits of a decision to the more strategic issues that concern stockholders. The concept of organizational stakeholders, in contrast, looks at more than just owners and managers. It argues that groups other than stockholders and top management have a significant stake in the actions of the corporation and need to be considered in strategic decisions. What might benefit owners and management might hurt employees, the local community, or the environment. The concept of stakeholders thus proposes that the suggestions of agency theory are incomplete and insufficient to ensure that top management deals fairly not only with stockholders, but also with the needs of all concerned stakeholder groups. As it is currently defined, agency theory is more in agreement with Milton Friedman’s narrow view of the responsibilities of a corporation than with the stakeholder view more common to concerns of social responsibility. (See Chapter 3 for Friedman’s view of corporate responsibility.) This could change if society begins to consider top management not only as direct agents for stockholders, but also as indirect agents for other groups with a stake in the corporation’s activities. Agency theory could thus be expanded to include the concerns of other interested groups and thus incorporate the stakeholder approach.

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SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE The end of chapter exercise asks the student to evaluate the “best” and the “worst” manager for whom the student has worked. The questionnaire is based on the concept of French and Raven’s “bases of power.” This concept is usually discussed in Introduction to Management as well as in Organizational Behavior textbooks as a part of their discussion of leadership. You may need to briefly explain what each base means as part of your discussion of their scores. Briefly, reward power is based on someone’s ability to give another something that is valued for doing what the other person wants. Coercive power is based on someone’s ability to give someone something that is disliked if the other person does not do what is desired. Legitimate power is like authority in that it is based on one person’s belief that another person has the right to ask him/her to do something. Referent power is like charisma in that it is one person’s ability to get others to identify with him/her and to want to be like that person. Expert power is based on a person’s knowledge or abilities in an area that is important for job performance and that the person is willing to share with someone else. List the five bases of power on the board. Ask around five members of the class to provide you with their scores for their “best manager” on each of the bases. Write their totals under each of the five bases on the board and then calculate the average for each base. Do the same thing for the same five students for their “worst boss.” In most instances, the average “best boss” will score higher than the average “worst boss” on referent, expert, and reward power, and lower on coercive and legitimate power. Because the “best manager” tends to have many of the characteristics of the transformational leader, this questionnaire provides some interesting information to use in answering the discussion question: Would you like to work for a transformational leader?

ADDITIONAL TEACHING MODULE CORPORATE GOVERNANCE STYLES Just as boards of directors vary widely on a continuum of involvement in the strategic management process, so do top management teams. For example, a top management team with a low involvement in strategic management will tend to be functionally oriented and will focus its energies on day-to-day operational problems; this type of team is likely either to be disorganized or to have a dominant CEO who continues to identify with his or her old division. In contrast, a top management team with high involvement will be active in strategic planning. It will try to get division managers involved in planning so that top management will have more time to scan the environment for challenges and opportunities. Both the board of directors and top management can be placed on a matrix that reflects four basic styles of corporate governance.

Styles of Corporate Governance

Degree of Involvement

High

Entrepreneurship Management

Partnership Management

Chaos Management

Marionette Management

by Top Management Low

Low

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High


Degree of Involvement by Board of Directors Chaos Management When both the board of directors and top management have little involvement in the strategic management process, their style is referred to as chaos management. The board waits for top management to bring it proposals. Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago. The basic strategic philosophy seems to be, “If it was good enough for old J.B., it’s good enough for us.” There is no strategic management being done here. Entrepreneurship Management A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management. The board is willing to be used as a rubber stamp for top management’s decisions. The CEO, operating alone or with a team, dominates the corporation and its strategic decisions. An example is Control Data Corporation under the leadership of its founder, William C. Norris. For 29 years, Norris dominated both the company’s top management and its board of directors. Insisting that the company could profit by addressing “society’s unmet needs,” Norris directed corporate investments into the rejuvenation of ghettos and support of windpowered generators and tundra farming, among other projects. Although these investments tended to result in losses, few people were willing to challenge his strategic decisions. Some employees even referred to him as “the Pope.” A former Control Data executive noted, “More often than not, he’s proven his critics wrong, so now his visions aren’t challenged.”

Marionette Management Probably the rarest form of strategic management style, marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations. Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president. The president is forced into a COO role and can do only what the board allows him/her to do. This style also occurs when a board fires a CEO but is slow to find a replacement. The COO or executive vice-president stays on as “acting” president or CEO until the selection process is complete. In the meantime, strategic management is firmly in the hands of the board of directors. Marionette management occurred at Winnebago Industries when the company’s board of directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen’s title as chief executive officer but left him as company president. No new CEO was named. Hanson, whose family owned 46% of Winnebago’s stock, had given up the CEO title in 1983 to President Haugen, a long-time employee. Outside observers noted that although Chairman Hanson did not also hold the title of CEO, he appeared to have taken on the CEO’s responsibilities once again. Partnership Management Probably, the most effective style of strategic management, partnership management is epitomized by a highly involved board and top management. The board and top management team work closely to establish the corporate mission, objectives, strategies, and policies. Board members are active in committee work and utilize strategic audits to provide feedback to top management on its implementation of agreed-upon strategies and policies. This appears to be the style in a number of successful corporations such as Texas Instruments, Target, and General Electric Company.

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CHAPTER THREE SOCIAL RESPONSIBILITY AND ETHICS IN STRATEGIC MANAGEMENT The chapter examines the relationship between business firms and society and presents issues in social responsibility and ethics. It describes the relationship between social responsibility and corporate performance. The chapter considers stakeholder concerns and presents various responsibilities of business firms as well. Ethics and ethical behavior are considered in light of the challenge from moral relativism. It describes guidelines for ethical behavior according to utilitarianism, individual rights, and justice approaches. LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Discuss the relationship between social responsibility and corporate performance. Explain the concept of sustainability. Conduct a stakeholder analysis. Explain why people may act unethically. Describe different views of ethics according to the utilitarian, individual rights, and justice approaches. TOPICS OUTLINE COVERED 1. Social Responsibilities of Strategic Decision Makers a. Responsibilities of a Business Firm 2. Sustainability a. Corporate Stakeholders 3. Stakeholder Analysis 4. Ethical Decision Making a. Some Reasons for Unethical Behavior b. Encouraging Ethical Behavior 5. View on Ethical Behavior SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

3-1.

How has moral relativism led to criminal activities by some employees in companies?

Moral relativism suggests that morality is relative to some personal, social, or cultural standard. There is no method for deciding whether one decision is better than another. For this very reason, many people justify their unethical positions, arguing that there is not one absolute code of ethics. 3-2.

How does a company ensure that its code of ethics is integrated into the daily decision-making process of the company and is not just a symbolic trophy or plaque hanging on the wall?

When management of a company wants to improve the ethical behavior of employees in the organization, a code of ethics should be communicated in training programs, in performance appraisal systems, policies and procedures, and also through their own actions. 3-3.

What is the relationship between corporate governance and social responsibility?

This question is partially answered by the last trend in corporate governance presented in Chapter 2. Quite simply, it states that society, in the form of special interest groups, increasingly expects boards of directors to balance the economic goal of profitability with the social needs of society. Issues dealing with workforce diversity and the environment are now reaching the board level. If business corporations are to avoid increased governmental restrictions on their activities, management will need to be even more aware of the various needs of their stakeholder groups. The board of directors is in a unique position to view the corporation as a whole and to evaluate management’s performance in terms of stakeholder criteria. To the extent that boards use only shareholder value as

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their key criteria, they may not be acting responsibly from society’s point of view. Increasingly, concerns over social responsibility may be directed through the board of directors. Agency theory defines the board’s interests quite narrowly. Perhaps it is time for agency theory to be expanded to include stakeholders other than just shareholders. Stewardship theory may provide the rationale to expand the responsibilities of the board and top management in terms of the corporation’s overall social responsibilities. This is likely to continue being a controversial issue for quite some time. 3-4.

What is your opinion of Apple having a code of conduct for its suppliers? What would Milton Friedman say? Contrast his view with that of Archie Carroll’s.

Do a company’s responsibilities end at its boundary, or do its responsibilities extend to include its suppliers and distributors? This very thorny question has become a point of contention in the area of social responsibility. The question includes a basic question in organization theory: what is the boundary of an organization? Certainly, one could argue that a company is composed of its employees and all of its assets, such as land, buildings, and equipment. These can thus define a company’s boundary. Given this view, everything else may be called a company’s “environment” and therefore outside of a company’s control or responsibility. One could thus argue that a company such as Apple or Nike cannot be held responsible for the actions of a separate and independent supplier company/contractor. The very popularity of outsourcing as a substitute for vertical integration means that more firms are contracting with other firms to fulfill functions a company no longer wishes to do on its own. If the contract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplying company, then the hands-length nature of transactions is compromised and it becomes difficult to discern where one firm’s boundary begins and another firm’s leaves off. Such a relationship suggests that one company does have some influence over another company’s actions by nature of the other company’s dependency on the first company. One could thus argue that a company’s social responsibilities extend beyond what is normally thought of as its boundary to the extent that it has some control and influence over the other company’s actions. Clearly, Apple’s management was thinking this way when it drafted its code of conduct. Milton Friedman would probably be very much against Apple’s meddling with the rights of its suppliers to freely contract with their employees. Using Carroll’s categories, Friedman would probably argue that the only responsibilities of a business firm are economic and legal. Friedman does say that business should play “within the rules of the game.” This can be interpreted as meaning a supplier’s legal responsibilities to follow the rules established within that country. If a purely economic justification is used, it may be difficult but still possible to justify ethical and discretionary responsibilities. Carroll points out that a refusal to consider ethical responsibilities is likely to lead to an increase in a firm’s legal responsibilities—which, considering the usual inefficiencies of government, will lead to higher costs and lower long-run business efficiency. Either the U.S. federal government or the United Nations may force companies in developed countries to follow a code like Gap’s or else face sanctions. Friedman would say that this is foolishness, but Carroll would argue that this is a natural result of ignoring one’s ethical responsibilities. 3-5.

Why should a for-profit organization be socially responsible to its various stakeholders?

A stakeholder is any group or individual who can affect, or is affected by, the achievement of a corporation’s objectives. Stakeholders include employees, customers, suppliers, stockholders, banks, environmentalists, the government, and other groups who can help or hurt the corporation. Besides the owners and employees, there are many groups in society toward whom the corporation is responsible. The objectives of a corporation should only be achieved by balancing the often-conflicting interests of these different groups. By incorporating the participation of stakeholders in their governing boards, corporations are likely to respond to the interests of society as a whole. This incorporation involves governing boards setting an overall direction for the corporation as they coordinate with the stakeholders of the organization. The corporation’s coordinating function can be explained and justified by the organizational concern for stakeholders, who identify moral and philosophical guidelines for the governance and management of corporations. 3-6.

Why do some employees of an organization behave unethically? Why is it necessary for an organization to develop employees’ ethics?

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Unethical behavior in employees is due to three factors. First, employees may manipulate others for their personal gains. Second, they may fail to see the connection between their actions and the outcomes of those actions. Third, they may believe that ethical choices are driven only by circumstance and that there are certain occasions or situations in which ethics may not apply. By addressing and recognizing these factors that shape employees’ ethical intentions and behavior, organizations can establish an environment that encourages ethical behavior. Unethical behavior increases when employees feel that their actions will not harm a potential victim and that their peers will not condemn their actions. They will engage in more unethical behavior when the company promotes an environment that encourages selfishness instead of an environment that focuses employee attention on the company’s stakeholders. By employing direct action that prohibits unethical behavior and encourages ethical activities through positive incentives, organizations can improve their chances of accomplishing organizational objectives and achieving outstanding performance. 3-7.

Given that people do not overtly use a company’s code of ethics to guide their decision making, what good are the codes?

The chapter states that managers tend to ignore codes of ethics and try to solve ethical dilemmas on their own. To combat this tendency, corporations should not only develop a comprehensive code of ethics, but also communicate the code in their training programs, performance appraisal systems, and policies and procedures. Developing codes of ethics can be a useful way to promote ethical behavior, especially for people who are operating at Kohlberg’s conventional level of moral development. A code of ethics (1) clarifies company expectations of employee conduct in various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions in decisions and actions. If nothing else, developing and communicating a comprehensive code of ethics can help protect a company from lawsuits. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A3-1. How appropriate is the theory of laissez-faire in today’s world? As indicated in the chapter, Milton Friedman contends that it is very appropriate. The quote from his classic article, “The Social Responsibility of Business Is to Increase Its Profits” does suggest a certain modification, however, to pure laissez-faire. He states that business should work to increase its profits “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” These “rules of the game” form the crux of the argument. What should these rules be and who should communicate and enforce them? This leads directly into Archie Carroll’s contention that there are four responsibilities of business corporations: economic, legal, ethical, and discretionary. Pure laissez-faire argues for economic responsibilities only. Friedman modifies laissez-faire by presumably adding legal responsibilities. One could make the point that the “rules of the game” should include ethical responsibilities as well. The problem, of course, is what happens to the concept of laissez-faire when one adds all these responsibilities to it and then expects businesspeople at all levels to accept them without outside force? Does laissez-faire as proposed by Adam Smith and argued by others include only economic responsibilities? If legal and ethical responsibilities are also expected by society of business corporations, is it still “free enterprise” laissez-faire or some other kind of system? A3-2. Using Carroll’s list of four responsibilities, should a company be concerned about discretionary responsibilities? Why or why not? Except for a few die-hard followers of Milton Friedman’s philosophy, few people would agree that a business firm should fulfill only its economic and legal responsibilities and completely ignore ethical ones. The same is not true of discretionary responsibilities, however. Because discretionary responsibilities are defined by Carroll as purely voluntary, there is no pressure by anyone for a business firm to fulfill them. One can argue, nevertheless, that there are three good reasons to undertake these kinds of responsibilities. The first reason is the morality rationale—it may be the right thing to do, even though the company may not benefit and may even be hurt in the short run. The second

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reason is enlightened self-interest. If a firm undertakes a discretionary activity, it may gain short-run advantages in the marketplace (e.g., a company offering free day care to its employees may attract more potential workers at lower wages). It may also serve as a role model for government to legislate if and when that responsibility moves from discretionary to ethical and finally to legal (and thus the firm is able to do things its way instead of the government’s way). The third reason is also one of enlightened self-interest. If a company develops a reputation for voluntarily doing socially useful activities even though it gains little economically in return, it may collect valuable public relations credit in people’s minds. This may translate into better sales or a willingness on the part of some government agency to overlook a questionable activity the company might unthinkingly engage in. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE The end of chapter exercise asks the student to evaluate the position of an organization facing a particular dilemma and to suggest a course of action to the manager. Students should read the exercise and make the decision in an ethical manner for the manager. Ideally, students may analyze the problem in three ways: fiduciary duty, stakeholder analysis, and the Kantian categorical imperative. If students view the manager’s fiduciary duty to the shareholders as paramount, they will decide to make the gamble. If they see a duty to stakeholders other than shareholders (e.g., employees, customers), they will still choose to act as if the product closer to release is THE ONE. Students will also reach a conclusion based on the Kantian categorical imperative explained in the chapter.

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CHAPTER FOUR ENVIRONMENTAL ANALYSIS AND INDUSTRY ANALYSIS This chapter examines key aspects of the external environment of the corporation with special emphasis on environmental analysis, industry analysis, and forecasting. Environmental analysis is presented as the first part of the strategic management model and a crucial task for strategic managers. The emphasis is upon monitoring strategic factors and utilizing possible sources of information. The Five Forces approach to industry analysis is discussed in some detail. Forecasting is then addressed in terms of assumptions and basic techniques. Industry scenario construction/writing is explained. The chapter ends with a suggested way to synthesize external factors through the use of an EFAS table. LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

List the aspects of an organization’s environment that can influence its long-term decisions. Identify the aspects of an organization’s environment that are most strategically important. Conduct an industry analysis to explain the competitive forces that influence the intensity of rivalry within an industry. Discuss how industry maturity affects industry competitive forces. Categorize international industries based on their pressures for coordination and local responsiveness. Identify key success factors and develop an industry matrix. Construct strategic group maps to assess the competitive positions of firms in an industry. Develop an industry scenario as a forecasting technique. Use publicly available information to conduct competitive intelligence. Construct an EFAS table that summarizes external environmental factors. TOPICS OUTLINE COVERED 1. Aspects of Environmental Analysis a. Identifying External Environmental Variables 2. Strategic Importance of the External Environment a. Analyzing the Societal Environment: STEEP Analysis b. Identifying External Strategic Factors 3. Industry Analysis: Analyzing the Task Environment a. Five Forces Approach to Industry Analysis 4. Industry Evolution 5. Categorizing International Industries a. International Risk Assessment b. Strategic Groups c. Strategic Types d. Hypercompetition 6. Using Key Success Factors to Create an Industry Matrix 7. Competitive Intelligence a. Sources of Competitive Intelligence b. Monitoring Competitors for Strategic Planning 8. Forecasting a. Danger of Assumptions b. Useful Forecasting Techniques 9. The Strategic Audit: A Checklist for Environmental Analysis 10. Synthesis of External Factors

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 4-1.

How does STEEP analysis aid in the development of the strategy of a company?

STEEP analysis is designed to monitor trends in the society and natural environments. In doing so, this analysis requires scanning the environment for sociocultural, technological, economic, ecological, and political environmental forces that may impact the way an organization does business. 4-2.

The effects of climate change on companies can be grouped into six categories of risk. Use any two of these to explain the impact upon the resort hotel industry.

The six types of risk are regulatory risk, supply chain risk, product and technology risk, litigation risk, reputational risk, and physical risk. Each of these can impact the resort hotel industry. For each of these risks, the student should be able to give several examples of the impact for the resort hotel industry. 4-3.

Explain why environmental analysis is considered an important activity for the strategy formulation process of an organization.

Scanning and assessing the environment of an organization is necessary for taking appropriate decisions and for adapting strategies to their contexts during turbulent changes. Before managers can begin strategy formulation, they must understand the context of the environment in which their organization competes. It is virtually impossible for a company to design a strategy without a deep understanding of its external environment. Once management has framed the aspects of the environment that impact the business, it is in a position to determine the firm’s competitive advantages. Environmental scanning is an overarching term encompassing the monitoring, evaluation, and dissemination of information relevant to the organizational development of strategy. A corporation uses this tool to avoid strategic surprise and to ensure its long-term health. Organizations need to assess their environment to understand the external forces of change that may affect their future competitive position so that they can develop effective strategies. Many researchers in strategic management advocate the importance of obtaining a thorough perception and understanding of the environment. They see the alignment between the organization and its environment as essential for performance, and consider strategy as the key means to achieve this goal. 4-4.

How would you determine the level of competitive intensity in an industry?

The answer to this question can be found in Figure 4–2 in the chapter. By this time, students should be able to list the five forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman. They are briefly: • Threat of new entrants • Rivalry among existing firms • Threat of substitute products or services • Bargaining power of buyers • Bargaining power of suppliers • Relative power of other stakeholders Once they have listed the forces, push the students to explain how each of the forces can affect the level of competitive intensity within an industry. Use price of the company’s product (i.e., how will a change in each of the forces affect the average price of the product?) and then look at how changes in each force might affect average product quality and other characteristics of the product offered in this particular industry. Arbitrarily select for analysis a well-known industry such as airlines or automobiles. After examining past and present forces operating in a particular industry, ask the students to try to predict what will happen to each of these forces in the future and how these developments might affect the future competitive intensity of the industry. Here’s an example of an exercise you could use in class.

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What are the forces driving industry competition in the airline industry? First, ask each person in the class to individually evaluate each of the forces. Alternatively, form groups to evaluate the forces. Next, ask the class (or each group) to indicate whether they marked high, medium, or low for each force. Ask individuals/groups for their rationale to get some discussion going. Next, ask the class which of these forces are changing and to indicate why. The next step is to ask the class to evaluate the future level of competitive intensity in the airline industry. Would they invest or look for a job in this industry? The authors’ opinions regarding the current level of these forces are as follows. The overall level of competitive intensity is high and bound to get higher. Feel free to disagree.

4-5.

Threat of new entrants: High. Almost anyone can buy used airplanes and start a charter service. As other nations privatize their high-cost, state-owned airlines, new low-cost entrants will emerge.

Rivalry among existing firms: High. As more airlines leave their nationally protected areas, they are entering areas previously controlled by other airlines. Because there are few ways to differentiate airline service, many carriers become commodities, competing primarily on price. Price wars result from this high degree of rivalry.

Bargaining power of buyers/distributors: Medium to Low. As more airlines are selling directly to customers via the Internet, travel agents as the primary distributors have become less important to carrier sales. The lowered power of travel agents is indicated by the fact that major airlines were able to institute a cap on travel agent commissions so easily and to emphasize ticket sales via corporate websites.

Bargaining power of suppliers: High. With only two large airframe manufacturers compared to many more airline companies, supplier bargaining power is quite high.

Relative power of other stakeholders: Medium. Who are the key stakeholders? Pilot and flight attendant unions are traditionally strong at the established carriers (raising costs). Nonunionized carriers thus gain a cost advantage (raising the level of competitive intensity). Because airline crashes get major attention, governments are quick to pass safety regulations (raising costs and thus competitive intensity). However, national concerns also cause governments to safeguard domestic airlines from strong foreign competition thus lowering competitive intensity. Is Pepsi Cola a substitute for Coca Cola?

This is a good question to check how well students understand the basic concepts of industry analysis. Those with a very superficial understanding of the topics discussed in this chapter will tend to answer “yes” to this question. They are using their own common sense understanding of a substitute being another product within the same category. Because Coke and Pepsi are both colas, most people think of them as substitutes for each other. They have almost identical product characteristics. According to Porter, however, substitute products are those products that appear to be different but can satisfy the same need as another product. This means that in Porter’s mind, substitutes do not have similar product characteristics, but are still able to satisfy the same need. This indicates that Porter would not view Pepsi and Coke as true substitutes, but two versions/brands of the same product. Thus, Porter would view coffee and tea (both having caffeine) as being substitutes for a soft drink cola. The whole idea of Porter’s approach to industry analysis is to get people to go beyond the obvious when considering what affects the level of competitive intensity within an industry. 4-6.

What are the most significant implications of a strategic group analysis of an organization?

A strategic group is a group of organizations that work together in an industry by adopting some similar cooperative strategies in the same market. These strategies might include product offerings, geographical location, choices of distribution channels, product quality, vertical integration, and level of technology. Organizations within a strategic

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group can work together closely and adopt similar but effective strategies and business operations to compete in the market. A strategic group analysis is important for identifying the appropriate niche market and providing suitable goods and services to meet demand. The group can even set the rules of competition and influence the standard of product quality. 4-7.

How is Porter’s five force framework related to the identification of key success factors?

The five force framework provides the basis for identifying an industry’s attractiveness. One of the objectives of an industry analysis is to determine the factors that organizations need in order to be competitive in the market. These are the industry’s key success factors, which are identified by considering the main product or service features that the industry’s market expects. They are the organizational characteristics necessary for responding to the macro environment. They include industry factors such as the impact of new market entrants, substitutes, suppliers, and the competitive behavior of rivals that exist in the market. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A4-1. Why is environmental uncertainty an important concept in strategic management? A key part of strategic management, environmental analysis is a tool used to help avoid strategic surprise and cope with an uncertain environment. If the environment was certain and predictable, environmental analysis would be a rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing world, however, those corporations that engage in environmental analysis and strategic planning tend to deal better with environmental uncertainty and to be more successful than their nonplanning brethren. A4-2. What can a corporation do to ensure that information about strategic environmental factors gets the attention of strategy makers? This is a very real problem in most large corporations given the usual obstacles to good communication. The very people who are in the best positions to gather this data are often the ones who either fail to pass it on because it’s too much of a chore, or they fail to notice it because no one told them how important certain developments are to top management. Because proper information dissemination is an important part of environmental analysis, corporations attempt to schedule a series of analytical reports for top management’s information. Some of these reports are depicted in Figure 4–1 in the chapter. The purchasing department, for example, might be tasked with the job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market research department might prepare analyses of present and future customers for certain products and services with special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years. Other approaches are, of course, possible to get needed information to the attention of strategy makers. It might be useful to generate some of these ideas in class. A4-3. If most long-term forecasts are usually incorrect, why bother doing them? This question is based on the assumption that most long-term forecasts are usually incorrect. One must keep in mind that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in three years will very likely occur if it is based on a strong drop in the present birth rate. Nevertheless, most people would probably agree that forecasts going out 5 to 10 years have a low probability of becoming reality in today’s dynamic world. The text takes the position that even if predictions prove to be wrong, the very act of analyzing and forecasting the environment helps managers take a broader perspective. It also forces managers to take an active rather than a passive orientation toward its external environment. It encourages calculated risks over WAHs (wild a** hunches) and is more likely to result in strategic management instead of reactive management. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE How far should people in a business firm go in gathering competitive intelligence? Where do you draw the line?

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This is an interesting exercise to use not only for covering ethics in Chapter 3, but also for introducing some of the concepts found in Chapter 4, Environmental Analysis and Industry Analysis. For this reason, you might want to use this exercise when discussing ethics in Chapter 3 rather than at the end of Chapter 4. Approach 1: First, ask your students to complete this exercise. Second, list all the items on the blackboard in which a large percentage of the class rates each of them as 4 or 5. Third, list all the items in which a large percentage of the class rates each of them a 2 or 1. Fourth, list all the items in which a large majority rates them as a 3. Once these three sets of items are listed on the board, ask the class what differentiates one group from another. Try to identify the criteria the class used to rate the items. This provides the rationale the students in your class are using to make ethical decisions. You might also want to challenge the class as a whole by asking for minority opinions—those who rated a particular item significantly differently than did the class as a whole. Approach 2: Have the class complete the exercise and hand in their ratings anonymously on a separate sheet of paper. Have them keep one copy of their ratings. After class, calculate the means for each item, put them into one of the three categories mentioned above, and list them on a transparency. Show the class their average responses by group. Ask them what differentiates one group from another and probe for the criteria they used to rate the items. Ask them to look again at their personal ratings of the items and identify where they differ from the overall average class rating. Encourage individual students to challenge the average class ratings. Some interesting discussion is bound to result. You may want to provide the class with the average responses found in the Jones and Bryan study cited below. This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. of Georgia State University for their article “Business Ethics and Business Intelligence: An Empirical Study of Information-Gathering Alternatives,” in the June 1995 issue of the International Journal of Management (pages 204–208). A total of 108 undergraduates in a strategic management class completed the questionnaire during the early part of the term, prior to a discussion of ethics. The resulting mean responses were as follows: The business firm should try to get useful information about competitors by: 4.55

Careful study of trade journals.

1.13

Wiretapping the telephones of competitors.

2.59

Posing as a potential customer to competitors.

1.57

Getting loyal customers to put out a phony “request for proposal” soliciting competitors’ bids.

4.21

Buying competitors’ products and taking them apart.

3.54

Hiring management consultants who have worked for competitors.

1.44

Rewarding competitors’ employees for useful “tips.”

4.00

Questioning competitors’ customers and/or suppliers.

1.97

Buying and analyzing competitors’ garbage.

1.37

Advertising and interviewing for nonexistent jobs.

4.09

Taking public tours of competitors’ facilities.

1.58

Releasing false information about the company in order to confuse competitors.

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3.70

Questioning competitors’ technical people at trade shows and conferences.

3.29

Hiring key people away from competitors.

3.59

Analyzing competitors’ labor union contracts.

1.46

Having employees date persons who work for competitors.

2.61

Studying aerial photographs of competitors’ facilities.

Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00. Those items with a mean between 2.5 and 3.5 reflected student uncertainty about whether the action was appropriate or not. Items with a mean response of less than 2.5 were judged inappropriate. Jones and Bryan were surprised to find no statistically significant differences between males and females or on the basis of age. They suggested that the strong emphasis in the business curriculum on strategic management might have tended to suppress any gender and age differences. ADDITIONAL TEACHING MODULE (Use when discussing forecasting) THE ROLLING J-CURVE When current environmental trends (such as the price of oil) look bad or when a new product introduction is not doing as well as expected, managers and analysts are tempted to use the infamous rolling J-curve style of forecasting, in which present trends are discounted in the hope that everything will soon improve as hoped. Wellknown among strategic planners, the rolling J-curve forecast is feared with good reason by most executives. For example, if a new program is not resulting in increased sales as anticipated, the person in charge of the program simply alters the forecast by announcing that the decrease is only temporary and that the expected increase will occur sometime soon. Sales can thus be diagramed on a chart with the actual sales figures curving downward over time and the estimated future sales figures forming the upward curve of the J (while everyone continues to hope for a “light at the end of the tunnel”). Companies can go bankrupt using these kinds of forecasts in which hope substitutes for analysis.

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CHAPTER FIVE ORGANIZATIONAL ANALYSIS AND COMPETITIVE ADVANTAGE This chapter completes the section on environmental scanning by examining the internal environment of a corporation. Often called organizational analysis (to contrast it with industry analysis), internal scanning is a key part of the resource-based view of the firm—the view that a company’s sustained competitive advantage is primarily determined by its resource endowments. The chapter contrasts the industry value chain from the corporate value chain. Following the popular functional approach, the chapter breaks the internal environment down into the corporation’s structure, culture, and resources. The chapter proposes that to the extent that a corporation’s present structure and culture are compatible with present or potential strategies, they can be considered strengths or weaknesses. Corporate resources are discussed in terms of marketing, finance, research and development, operations, human resources, and information systems. The point is made that a corporation’s resources include not only measurable assets, such as buildings and people, but also the skills and competencies of the people within the functional areas. The chapter ends with a suggested way to summarize internal factors through the use of an IFAS Table. LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6.

Apply the resource-based view of the firm and the VRIO framework to determine core and distinctive competencies. Explain company business models and how they can be imitated. Use value chain to assess the activities of an industry and of an organization. Explain why different organizational structures are utilized in business. Assess a company’s corporate culture and how it might affect a proposed strategy. Construct an IFAS Table that summarizes internal factors. TOPICS OUTLINE COVERED 1. A Resource-Based Approach to Organizational Analysis—VRIO a. Core and Distinctive Competencies b. Using Resources/Capabilities to Gain Competitive Advantage 2. Business Models 3. Value-Chain Analysis a. Industry Value-Chain Analysis b. Corporate Value-Chain Analysis c. Scanning Functional Resources and Capabilities 4. Basic Organizational Structures 5. Culture a. Strategic Marketing Issues b. Strategic Financial Issues c. Strategic Research and Development (R&D) Issues d. Strategic Operations Issues e. Strategic Human Resource Management (HRM) Issues f. Strategic Information Systems/Technology Issues 6. The Strategic Audit: A Checklist for Organizational Analysis a. Synthesis of Internal Factors (IFAS) SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

5-1.

How does the resource-based view of the firm provide a superior means of evaluating a company’s competitive advantage?

A resource-based approach to organizational analysis highlights the resources of the firm with which it can confront

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the environment for success. This kind of analysis not only identifies resources, but also examines how well the organization is developing and taking advantage of the resources they display. The VRIO framework uses four questions to evaluate a firm’s competencies: (1) is it valuable, (2) is it rare, (3) how easy is it to imitate and are there ways to delay or prevent competitors from imitating, and (4) is the firm organized to exploit the resource? 5-2.

Explain how using an IFAS Table impacts the understanding of a company’s internal resources and capabilities.

An IFAS (Internal Factor Analysis Summary) is one way to organize the internal factors into strengths and weaknesses as well as to analyze how well a particular company’s management is responding to these specific factors in light of the perceived importance of these factors to the organization. 5-3.

What is the relevance of the resource-based view of the firm to strategic management in a global environment?

The resource-based view of the firm is an attempt to bring attention to the importance of a corporation’s resources in strategic management. For much of the 1980s, Porter’s concepts of industry analysis and competitive strategy dominated the field of strategic management to such an extent that many felt that industry structure alone seemed to determine a firm’s profit potential. Unfortunately, this emphasis on the industry tended to ignore a firm’s core skills and competencies. What good is the knowledge that a niche in the market exists that can be reached through a focused differentiation competitive strategy if a corporation doesn’t have the resources to implement such a strategy? Experts on the resource-based view suggest that differences in performance among companies may be explained best not through differences in industry structure identified by industry analysis, but through differences in corporate assets and resources and their application. The resource-based view of the firm is compatible with the traditional concepts of SWOT and distinctive competence, popular in the field since the 1960s. The only danger with the resource-based approach is that analysts may put too much emphasis on internal factors and not enough on external factors. Nevertheless, the idea that the durability and imitability of corporate resources determine competitive advance is a very useful one. 5-4.

How can value-chain analysis help identify a company’s strengths and weaknesses?

Value-chain analysis, as proposed by Porter, is a way of examining the nature and extent of the synergies that do or do not exist between the internal activities of a corporation. The systematic examination of individual value activities can lead to a better understanding of a corporation’s strengths and weaknesses. Its advantage over other methods of analyzing a firm’s internal environment is its ability to visualize a company in terms of strings of product value chains, which can be tied together in places to achieve economies of scope. 5-5.

Why is organizational culture important for a business to effectively formulate its strategy?

Organizational culture shapes the behavior of people in a corporation, thus affecting corporate performance. Firms with a sustained superior financial performance are typically characterized by a strong set of core organizational cultural values that define the ways in which they conduct business. Organizational culture as a company resource is, therefore, of great importance to the formulation of the company’s corporate strategy. It is unique and specific to the organization; and, because corporate cultures have a powerful influence on the behavior of people at all levels, they can strongly affect a corporation’s ability to shift its strategic direction. Since a strategy represents an organization’s intent and direction, it must be based on the organization’s values, traditions, and norms. Thus, the strategy has to be based primarily on its organizational culture. Students should note that it is a serious weakness if the corporate’s culture is not compatible with its proposed strategy. 5-6.

How are organizational resources linked to the competitive advantages and corporate performance of an organization?

Organizational resources are closely related to the competitive advantages and strategy of an organization. Corporate performance is based primarily on the possession and utilization of organizational resources. It depends not only on

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the organizational ability to establish competitive advantages but also on the sustainability of these advantages. This sustainability depends on whether resources and capabilities are durable and whether competitors can imitate the competitive advantage that the organization can offer. Resources and capabilities are imitable if they are transferable or replicable. Organizational resources can help organizations develop sustainable competitive advantages in their routine operations. Organizational resources can also affect the competitiveness and performance of an organization through the four main characteristics stated as follows: value, rareness, imitability, and the organization’s ability to utilize the resources. 5-7.

How is an organization’s possession of valuable and scarce resources related to the planning and formulation of its corporate-level strategy for enhancing its competitive advantages in the market?

The possession of valuable and scarce resources is closely related to the formulation of an organization’s corporatelevel strategy. When the primary concern of the strategy is the selection and positioning of the organization in a competitive market, valuable resources can provide special advantages over competitors. Valuable and scarce resources represent the uniqueness of a company. This suggests that the key to profitability is not doing the same thing as other companies but rather exploiting competitive advantages. Among several other factors, establishing competitive advantage involves formulating and implementing a strategy that exploits the uniqueness of a company’s portfolio of resources and capabilities. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A5-1. What kind of internal factors help managers determine whether a firm should emphasize the production and sales of a large number of low-priced products or a small number of high-priced products? The number of factors that can be discussed in answering this question is enormous. A few of the most important factors can be brought out by going through each functional area. For example, under marketing, a strong market research group may be able to identify the kinds of niches available to the products or services under consideration. In terms of finance, the production of a large number of low-priced products suggests a large capital-intensive manufacturing facility. It may be possible, however, to produce a few high-quality goods with a small amount of capital because the needed manufacturing facilities may be small, utilizing craft labor. R&D may be an important consideration also. In order to produce high-quality products, a fairly sophisticated applied R&D effort may be needed. An expensive engineering staff may be needed, in contrast, to design the assembly line needed to keep costs as low as possible for a low-priced product. The type of manufacturing system in place will, of course, be a dominant factor in choosing either approach. If the facilities are primarily job shops, for example, a plan to produce a large number of low-priced products would not be feasible in the short run. Costs would be extremely high because of the need for overtime and the lack of automated equipment. In terms of human resource management, a fairly unskilled and low-paid workforce cannot normally be expected to produce a high-quality product on old assembly line machinery. Either the workforce would need to be replaced or an extensive job training and job enrichment program would need to be established. Either approach costs both time and money. A5-2. Why should information systems be included in the analysis of a corporation’s strengths and weaknesses? Although not always considered a major part of the traditional, functionally organized business corporation, information systems have become very important to those corporations operating in a dynamic and complex environment. From a strategic management point of view, information systems are important because they can (1) provide a basis for analyzing early warning signals that originate both externally and internally and (2) provide the information necessary to make strategic decisions. To the extent that a corporation has a completely integrated information system, it is a strength that can provide a significant competitive advantage. Environmental scanning is more systematic with information dealing with strategic factors getting to corporate- and business-level planners and decision makers in a timely manner. A computerized information system can be used to develop a series of likely industry scenarios as well as a number of alternative strategies and implementation programs. Efficiencies coming

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from a well-integrated information system can also be shared with customers and suppliers, thus serving as a competitive weapon in a dynamic marketplace. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE Today, the primary means of information collection is through the Internet. Try the following exercise. 5-8. Form teams of around three to five people each. Select a well-known publicly owned company to research. Inform the instructor of your choice. 5-9. Assign each person a separate task. One task might be to find the latest financial statements. Another might be to learn as much as possible about its top management and board of directors. Yet another might be to identify its business model or its key competitors. Conduct research on the company using the Internet only. a. Apply the resource-based view of the firm to determine the core and distinctive competencies of your selected company. b. Use the VRIO framework and the value chain to assess the company’s competitive advantage and how it can be sustained. c. Understand the company’s business model and how it could be imitated. d. Assess the company’s corporate culture and how it might affect a proposed strategy. e. Scan functional resources to determine their fit with the company strategy. f. What would be your prediction about the future of this firm if it continued on its current path? 5-10. Would you buy stock in this company? Assume that your team has US$25,000 to invest. Allocate the money among the four or five primary competitors in this industry. List the companies, the number of shares purchased of each, the cost of each share as of a given date, and the total cost for each purchase assuming a typical commission used by an Internet broker such as E-Trade or Scottrade. 5-11. Meet with your team members to discuss what you have found. What are the company’s opportunities, threats, strengths, and weaknesses? Go back to the Internet for more information if needed. This is a good exercise to develop Internet research skills. The students are grouped into teams and asked to conduct research on a company of their choice by using only the Internet. By examining corporate websites (among other sources) for 10-K reports, proxy statements, and so on, the teams should be able to get a fairly good understanding of a firm’s strengths and weaknesses. An alternative approach to this assignment is for the instructor to assign a series of well-known companies to student teams for them to research. The instructor could, for example, select an industry for each team to analyze. (Each team would, of course, be assigned a separate industry.) Each team would then carry out the assignment as given in the textbook, but only on a firm that they can find within that industry. This is a good way to combine industry analysis with organizational analysis.

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CHAPTER SIX STRATEGY FORMULATION: BUSINESS STRATEGY This chapter is the first of three chapters dealing with the formulation of strategy. Following the strategic decisionmaking process introduced in Chapter 1 and depicted in Figure 1.5, these chapters emphasize steps 5(a), situation analysis of strategic factors; 5(b), the review and revision of a firm’s current mission and objectives; 6(a), the generation and evaluation of strategic alternatives; and 6(b), the selection and recommendation of the best alternative. Situation analysis is conducted using SWOT in the form of generating a Strategic Factors Analysis Summary (SFAS) matrix to summarize a corporation’s strategic factors and to help identify propitious niches. Once a corporation’s strengths, weaknesses, opportunities, and threats are identified, strategic managers should review and revise, if necessary, the mission and objectives before proceeding to developing feasible alternative strategies. The chapter then presents the matrix as one way of generating alternative corporate and business unit strategies by using strengths to capitalize on opportunities and/or working around weaknesses to avoid threats. Business strategies are explained in terms of competitive and cooperative strategies. Competitive tactics are also discussed. LEARNING OBJECTIVES 1. 2. 3. 4.

Utilize the SFAS matrix to examine business strategy and a SWOT diagram for presentation. Develop a mission statement that addresses the five elements of good design. Explain the competitive and cooperative strategies available to corporations. Identify the types of strategic alliances. TOPICS OUTLINE COVERED 1. A Framework for Examining Business Strategy a. Generating a Strategic Factors Analysis Summary (SFAS) Matrix b. Finding Market Niches 2. Mission and Objectives 3. Business Strategies a. Porter’s Competitive Strategies b. Cooperative Strategies 4. Strategic Alliances SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

6-1.

How does a hypercompetitive environment change the strategic approach for a company?

Hypercompetitive environments require companies to continue improving their competitive advantage through continuous improvement practices. D’Aveni contends that when industries become hypercompetitive, they tend to go through escalating stages of competition. Initially, firms compete on costs, then move out into untapped markets, and finally, raise barriers of entry so that no other players can join in the competition. 6-2.

Explain how our understanding of the three generic strategic approaches available to companies can be used to direct the efforts of all employees at those companies.

The three generic strategies include cost leadership, differentiation, and focused. Cost leadership is the ability of a company or business to design, produce, and market a comparable product more efficiently than its competitors. Differentiation is the ability of a company to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service. Focus is the ability of a company to provide unique and superior value to a particular buyer group. As strategies are defined, employees are able to shape their efforts toward operating efficiently, developing innovative products and systems, or understanding a niche market.

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6-3.

What industry forces might cause a niche to appear or disappear?

Newman’s argument for a propitious niche includes the implication that a corporation with such a niche will be successful so long as it fills that niche. This niche is the specific competitive role held by a corporation, division, or product/service. A propitious niche is one that is so well suited to the firm’s internal and external environment that competitors are not likely to challenge or dislodge it. In terms of automobiles, both Rolls Royce and Ferrari fill two very different niches in the industry. The key to answering this question is in understanding that a propitious niche exists not only because of environmental opportunities, but also because a company has the resources to take advantage of these opportunities. Therefore, a niche can disappear because of changes within a company as well as because of environmental changes. Some of the possible changes are: a.

b.

The environment/industry changes. The company/SBU continues to make its products or services, but the size of the market changes. 1)

Contracts. The market gets smaller because of factors beyond the control of the company/SBU. For example, the increasing price of gasoline in 2008 followed by a recession contracted the market for gas-guzzling, performance-oriented automobiles. The niche could then support only the strongest companies/SBUs. A similar pattern may occur as demand for electric vehicles outpaces demand for gas-powered models.

2)

Expands. The company/SBU, through its own efforts, not only fills a demand in the market but also causes the market to expand. Unless the company/SBU can manufacture sufficient products to meet growing demand or is able to defend a patented process (as Proctor & Gamble did with CrestFluoride toothpaste for years), profit opportunities will cause competitors with sufficient internal resources to join the niche. Such competitors may be stronger and drive the original company/SBU out of the market, thus causing it to lose its niche. The auto industry is likely to experience significant change as investment in electric vehicles changes the traditional power dynamics within the industry.

The company/SBU changes. The same market demand continues for specific products or services, but the company/SBU itself changes so that there is no longer synchronization between itself and the market. 1)

Contracts. Due to demands for resources elsewhere in the corporation, the company/SBU may be forced to cut back its activities. It is unable to satisfy market demand. Customers either leave the market by buying a substitute product or stay in the market by buying a competitor’s product. Such unfulfilled demand encourages competitors, which may drive the original company/SBU out of the niche.

2)

Expands. Its own success in the niche may cause the company/SBU to move into nearby niches. The need for resources in the battle for new niches may cause the company/SBU to take its original niche for granted. Small competitors may take advantage of the lack of concern by fighting to expand their piece of the market, thereby squeezing the company/SBU out of the original market and thus out of its niche.

If a company/SBU loses its niche, it is likely to become much less profitable unless it can find a new niche. The specifics of what might happen depend on how the company/SBU originally lost its niche. The possibilities for class discussion can be almost endless. 6-4.

What are the major sources of competitive advantages of an organization that can be effectively developed to support a cost leadership strategy for competing in the market?

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To answer this question, it is necessary for students to find out how an organization can strategize to lower its fixed costs, how it can attain an economy of scale, how it can avoid marginal customer accounts, etc. The major sources of competitive advantages that can be developed by adopting a cost leadership strategy are economies of scale, which refers to the cost saving attributed to decreased fixed costs per unit when the volume of production and sales increase; learning curve, which represents the cost saving attributed to the reduction of costs that arises as a result of fewer mistakes made and an improvement in problem solving due to the repetition of operations; and, last but not the least, technological improvement, which is the cost saving attributed to improved efficiency through an innovation of the production process. 6-5.

How can an organization develop a competitive advantage internally without the help of outsiders?

Competitive advantage can be developed internally through innovation. Innovation provides a basis for competing in the market. Examples of innovation within an organization include the development of new products, new packaging, new production processes, and new images that incorporate new ideas and new knowledge. Organizational innovation can ensure that competitive advantages developed through new ideas will have exclusive power and endowment, which will likely be sustainable. Also, as was discussed in Chapter 4, competitive advantage can be derived from maintaining a database of environmental trends and competitive activity. Fostering a mindset that keeps an organization open to risking a current advantage for a possible new advantage is yet another way to develop competitive advantage. 6-6.

Explain the importance of strategic alliances.

A strategic alliance is a cooperative relationship between two or more companies that involves the sharing or grouping of resources in pursuit of common goals. Increased market competition demands that organizations identify new opportunities to be able to enhance their competitive advantages. Many successful organizations prefer to pursue competitiveness in a collaborative way because it allows them to be more flexible and pool required resources. This also helps organizations bear research and development costs. Alliances allow companies to develop new capabilities and competencies by providing an alternative to diversification and, thus, facilitate the development of effective competitive strategies. This, in turn, helps the organizations enter new markets, quickly identify critical skills, and provide additional support where needed. Students should also note that since alliances are based on a learning curve, they are mostly temporary in nature and can be dissolved once the aim or objective has been achieved by the parties involved. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A6-1. How can a company overcome the limitations of being in a fragmented industry? As pointed out in the text, a fragmented industry is an industry with many small- and medium-sized companies competing for relatively small market shares. No one firm or group of firms is able to dominate the industry in any way. Businesses tend to be local and oriented to market segments. This may occur because the industry is relatively new and based on a product in the early stage of its product life cycle. Entry barriers are probably low and new entrants are constantly moving into the industry as others leave or go bankrupt. If there are few economies to be gained from size or no one design ever reaches the point of consumer acceptance, the industry may remain in this stage indefinitely. Often, however, the trick to becoming a successful firm in this kind of industry is to find the key to standardization that allows economies. Domino’s Pizza achieved success in fast food by providing standardized pizza throughout North America and by guaranteeing delivery time faster than competition. Before Pizza Hut and Domino’s settled upon standardized pizza appealing to a wide variety of tastes across North American, the pizza business was a fragmented industry characterized by many small pizza “parlors” serving small market segments in cities throughout North America— thus the development of “Chicago-style” and “New York–style” pizzas, which are now available throughout North America.

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SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE Select two publicly owned companies within a particular industry and perform a comparative SWOT analysis for them. INDUSTRY: _______________________________________________________________________ Companies: _______________________________________________________________________ Strengths: ________________________________________________________________________ Weaknesses: ______________________________________________________________________ Opportunities: _____________________________________________________________________ Threats: __________________________________________________________________________ Select an industry to analyze. Identify companies for each of Porter’s four competitive strategies. How many different kinds of differentiation strategies can students find? This strategic practice exercise challenges students to list companies that illustrate cost leadership, differentiation, cost focus, and differentiation focus competitive strategies. The class will normally be able to identify companies that follow a broad-scope cost leadership strategy based on their well-advertised low prices. Walmart and Southwest Airlines are well-known examples of such companies. Students should also be able to think of companies following a broad-scope differentiation strategy. Examples of these are Procter & Gamble, Nordstrom, BMW, and Apple. However, students will typically have greater difficulty in identifying companies that follow either of the focus strategies. Many of these companies are local or regional and are not as well-known as the national and international firms using a broad-scope strategy. After some effort, students should be able to list a few well-known firms that use differentiation focus. These may be firms such as Ferrari, which makes and sells luxury cars; Midamar Corporation, which offers halal foods that are processed in accordance with Islamic law; or Nickelodeon, which provides cable television programs for children. Identifying firms that follow a cost focus competitive strategy is much more difficult. Manufacturers of store brand products, such as PotlachDeltic Corporation or Dean Foods, are not as wellknown as Procter & Gamble or Colgate-Palmolive, but they are just as important to U.S. grocery store sales. Local manufacturers or retail stores that emphasize a narrow product line to keep costs down may be good examples of companies that follow such a strategy.

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CHAPTER SEVEN STRATEGY FORMULATION: CORPORATE STRATEGY This chapter focuses on formulating strategy at the corporate level. Corporate strategy deals with the three key issues facing the corporation as a whole: (1) the firm’s overall orientation toward growth (directional strategy); (2) the industries or markets in which the firm competes through its products and business units (portfolio strategy); and (3) the manner in which management coordinates activities, transfers resources, and cultivates capabilities among product lines and business units (parenting strategy). Directional strategy is composed of growth, stability, and retrenchment. Vertical and horizontal integration as well as concentric and conglomerate diversification are discussed as examples of corporate growth strategies. International entry strategies are also listed as growth strategies. Portfolio analysis is explained as a technique for managing various product lines and business units for their maximum cash flow. Corporate parenting is a resource-based approach, which attempts to use capabilities found in various parts of the corporation to generate synergies across these units. LEARNING OBJECTIVES 1. 2. 3. 4.

Explain the three key issues that corporate strategy addresses. Apply the directional strategies of growth, stability, and retrenchment to the organizational environment in which they work best. Apply portfolio analysis to guide decisions in companies with multiple products and businesses. Develop a parenting strategy for a multiple-business corporation. TOPICS OUTLINE COVERED 1. Corporate Strategy 2. Directional Strategy a. Growth Strategies b. Controversies in Directional Growth Strategies c. Stability Strategies d. Retrenchment Strategies 3. Portfolio Analysis a. BCG Growth-Share Matrix b. Advantages and Limitations of Portfolio Analysis c. Managing a Strategic Alliance Portfolio 4. Corporate Parenting a. Developing a Corporate Parenting Strategy b. Horizontal Strategy and Multipoint Competition SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

7-1.

List the means available to a company for horizontal growth and explain why a company might pursue one over another.

A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by increasing the range of products and services offered to current markets. Horizontal growth can be achieved by internal development or externally through acquisitions and strategic alliances. Depending on the company’s comfort with risk as well as the resources they have available, a company may select any of these strategies for horizontal growth. 7-2.

Evaluate the types of retrenchment strategies that might be used by companies in stagnant industries.

Retrenchment refers to reducing the company’s level of activities. A turnaround strategy emphasizes the improvement of operational efficiency and is probably the most appropriate when a company’s problems are

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pervasive but not yet critical. A captive company strategy involves giving up independence in exchange for security. A company with a weak competitive position may not be able to engage in this strategy. The sell-out/divestment strategy makes sense if management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. Bankruptcy involves giving up the firm to the courts in return for some settlement of the corporation’s obligations. Finally, liquidation is the termination of the firm all together. 7-3.

How is a diversification strategy related to the sustainable growth and development of an organization?

The main purpose of a diversification strategy is to seek potential for sharing, extending, and transferring resources and capabilities between various businesses within the same group, both vertically and horizontally. Some of the most important sources of value creation within a diversified company include the ability to apply common general organizational resources while building on skills to carry out different businesses and the ability to integrate the operations of such businesses to effectively develop corporate competitiveness. Apple is an example of a company that employed a diversification strategy. It initially focused on PCs but, seeing the growth potential in other areas related to its core business, it diversified its portfolio to include mobile devices. Similarly, the Virgin Group broadened its business from only music production to travel and mobile devices. 7-4.

What are the major factors that an organization needs to analyze before it can consider entering a foreign market?

When an organization considers entering a foreign market, it needs to analyze the attractiveness of the foreign market as well as its own potential to establish a competitive advantage in that market. Whether an entry strategy will be successful or not depends on the organization’s ability to transfer its resources and capabilities to the new market and its effectiveness at extending its competitive advantage externally. The major factors that an organization needs consider when entering a foreign market include analyzing and assessing the political, sociocultural, economic, and technological environments. These factors will influence the organization’s choice of entry strategy, foreign staffing policy, supply chain management, international foreign exchange and fund management, and global sourcing arrangement. With regard to an international entry strategy, a company must focus on both internal and external growth.

7-5.

Is stability really a strategy or just a term for no strategy?

An argument can be made that stability is not really a strategy in itself, but is just a pause between strategies. Because one way to view strategy is as a direction the corporation is taking in order to reach its objectives, standing still has no direction and thus is not a strategy. The text takes the position, however, that stability is a strategy in itself. Just as no decision is the same as making a decision, it is argued that even though stability may be viewed as not choosing a strategy, it is therefore a strategy by default. Stability may be a very appropriate long-term strategy for a small business in which the owner/manager does not want the corporation to grow beyond his/her abilities to manage it personally and is very happy with the level of lifestyle the business provides. Typically, however, stability is perceived only as a viable short-term strategy while strategic managers are waiting for key factors needed for growth to fall into place. Nevertheless, to the extent that stability helps explain the movement of a corporation toward its objectives, it deserves to be called a strategy. 7-6.

How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in a global industry?

The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer. According to the text, portfolio analysis attempts to answer the following two questions: •

How much of our time and money should we spend on our best products and business units in order to

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ensure that they continue to be successful? •

How much of our time and money should we spend developing new costly products, most of which will never be successful?

The basic theme of portfolio analysis is its emphasis on cash flow. Portfolio analysis puts corporate headquarters into the role of an internal banker. In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects to get a profitable return. The product lines/business units form a portfolio of investments that top management must constantly juggle to ensure the best return on the corporation’s invested money. Corporate parenting attempts to answer two similar, but different, questions: •

What businesses should this company own and why?

What organizational structure, management processes, and philosophy will foster superior performance from the company’s business units?

Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by managing business units for cash flow, that is, by using cash generated from mature units to build new product lines. Unfortunately, portfolio analysis fails to deal with the question of which industries a corporation should enter or with how a corporation can attain synergy among its product lines and business units. As suggested by its name, portfolio analysis tends to primarily take a financial point of view and views business units and product lines as if they were separate and independent investments. Corporate parenting, in contrast, views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units. The central job of corporate headquarters is not to be a banker, but to coordinate diverse units to achieve synergy. This is especially important in a global industry in which a corporation must manage interrelated business units for global advantage. Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse product lines/business units to achieve better overall corporate performance. It is different in that it is an approach to organizational learning that aims to disseminate knowledge and competencies throughout the organization. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A7-1. How does transaction cost economics apply to vertical growth? To concentric versus conglomerate diversification? Transaction cost economics is especially applicable to the question of vertical growth versus outsourcing (i.e., the classic make-or-buy decision). It argues that vertical growth is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great. The transaction costs become too great when the transactions (a) involve a high level of uncertainty, (b) involve highly specialized assets, and (c) must occur frequently. However, when highly integrated firms become excessively large and bureaucratic, the costs of managing the internal transactions may become greater than simply purchasing the goods on the open market, thus justifying outsourcing over vertical growth. The second part of the question is a “mind stretcher.” Because the text does not apply transaction cost economics to either concentric or conglomerate diversification, this question really forces the student to do some original thinking. Transaction cost economics might suggest that diversification of any kind is more efficient than just concentrating in one industry when the costs of one firm’s operating in two industries are lower than the summed costs of two separate firms. This phenomenon can occur when synergies exist to provide economies of scale or scope. Given that such synergies are more likely to exist when a firm engages in concentric diversification, transaction cost economics would propose that concentric diversification should be generally more efficient than conglomerate diversification. (Try this question out on your grad students to see what they can do with it!)

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A7-2. Must a corporation have a common thread running through its many activities in order to be successful? Why or why not? The concept of a corporate mission implies that throughout a corporation’s many activities, there should be a “common thread” or unifying theme, and that those corporations with such a common thread are better able to direct and administer their many activities. This is one way to achieve a “strategic fit” so that overall corporate effectiveness and efficiency are achieved. There are, however, a number of corporations that do not have a common thread connecting their divisions, yet are successful. These corporations are often referred to as conglomerates because they are an assemblage of separate firms having different products in different markets but operating together under one corporate umbrella. Operating in effect as holding companies, they typically have no real common thread other than return on investment (i.e., financial synergy). General Electric and Berkshire Hathaway are just two of the many examples of successful conglomerates. They can be very successful because their operations in many diverse businesses allow them to spread their risks over many different markets. Just as the common thread concept implies a heavy marketing orientation, the conglomerate approach implies a heavy finance orientation. The lack of concern for a common thread enables a conglomerate to acquire and sell off divisions without regard to any synergy other than financial. Corporate strategy makers are thus able to focus entirely on ROI. They need only to involve themselves in divisional (business) strategies to the extent that funds are requested to support the strategies. The problem with this approach, however, is that corporate top management may not understand divisional problems in any sense other than financial and is thus strongly tempted to sell off troubled divisions rather than help them recover. Although General Electric is a conglomerate, its outstanding pool of executive talent enables it to transfer core competencies from one division to another. It is an excellent example of using parenting strategy to boost the performance of seemingly unrelated SBUs. One could therefore conclude that a common thread is not necessary for corporate success, especially if one has a distinctive competency in managing diverse businesses. A7-3. What is the value of portfolio analysis? Its dangers? Portfolio analysis is a popular approach to aid the integration and evaluation of environmental data. It is just as useful for a single business corporation with a number of separate products as it is for a large corporation with autonomous operating divisions. By carefully examining both market or industry factors and business strengths or market share, it is possible to pinpoint factors of strategic importance to corporate or divisional success. Portfolio analysis thus serves as a convenient technique for comparing external opportunities and threats with internal strengths and weaknesses. The advantages and limitations of portfolio analysis are listed in the chapter.

A7-4. What concepts or assumptions underlie the BCG growth-share matrix? Are these concepts valid? Why or why not? The product life cycle and the experience curve underlie the BCG growth-share matrix. The development of question marks into stars and then into cash cows suggests the introduction, growth, and maturity stages of the product life cycle. Dogs appear to be those products or units on the decline stage of the product life cycle. The experience curve discussed in Chapter 5 is certainly key to understanding the implications of the BCG matrix. The experience curve is based on the idea that unit production costs decline by some fixed percentage as the accumulated volume of production in units doubles. In order to make a question mark product a star, the suggested manufacturing strategy is to build capacity ahead of demand in order to achieve the lower unit costs that develop from the experience curve. On the basis of some future point on the experience curve, the idea is to price the product very low to preempt competition and quickly increase market demand and thus market share. The resulting high number of units sold and high market share should result in high profits when overall market growth slows and the company reduces its investment in the product—thus a cash cow is born. Both of these concepts are well known and useful ways to conceptualize the useful lives of specific products and of the relation of unit costs to volume. Unfortunately, they lose some of their value when they are taken too much at face value and generalized too far. Different products have different product life cycles. What applies to one product

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will probably not apply to another. Examples can be shown of companies that have supported their products to extend their lives by “putting a tail” on the maturity part of the product life cycle. The experience curve of the industry as a whole or of one company might not hold true for a particular company. The experience curve does not “just happen”—a firm has to invest a lot of time and money into getting that experience. The trend toward computerized robot technology and flexible manufacturing means that learning times (and thus experience time) are becoming shorter and products can now be economically manufactured in small, customized batches instead of in large assembly line production. This potential quick movement down the experience curve, coupled with the ability to target an increasing number of market niches, may mean that the strategy of building large mass-production facilities ahead of demand may be doomed to failure. Future market share may be composed of a series of market segments, each with their own specialized (and thus low volume) product. In this instance, the prescriptions of the BCG matrix will not be useful and may in fact hurt a company if applied as given. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE What is the future of electronic publishing? After a brief summary of the publication of the first Internet book, Stephen King’s Riding the Bullet, this exercise asks students to form into small discussion groups to discuss the future of Internet publishing. The exercise proposes some questions as discussion guides, such as what are the pros and cons of electronic publishing? The issue of electronic publishing is an important one for the publishing industry. It has the potential to affect newspapers, periodicals, and books. It is already changing the music industry. For a publisher, its corporate strategy must include the Internet. One could use parenting strategy to assess the fit of a new Internet business unit with a publisher’s more traditional print-oriented units. It appears that the fit between parenting opportunities and parenting characteristics may be high. There are many Internet opportunities to disseminate knowledge, and the parent has access to the copyrighted knowledge that is desired by the marketplace. Unfortunately, there appears to be a high likelihood of a mismatch between the strategic factors and the parenting characteristics. Computerization is a strategic factor for Internet businesses, but has been traditionally unimportant for the traditional publisher. For one thing, most of the publishing houses’ backlists are not computerized. Even for their current lists of books, every publisher uses its own combination of packaged and in-house software. As a result, there are probably 2,000 different formats in use for storing books electronically. This is compounded by the fact that most publishers outsource printing to specialized printers who use their own software with specialized formatting. Moving to electronic publishing could be viewed as part of a horizontal growth strategy. As defined in the chapter, horizontal growth can be achieved by expanding a firm’s products into other geographic locations and/or by increasing the range of products and services offered to current markets. It could easily be argued that the Internet is just another distribution channel for a company’s current products. The problem with this view is that some items may do well on the Internet, whereas others may not. The issue is which items should be made Internet-accessible? Currently, most people do not like reading on their computer screens. Products are being invented that may overcome that resistance. Nevertheless, paper books have many advantages over electronic books. This becomes very clear when students are asked to decide if their textbooks should be electronic or in paper form. They should first understand that there is, thus far, no real financial savings for buying an electronic over a paper book. Consider that the typical cost of an electronic textbook is about the same as that of a used textbook. Even if the cost of the e-book is slightly less than that of a used paper book, the paper book has some resale value, whereas the e-book has none. The mystery writer Patricia Cornwell proposed that e-books will not replace paper books. She states, “I see it as an enhancement to the library—a more portable way to have your library with you… Imagine if you could carry all your textbooks to class in a little handheld computer.” (“Patricia Cornwell on E-Books,” PC Magazine, August, 2001, p. 30.) Jason Ohler, in his article, “Taming the Technological Beast,” (in the January–February 2001 issue of The Futurist) proposes a useful exercise to evaluate a new technology. He asks students to assume that they are employed by a fictitious Science and Technology Administration and that their job is to analyze the effects of a technology before it is released to the public. He applies his analytical approach to the e-book. Ohler points out, “The e-book is a

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splendidly mysterious and engaging technology because of its wild-card status. It continues some traditions, modifies others, creates entirely new ones, and in general promises to wreak a slow havoc on life as we know it.” He sums up the advantages and disadvantages in a chart on page 19 of the January–February 2001 issue of The Futurist. Among the e-book advantages are: environmentally friendly, easier to carry, personalizes the reading experience, easier to swap, harder to censor, and more adaptable to different reading styles. Its disadvantages include the need for an expensive technological infrastructure, increased eyestrain, increased expenses, sacrificed depth for breadth of experience, more difficulty in enforcing copyrights and compensating authors, and displaced workers in traditional publishing.

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CHAPTER EIGHT STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE This chapter is the last of three dealing with the formulation of strategy. It reconnects with the resource-based view of the firm presented in Chapter 5 by discussing the importance of core and distinctive competencies to competitive advantage and corporate growth. The chapter discusses functional strategies in the areas of marketing, finance, R&D, operations, purchasing, logistics, human resources, and information systems. The chapter also provides criteria for deciding if specific functional activities should be provided internally or outsourced. It discusses strategy selection in terms of corporate scenarios, attitudes toward risk, external and internal pressures, as well as the needs and desires of key managers. After presenting ways to improve strategic choice, the chapter ends with the development of policies to fit the strategy. LEARNING OBJECTIVES 1. 2. 3. 4.

Discuss the impact that the various types of functional strategies have on the achievement of organizational goals and objectives. Explain which activities and functions are appropriate to outsource/offshore in order to gain or strengthen competitive advantage. List and explain the strategies to avoid. Construct corporate scenarios to evaluate strategic options. TOPICS OUTLINE COVERED 1. Functional Strategy a. Marketing Strategy b. Financial Strategy c. Research and Development (R&D) Strategy d. Operations Strategy e. Purchasing Strategy f. Logistics Strategy g. Human Resource Management (HRM) Strategy h. Information Technology Strategy 2. The Sourcing Decision: Location of Functions 3. Strategies to Avoid 4. Strategic Choice: Constructing Scenarios a. Constructing Corporate Scenarios b. The Process of Strategic Choice 5. Using Policies to Guide Strategic Choices SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

8-1.

How can an operations strategy be used to understand and exploit a particular product offering?

The operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources, and relationships with suppliers. Each of these details can be exploited in terms of strategic implementation, allowing for competitive advantage. 8-2.

How are corporate scenarios used in the development of an effective strategy?

Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment. The results of a detailed scenario construction should be anticipated net profits, cash flow, and net working capital for each version.

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8-3.

Explain how functional strategies can support an organization’s corporate strategy.

Functional strategies are related to organizational functions such as marketing, finance, human resources, production, and research and development. They support the organization’s corporate-level strategy by providing a direction for the short-term activities required by each functional area to meet the goals established in the corporatelevel strategy. Functional strategies also provide some operational frameworks for an organization to implement its corporate and business strategies effectively. 8-4.

Why is it important for strategic planners to pay particular attention to planning and implementing a pricing strategy in a competitive market?

The setting of competitive pricing is a type of functional strategy that can have a direct impact on profits, affect the image of the brand, and determine the type of customer and competition the organization will attract. Pricing is very important because market competition is getting increasingly stronger. The Internet has become a very powerful tool for consumers to effectively compare prices; thus, people are much smarter about spending than they were before. Consumption patterns have changed significantly and concern about value for money has become a common philosophy for most consumers. The major concerns for strategic planners are the analyses of the external and internal environments, the planning of appropriate business strategies, and then the execution, control, and evaluation of these strategies. Pricing is a key factor for balancing these major concerns. 8-5.

How does mass customization support a business unit’s competitive strategy?

Mass customization is an operations functional strategy. According to the text, mass customization requires flexibility and quick responsiveness. Appropriate for an ever-changing environment, mass customization requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it. The result is low cost, high quality, customized goods and services. Mass customization is one way to support a differentiation strategy in a hypercompetitive market in which customers are demanding a highly differentiated product at a reasonable price. The customer is primarily interested in purchasing a product designed to its own specifications and delivered where and when it needs them. Even though price may be secondary to specific product characteristics, it cannot be significantly higher than the price for a mass produced good. 8-6.

Identify the common signs that an outsourcing strategy has not been executed effectively.

There are many common signs which indicate that an outsourcing strategy is not implemented effectively. First, there are some outsourcing activities that should not be outsourced, especially those which belong to the core business of the organization. Next, some outsourcing activities involve wrong vendor selection as well as a poor write-up of the outsourcing contract. From time to time, personnel issues such as staff redundancy are overlooked. Last but not the least, there are hidden costs associated with outsourcing and the failure to plan the end of an outsourcing arrangement. (Note: Signs of incorrect outsourcing can lead to a discussion on the consequences that such policies can have). 8-7.

What is the relationship of policies to strategies?

Generally speaking, the text views policies as the link between strategy formulation and implementation. They are the broad guidelines to be used in the implementation of strategy. The text takes the position that the dividing line between formulation and implementation is the difference between the planning activities of formulation and the action-oriented activities of organizing, directing, and controlling. Because the development of policies primarily involves planning, not action, policies more properly belong within strategy formulation. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A8-1. What are the pros and cons of technological leader versus technological follower as a functional

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strategy? This question is related to the earlier question about first versus late movers. The technological leader strategy is a functional strategy necessary for a company to be a first mover in an industry. R&D can help a company to pioneer an innovation and reap the first mover advantages. The leader strategy is normally expensive. In contrast, the technological follower strategy can be fairly cheap. This functional strategy is appropriate for those firms choosing to reap the benefits of late movers. A8-2. What are the advantages and disadvantages of the devil’s advocate, dialectical inquiry, and consensus approaches to making strategic choices? Research generally indicates that either the devil’s advocate or dialectical inquiry methods are superior to consensus in decision making. The drive-in consensus to get everyone to agree on an alternative can result in “groupthink”—a situation when all try to overcome their personal reservations in order to show unanimity and be a team player even if the alternative chosen is defective. On the positive side, however, consensus results in a positive team approach to implementation. Both devil’s advocate and dialectical inquiry are conflict-oriented and can create problems in implementation. Nevertheless, both work to ensure that an alternative is critically evaluated before agreement is reached. Both need to be set up in advance of the discussion. In the case of the devil’s advocate, one person or group is assigned the task of finding everything wrong with a particular alternative. The advocate must propose nothing, but only criticize the alternative in question. In contrast, dialectical inquiry requires two separate proposals be developed. Both sides must defend their own alternative and attack the alternative presented by the other. The limitations of the devil’s advocate are as follows. (a) Only one proposal is presented. It is either accepted or rejected. Thus, participants don’t have an opportunity to compare the alternative under consideration with another possibility. (b) Because the devil’s advocate defends nothing, the person(s) taking this position may be criticized for “taking cheap shots” at an alternative everyone likes and may hesitate to continue the attack in the face of group pressure. Thus, the devil’s advocate must have the strong support of the leader of the group in order to be effective. The limitations of dialectical inquiry are as follows. (a) Two people or groups must spend much time preparing their position for debate in front of an audience. The emphasis may turn to presentation skills and “scoring points” over serious analysis. (b) The win–lose nature of this approach may create ill feelings and conflict among participants. Thus, people on the losing side may find difficulty joining the “winners” in implementing the alternative chosen.

A8-3. Should functional strategies be categorized under strategy formulation or under strategy implementation? The answer to this question depends upon one’s position in the hierarchy of strategy. At the top management level of a corporation, both divisional (business-level) and functional strategies could be viewed as ways of implementing corporate strategy. For example, suppose a corporation decides to concentrate on one industry as its corporate growth strategy. This strategy would need to be implemented by a business strategy oriented to improving the company’s competitive position. The same can be said of functional strategy. Strategy formulation and implementation can be interchangeable terms based on one’s location in a corporate hierarchy. This text categorizes all strategies under the heading of strategy formulation because of their common planning orientation. Implementation begins when one moves from planning into organizing and directing activities. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE Analyze eBay’s situation. What do you believe eBay’s core issues are? Which marketing strategy was eBay following: market development or product development? Do you agree with it? What decision-making process should the CEO utilize to make the decisions necessary to address the company’s product, customer approach, and business model going forward? What do you believe eBay’s core issues are? As CEO, Meg Whitman spent $6 billion to significantly expand the

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company through a series of acquisitions such as Skype, PayPal, StubHub, Rent.com, Shopping.com, StumbleUpon, and a 25% interest in Craigslist. Over the next decade, the company experienced ups and downs. One highlight was the spinoff of PayPal in 2015. However, by 2016, eBay’s core unit faced formidable competition from both niche sites and Amazon raising questions as to whether the company could continue to grow. In 2019, eBay announced that it was considering selling its StubHub unit. By 2020, revenues had fallen, and the number of active buyers had dropped substantially. (All of this information is presented in the case exercise.) These are symptoms of an underlying problem. Encourage students to dig for the underlying problem. Was Whitman wrong to expand the range of eBay’s products through acquisition? Although PayPal was an example of vertical growth, the rest of the acquisitions were either horizontal growth or concentric diversification. A good argument can be made that although each of these acquisitions looked appealing, they were too many, too soon. Management appears to have been distracted by new business growth opportunities, took its eye off its core business, and was unable to integrate the new businesses with the old. Whitman and her team probably assumed that eBay’s lead in Web auctions was sustainable without much reinvestment and thus wasted time and money on other ventures. This mistake has been made by many other companies, most notably by Sears Roebuck when it acquired insurance and real estate businesses instead of investing in its retail stores. Which marketing strategy was eBay following: market development or product development? Do you agree with it? Using a market development strategy, a company or business unit can (1) capture a larger share of an existing market for current products through market saturation and market penetration or (2) develop new uses and/or markets for current products. Using the product development strategy, a company or unit can (1) develop new products for existing markets or (2) develop new products for new markets. Aside from PayPal, eBay appeared to follow a product development strategy by acquiring new businesses whose services it could sell to its existing Web auction market. Because the company seemed to dominate the Internet auction market in 2007, market development probably did not make sense at the time as a way to increase sales or profits. There is a lesson here. Although product development seemed to make sense, it should have been done in a more careful and deliberate manner, always keeping an eye on the primary business to make sure competitors weren’t taking bites out the company’s market share. What decision-making process should the CEO utilize to make the decisions necessary to address the company’s product, customer approach, and business model going forward? The usual retrenchment tactics of cutting expenses by laying employees off and divesting recently acquired businesses may not be the smartest approaches. Following the information provided in the chapter, it would make sense for the CEO to call together the top management team for a day-long meeting on identifying eBay’s underlying problems and generating alternative solutions. Once some alternatives are generated, the CEO could use dialectical inquiry to form teams tasked to present the pros and cons of each alternative at a meeting one week in the future. Once all the alternatives are discussed, the top management team would be forced to decide the best alternative. This would be the best way to get all the managers to “buy into” the recommended solution and work hard to accomplish it.

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CHAPTER NINE STRATEGY IMPLEMENTATION: GLOBAL STRATEGY This chapter specifically addresses the question of how and when to expand operations beyond the borders of the company’s home country. Some of the popular options for international entry are: exporting, licensing, franchising, forming a joint venture, acquisitions, greenfield development, production sharing, turnkey operations, BOT concept, and management contracts. A multinational corporation (MNC) is a highly developed international company with a deep involvement thought the world, plus a worldwide perspective in its management and decision making. This approach works best when the industry has moved from being multidomestic to global. Strategic alliances between an MNC and a local partner are becoming increasingly popular as a means by which a corporation can gain entry into other countries. Corporations operating internationally tend to evolve through five common stages. The stages of international development are: stage 1—domestic company, stage 2—domestic company with export division, stage 3—primarily domestic company with international division, stage 4—multinational corporation with multidomestic emphasis, and stage 5—MNC with global emphasis. Nearly 80% of midsize and larger companies send some of their employees abroad as expatriates. The three most widely used techniques for international performance evaluation are ROI, budget analysis, and historical comparisons. LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Describe the means of entry by which an organization can do business in another country. Explain the elements of International Strategic Alliances that lead to success. Discuss the stages of International Development. Explain how companies can improve their staffing efforts as they expand beyond their home country. Discuss the unique issues related to Measuring Organizational performance that are presented with the administration of a truly international company. TOPICS OUTLINE COVERED 1. International Entry 2. International Coordination a. International Strategic Alliances 3. Stages of International Development 4. International Employment 5. Measurement of Performance

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 9-1.

What are the nine means by which a company can enter a new international market?

A corporation can select from several strategic options regarding the most appropriate method for entering a foreign market or establishing facilities in another country. Some of the most popular options for international entry are as follows: exporting, licensing, franchising, forming a joint venture, acquisitions, greenfield development, production sharing, turnkey operations, BOT concept, and management contracts. 9-2.

What are the advantages of using a Strategic alliance when operating in a new country?

Strategic alliances, such as joint ventures and licensing agreements, are a popular means by which a corporation can gain entry into other countries. The key to successful implementation is the selection of the local partner. Strategic alliances reduce the risk by partnering with experts in the new country. It is a quick method of obtaining local management, and it reduces the risk of expropriation and harassment by host country officials. It may also enable a firm to enter a country that restricts foreign ownership.

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 9-3.

What are the stages of International Development?

Stage 1 (Domestic company)—it exports some of its products through local dealers and distributors in the foreign countries. The impact on the organization’s structure is minimal. Stage 2 (Domestic company with export division)—success in stage 1 leads the company to establish its own sales company with offices in other countries. Stage 3 (Primarily domestic company with international division)—the company establishes manufacturing facilities in addition to sales and service offices in the foreign country. Stage 4 (Multinational corporation with multidomestic emphasis)—the company is a full MNC and increases its investments in other countries. Stage 5 (MNC with global emphasis)—the most successful MNCs move into this stage in which they have worldwide human resources, R&D, and financing strategies. 9-4.

How can an expat program be improved to the benefit of the organization?

There are several recommendations for improving the expatriation process. Have a compelling reason for sending a current employee to a new country. Choose individuals who are open to the assignment and committed to adapt to the new environment. Assign sponsors/mentors in both the home country and the new country. Develop a means of maintaining very open, frequent communication throughout the assignment. Design a plan for repatriation. Craft an approach for sharing the experiences. 9-5.

Why is strategic flexibility important for strategy formulation when an organization is at the growth stage?

A fast rate of change and the difficulty of predicting changes are common phenomena in growing organizations. When an organization is at its growth stage, developing innovation is the basic source of competitive advantage. A formal approach to strategy formulation that is based primarily on forecasting needs to be reconsidered. The adoption of strategic flexibility can combine a clear sense of direction based on the vision and mission of the organization with the adaptability needed to respond to and take advantage of new market opportunities. Strategic flexibility can be effectively utilized by organizations as both an offensive and a defensive measure, depending on the nature of the changes and their impact on the organization.

ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A9-1. Japanese corporations typically involve many more organizational levels and people in the development of implementation plans than do U.S. corporations. Is this appropriate? Why or why not? Although the text does not discuss Japanese practices in this chapter, they have received a lot of attention from the press in terms of quality circles, participative decision making, and the like. Bill Ouchi, in his book Theory Z, points out that the Japanese “ringi” process involves circulating a formal proposal throughout an organization for approval at every level before the decision is made. In American terms, it may seem to take the Japanese forever to make a decision. This results from the Japanese managers’ desire to involve those who will implement the decision in the initial formulation of strategy. Western strategy makers, by contrast, tend to make key decisions at the top (with some input from below as requested) and assume that it will be accepted without criticism and implemented appropriately. Implementation plans may thus be drafted rather generally by top management and given to lower level managers to “flesh out” the required plan of action. Arguments for and against the Japanese-style participative approach to implementation planning tend to boil down to the question of tradeoffs. Which is most important in a particular situation: time or commitment? It also brings up another question: how much consideration should be given to implementation questions when formulating strategy? The Japanese method appears to see less of a distinction between strategy formulation and implementation. Rather, the two tend to be handled together in the planning stages. This is done because the Japanese tend to involve more

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corporate levels in the formulation process and thus cannot ignore implementation issues. In the United States, these issues might be ignored because top management might consider itself to be “responsible” for strategy formulation decisions.

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CHAPTER TEN STRATEGY IMPLEMENTATION: ORGANIZING AND STRUCTURE Following the basic management functions of planning, organizing, directing, staffing, and controlling, the text views strategy formulation as primarily composed of planning activities, strategy implementation as primarily composed of organizing, directing, and staffing activities, and evaluation and control as primarily composed of controlling activities. This chapter begins by specifying who implements strategy and what must be done (e.g., programs, budgets, and procedures). It proposes a matrix of change to assess the impact new programs will have on an organization’s current activities. It stresses the importance of finding synergy among organizational activities. The rest of the chapter emphasizes organizing activities by looking closely at the design of organizations and jobs. Chandler’s proposition that structure follows strategy is explained in terms of stages of corporate development. The chapter also explains the organizational life cycle and what happens when corporations go into decline. Building on the discussion of basic organization structures in Chapter 5, this chapter presents three advanced designs of the matrix, the network (or cluster), and the cellular/modular structure. Reengineering, six sigma, and job design are explained as implementation methods. LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Describe the major issues that impact successful strategy implementation. Explain how you would develop programs, budgets, and procedures to implement strategic change. List the stages of corporate development and the structure that characterizes each stage. Explain how matrix, network, and modular structures are used to implement strategy. Discuss the issues related to centralization versus decentralization in structuring organizations. TOPICS OUTLINE COVERED 1. Strategy Implementation a. Who Implements Strategy? 2. What Must Be Done? a. Developing Programs, Budgets, and Procedures b. Achieving Synergy 3. How Is Strategy to Be Implemented? Organizing for Action a. Structure Follows Strategy b. Stages of Corporate Development c. Organizational Life Cycle 4. Flexible Types of Organizational Structure a. The Matrix Structure b. Network Structure—The Virtual Organization c. Cellular/Modular Organization: A New Type of Structure? 5. Reengineering and Strategy Implementation a. Six Sigma b. Designing Jobs to Implement Strategy c. Centralization versus Decentralization

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 10-1. How do timing tactics impact the strategy implementation efforts of a company? A timing tactic deals with when a company implements a strategy. Some companies are first movers, or pioneers. By being first movers, companies are able to establish a reputation as an industry leader, move down the learning curve to assume the cost leader position, and earn temporarily high profits. Late movers may be able to imitate the technological advance of others, keep risks down by waiting until a new technological standard is established, and

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take advantage of market segmentation. 10-2. What issues would you consider to be the most important for a company that is considering the use of a functional structure? One of the most important issues when utilizing a functional structure is leadership. The leader of the organization must be ready to share leadership with the functional directors whom he or she enlists. Functional structures often work well at Stage II, when companies focus their efforts in one industry. 10-3.

Why are staffing decisions considered an important component of strategic planning and the management process? How is the strategy implementation process connected to the decisions resulting from a staffing strategy?

Staffing decisions are an important component of the strategic formulation and implementation process. They need to be in line with an organization’s business strategy, and organizational leaders must fully understand the relationship between business strategy and staffing decisions. Some organizations have formal strategic plans while others do not. Yet, all organizations need to achieve a specific set of goals, and they have planned actions that they will undertake in their effort to enhance organizational performance. This improvement in organizational performance will depend on their having the right people in the right jobs at the right times to meet rapidly changing organizational requirements. Identifying future staffing needs is an important prerequisite for implementing business strategy. Staffing decisions must focus on the business environment by identifying the implications of staffing on the business environment. 10-4.

Why is it necessary for an organization to align its managers with its corporate strategy to ensure better organizational performance?

Research suggests that firms that align the profiles of their managers with the requirements of their strategies perform significantly better than firms where such an alignment is absent. The importance of a strategy-manager match suggests that the range of decision-making options available to the organization is determined by a combination of environmental, organizational, and leadership quality factors. The strategy-manager match can help the process of strategy formulation and implementation because these are affected by the personalities of senior managers. This approach represents the organization’s adaptation to the shifting requirements of the environment by using an effective staffing policy based on a match between managers and strategies. Is downsizing a good strategy for revamping an organization’s competitiveness when it is facing major competitive threats in the market? Retrenchment is a corporate-level strategy that tries to reduce the size or diversity of an organization’s operations. Downsizing the organization’s employment is a possible retrenchment strategy, but it should be the last one. The objective of downsizing is to reduce staff expenditure and revamp the organization by making it more financially competitive. However, downsizing also involves the withdrawal from offering certain products or serving certain markets because it leads to the possibility of staff shortage. It also means that the organization will not be able to take up any new opportunities in the market. Significantly, downsizing also lowers staff morale, which reduces operational efficiency. Therefore, downsizing should be handled with great care. 10-5.

10-6.

Can organizations be controlled by culture? Explain.

Organizational culture comprises the beliefs, values, and behavioral norms of an organization. It can influence how employees think and behave. Shared values can align the goals and objectives of managers and employees within the organization. Organizational culture can be viewed as a mechanism for achieving coordination and control. It is manifested in symbols, ceremonies, and social practices within an organization. Strong organizational cultures can create a sense of identity among employees that facilitates communication and the establishment of organizational routines, sometimes even across national boundaries. The unifying influence of organizational culture is likely to be especially helpful in assisting coordination through mutual adjustment in large functional teams for new product development. One of the advantages of organizational culture as a coordinating and controlling device is that it

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permits substantial flexibility in the types of interactions it can support. 10-7.

How is an international staffing strategy different from a domestic one?

An international strategy needs to determine when, how, and where to send expatriates for overseas operations. Expatriate employees are frequently assigned key positions. The issues of compensation and other human resource management operations are quite different for international and domestic operations. The compensation of expatriate employees needs to be examined along with compensation of local workers and that of workers in the home country. Differences in compensation packages have significant implications on staffing success in international operations. All of the above make formulating international staffing strategy much more complicated than formulating domestic staffing strategy.

ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A10-1. Does structure follow strategy or does strategy follow structure? Why? Although Chandler and others have made convincing arguments that a change in strategy tends to be followed by a change in structure, a good argument can be made for strategy following structure as well. To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative, they will have to assess the compatibility of a desired strategy with the present corporate structure. If the desired strategy cannot be implemented given the present structure, how much time, money, and effort will be needed to change the structure? Such a cost-benefit analysis may find the desired strategy to be too costly to implement. Research does support the contention that structure follows strategy. As shown earlier in Chapter 5, the reverse also appears to be true. Logic suggests that responsible strategy makers will consider the current corporate structure as a serious consideration in the choice of a strategic alternative. This fits with the resource-based approach. Chandler himself implies that one of the problems of strategy formulation in the past has been a lack of serious consideration of structural issues. This is suggested in the chapter when Chandler proposes that the creation of new strategy is followed by the appearance of new administrative problems, which contribute to a decline in economic performance. One is left wondering why the strategy makers in the corporations Chandler studied failed to foresee the need for structural changes at the time they created their strategy. Perhaps if they had been able to foresee all the needed implementation problems, the chosen strategy might have been quite different and more in line with their present structure. All this is merely conjecture, of course. Hindsight is always clearer than foresight. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE The Synergy Game Excerpted from Teaching Note by Yolanda Sarason and Catherine Banbury A key strategic issue for organizations is whether or not to diversify their business. In order for diversification to have performance implications, there must be some economies of scale or economies of scope, which has become known as “synergy.” Economies of scale are relatively easy to identify, as the advantages come from size. Economies of scope have proven more difficult, as it is harder to decipher if operating in two or more lines of business will cause an increase in performance. A relatively consistent finding in strategy research has been that organizations that diversify into related businesses outperform businesses that diversify into unrelated businesses. The issue that has become central to researchers as well as managers is how to identify the relatedness of businesses. Early researchers defined related by SIC code. This proved limited insight into the processes that result in increased performance. Resource-based theorists present the case that increased performance among some diversified firms is due to overlapping capabilities or “core competencies.” Central to this issue is how managers view their businesses as related. This exercise puts students in the role of managers by having them identify how businesses of recognizable firms are related.

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In this exercise, we use a game show format as an experiential exercise to help participants identify sources of synergy or core competencies among recognizable diversified firms. We list various products or services, the possible sources of synergy, and the actual company being described in the following table. Please feel free to develop more examples of your own.

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Products or Services

Synergy

Company

Family restaurants, airline catering, hotels, retirement centers

Standardized food service and hospitality setting

Marriott

Motorcycles, autos, sit-down lawn mowers, generators

Engine technology

Honda*

Athletic footwear, Rockport shoes, Greg Norman clothing, sportswear

Marketing and distribution for athletic-conscious products

Reebok*

Televisions, portable telephones, personal device assistants, pagers, two-way mobile radios

Manufacturer of untethered communications products

Motorola

Beer, cigarettes, coffee, soft drinks, cheese, chocolates

Distribution and marketing of consumable products

Philip Morris

Acetaminophen, tranquilizers, anti-inflammatory drugs, wound care products

Brand name, R&D, of healthcare products

Johnson and Johnson

Dinner ware, fiber optics, liquid crystal display, lighting, specialty glass

R&D of sand-based technology

Corning

Max Factor, Vidal Sassoon, Joy soap, Pepto-Bismol, Vicks 44, Folgers, Pringles, Tampax, Pampers, Cheer, Charmin

R&D, manufacturing and distribution of consumer products

Procter & Gamble

Television station, radio station, amusement parks, movie studio, retail outlets, cable station, distribution network, cruise lines, animation school

Family entertainment

Walt Disney

Razors, Oral B toothbrushes, Duracell batteries, stationary products, toiletries, Braun coffee makers

Distribution of consumer goods

Gillette

Pocket television, portable CD player, portable radio

Miniaturization of electronic audio products

Sony

Digital pianos, amplifiers, electric guitars, receivers, motorcycles, sound cards, digital and portable keyboards and synthesizers, snowmobiles

Electronic musical devices (except for the motorcycles and snowmobiles)

Yamaha

*Already presented in the exercise at the end of Chapter 10 of the textbook.

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CHAPTER ELEVEN STRATEGY IMPLEMENTATION: STAFFING AND DIRECTING This chapter deals specifically with staffing the corporation with people having the appropriate mix of abilities and skills, and directing people to use their abilities and skills most effectively and efficiently to achieve organizational objectives. The chapter explains how a change in strategy is most likely to have a significant impact on staffing needs. Research is presented on matching the manager to the strategy. Executive succession issues are considered. Downsizing is discussed as a commonly misused way to implement a turnaround strategy. International staffing issues are presented in terms of managing international assignments and adjusting to cultural differences. The chapter also explains how a corporation’s culture can be evaluated and managed to better suit the new strategy. Action planning, management by objectives (MBO), and total quality management (TQM) are presented as useful techniques to coordinate implementation activities. Hofstede’s research on the dimensions of national culture is used to explain why some management techniques can work well in some countries but not in others. LEARNING OBJECTIVES 1. 2. 3.

Explain the link between strategy and staffing decisions. Discuss how leaders manage corporate culture. Utilize an action planning framework to implement an organization’s MBO and TQM initiatives. TOPICS OUTLINE COVERED 1. Staffing a. Staffing Follows Strategy b. Selection and Management Development c. Problems in Retrenchment 2. Leading a. Managing Corporate Culture 3. Action Planning a. Management by Objectives b. Total Quality Management SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

11-1. What are the critical issues that a company must consider when trying to match its staffing to its strategy? Strategy is implemented effectively when staffing is ready to meet the challenges set forth. There are several issues that leaders must consider when matching staffing to strategy. A number of programs such as organizational and job design, reengineering, Six Sigma, MBO, TQM, and action planning can be used to implement a new strategy. Leaders must manage the corporate culture and find the right mix of qualified staff. It is also essential that leadership pay attention to star employees as well as the majority of the workforce in terms of performance and fit. 11-2. What are the unique impacts on a company that must employ staff in international settings? Implementing a strategy of international expansion takes a great deal of planning and can be very expensive. Primarily due to cultural differences, managerial style and human resource practices must be tailored to fit particular countries. One approach to staffing managerial positions of multinational corporations is to employ people with an international orientation, regardless of their country of origin. 11-3.

What skills should a person have for managing a business unit following a differentiation strategy? Why? What should a company do if no one is available internally and the company has a policy of promotion from within?

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Research does appear to support the proposition that the manager of a corporation or business unit should be matched to the strategy for successful implementation. Those executives who successfully implement a differentiation business strategy tend to have a high internal locus of control and have more experience in R&D. Because of the likely growth orientation of the strategy, managers should probably have a greater willingness to take risks, a higher tolerance for ambiguity, and sales/marketing experience. These characteristics make sense because of the product/market orientation needs of any unit interested in setting its products or services apart in the competitive marketplace. If this type of person is not available internally, then the company must recruit an appropriate outsider. In the case of a promotion from within policy, the policy should be reconsidered and an exception made. Otherwise, the company must take a chance on promoting one of its own—a good reason for proceeding cautiously. 11-4.

When should someone from outside a company be hired to manage the company or one of its business units?

Research suggests that firms in difficulty can improve their chances for success if they bring in an outsider who does not have the same devotion to past management practices as do most internal candidates. Many examples can be provided of corporations turning to external turnover specialists (sometimes called “hatchet men”) to regain their past success by firing “deadwood” and eliminating popular but unprofitable divisions, units, and projects. The probability of hiring an outsider to lead a firm in difficulty increases if there is no heir apparent, if the last CEO was fired, and if the board of directors is composed of a large percentage of outsiders. The insider/outsider distinction may not really be the important issue. Rather, the best answer may lie in finding the right person to implement the needed strategy regardless of where the person is found. 11-5.

What are some ways to implement a retrenchment strategy without creating a lot of resentment and conflict with labor unions?

The chapter discusses some of the problems involved in downsizing, a program usually used in implementing a retrenchment strategy. Unless staffing issues are dealt with appropriately in retrenchment, a situation can develop in which retrenchment feeds on itself and acts to further weaken instead of strengthening the company. The text proposes six guidelines for successful downsizing: • • • • • • 11-6.

Eliminate unnecessary work instead of making across-the-board cuts. Contract out work that others can do cheaper. Plan for long-run efficiencies. Communicate the reasons for actions. Invest in the remaining employees. Develop value-added jobs to balance out job elimination.

How can corporate culture be changed?

The chapter points out that communication is key to the effective management of a change in culture. Top management must be committed to a culture change and communicate that commitment to everyone in the organization. The new culture must be part of a “strategic vision” that can capture the emotions of the employees. A series of programs need to be established to move the corporation from one culture to another and a strong rationale given to justify such a radical change. Progress toward the goal must be measured at intervals and results communicated widely. A system of incentives also must be developed to reward those who support and encourage the culture change. 11-7.

Why is an understanding of national cultures important in strategic management?

An understanding of different national cultures is important in all aspects of strategic management. Because international trade is becoming increasingly important, knowledge of national cultures is important to environmental scanning. One must scan not only key forces in one’s industry, but also different societal forces in other parts of the world where the company might do business. An understanding of national cultures is also important to the

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formulation of strategy. Many cultures are very ethnocentric and do not like foreigners controlling key parts of their country. In Saudi Arabia, for example, non-Saudis cannot own land, they can only rent it. Most countries have rules regarding ownership of companies in industries that are deemed important to that country’s welfare (for example, the U.S. defense and airlines industries). A company must have an understanding of these differences if it is to formulate various entry strategies into different countries or regions. An understanding of different cultures is especially important in strategy implementation. Because of cultural differences, managerial style and human resource practices must be tailored to fit the particular situations in other countries. Hofstede found in his research that national culture is so influential that it tends to overwhelm even a strong corporate culture. In measuring the differences among five national dimensions from country to country, he was able to explain how a certain management practice might be successful in one nation but fail in another. Knowledge of these kinds of differences is crucial for any multinational corporation. An understanding of national cultures is also important to evaluation and control. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A11-1. How might manager–strategy fit be accomplished short of firing current managers? If the current manager of an SBU is capable, but does not appear to have the skills and experiences necessary to implement a particular strategy, the company might wish to either provide him/her with additional training or an assistant having some of those skills/experiences. Unfortunately, because most companies want to get implementation moving quickly and don’t want two managers to do the job of one, a better option is to transfer existing managers from one unit to another. Another approach is to consider the skills and experiences of the existing manager in the process of strategy formulation when choosing among strategic alternatives. If there is little difference in the expected results from two different strategies, it makes sense to select the strategy which best fits the existing manager’s skills and experiences. A11-2. Does culture follow strategy or does strategy follow culture? Why? This question derives from the question raised in Chapter 9 regarding the relationship between structure and strategy. The answer is much the same. To the extent that the formulators of strategy seriously consider implementation issues in choosing a strategic alternative, they will have to assess the compatibility of a desired strategy with the present culture. If the desired strategy cannot be implemented given the present culture, a lot of time, money, and effort will be needed to change the culture. Research reported in this chapter does support the contention that culture follows strategy. As shown earlier in Chapter 5, the reverse also appears to be true. The type of culture within a corporation will act to influence the selection of feasible alternative strategies. To the extent that the culture derives from the “distinctive competence” of the company, this may be very appropriate. Don’t throw away a good culture just because the current strategy is not as successful as it could be. Some might even say that a good culture is more important than a good strategy. Clearly, both strategy and culture are very important and need to be carefully evaluated before any significant change in either is recommended. Both strategy and culture affect each other simultaneously. A11-3. Compare and contrast action planning with management by objectives. An action plan states what actions are going to be taken, by whom, during what time frame, and with what expected results. Action plans are the primary means by which programs are developed for the implementation of strategy. Management by objectives (MBO) is also a technique useful for the development of programs. Like action planning, MBO pinpoints individual responsibilities for each unit objective and specifies a time frame when that objective is to be achieved. Unlike action planning, however, MBO takes a more organization-wide approach to planning implementation programs and budgets. For MBO to work, it should be a complete system. Action planning can be done, in contrast, at the individual level only. The key difference is that MBO is a system of hierarchical objectives beginning at the top of the corporation and cascading down through the divisions and work units. MBO also encourages the superior to negotiate the subordinate’s objectives with the subordinate’s input. MBO includes action planning as part of the discussions between a manager and his/her subordinate. Action planning alone, however, can

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be done strictly on a top-down basis with little to no input from the subordinate. A11-4. What value does a total quality management program have in implementing strategy? Total quality management (TQM) is an operational philosophy that stresses commitment to customer satisfaction and continuous improvement. It aims at improving quality, increasing flexibility, and reducing costs in order to better satisfy the customer. Because TQM aims to reduce costs as well as improve quality, it can be used as a program to implement either an overall low cost or a differentiation business strategy. Like MBO, TQM helps keep employees’ minds on a crucial objective of strategic management: increasing sales and profits by pleasing the customer. Because the mission of most business firms is customer driven, TQM helps to clarify and fine-tune the company’s mission statement. TQM makes the key point that because competitive advantage is usually only temporary, the organization must emphasize continuous improvement to improve product quality and reduce costs. According to TQM, customers can be internal as well as external to the organization. To the extent that a company is able to continually improve its service to its internal customers, it is more likely to keep internal transaction costs low and thus be in a better position to reap the benefits and avoid the disadvantages of vertical integration. A11-5. How can MBO help improve the implementation of strategy? MBO is a powerful implementation technique because it is a system that links plans with performance. It forces managers to communicate the objectives of the overall business unit to their subordinates so they are better able to see how they fit into the company’s goal accomplishment. MBO, therefore, acts to tie together corporate, business, and functional objectives, as well as the strategies developed to achieve them. This forms a hierarchy of objectives similar to the hierarchy of strategy mentioned in Chapter 1. The mutual give and take, together with the sense of personal responsibility exemplifying a successful MBO program, serves to motivate employees to help implementation activities succeed. SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE Using the Keirsey Temperament Sorter This is a fun exercise that provides students some insight into their own personality and how they compare with others in their decision-making style. First, ask the class to complete and score their Keirsey Temperament Sorter before class. When the students come to class, each of them should give you a sheet of paper with their name and personality type: Guardian, Artisan, Idealist, or Rational. As suggested in the chapter, put them into groups based on their personality type. One idea is to form some groups containing the same personality type and some other groups with representatives of all personality types. Ask them not to discuss their personality types during the exercise. Give each group about 30 minutes to accomplish a defined task. You could either give them a short case to discuss such as The Audit, or an exercise such as generating an idea for an entrepreneurial venture. Give them no further information—keep it deliberately vague. If you are asked questions, turn the question into a question by asking, “What do you think?” When time is up, ask a spokesperson from each group to (1) describe the process the group went through and (2) present orally each group’s recommendation (for a case) or proposal (for a new venture). After each group makes its presentation, ask the class as a whole to identify each group’s dominant decision-making style in terms of how they did their assignment. You may choose to do any one or all three of the options listed at the end of the exercise in the textbook: •

On a sheet of paper, each person in the class identifies his/her personality type and votes which team did the best on the project.

The class as a whole tries to identify each group’s dominant decision-making style in terms of how they did their assignment. See how many people vote for one of the four types for each team. •

Each member of a group guesses if she/he was put into a team composed of the same personality types or in one composed of all four personality types.

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You may want to lecture a bit about the Keirsey Temperament Sorter and about each of the four styles. Take the test online at http://www.advisorteam.com. You will be given the opportunity to become a registered member of the Advisory Team and to subscribe to the free newsletter, The Team Advisor Personality Zone. The website provides access to further information about the Temperament Sorter and personality types. Use this exercise to illustrate how important it is to consider personality differences when staffing an organization. Should creative, entrepreneurial firms have a larger number of some personality types (such as Artisans) than others? Do large bureaucracies thrive on Rationalists and Guardians to the disadvantage of Artisans and Idealists? What is the best style for strategic decision making? Should a strategic planning committee be composed of a mixture of all four styles or just one style?

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CHAPTER TWELVE EVALUATION AND RE-ASSESSMENT This chapter examines the final segment of strategic management—the evaluation of performance and the control of work activities. Beginning with a basic five-step feedback model, measures of corporate, divisional, and functional performance are described. Activity-based costing and enterprise risk management are explained. Advantages and limitations of ROI, ROE, and EPS as performance measures are listed. Economic value added (EVA) and market value added (MVA) are proposed as measures of shareholder value. The balanced scorecard is explained. Responsibility centers are suggested to pinpoint performance in various parts of the corporation. Benchmarking is discussed as a way to compare a company’s products, services, and practices with industry leaders. The chapter also discusses transfer pricing and information systems in controlling international activities and processes. The chapter explains two of the most frequent negative side effects of the monitoring and measuring of performance activities— short-term orientation and goal displacement. Guidelines are presented to help keep the likelihood of occurrence of these negative side effects to a minimum. Long-term incentive plans are also recommended to better link compensation to strategic performance. LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Explain how various types of measures and controls are utilized to properly assess performance including activity-based costing, ERM, ROI, and EVA. Develop a balanced scorecard to examine key performance measures of a company. Apply the benchmarking process to a function or activity. Explain how strategic information systems are being utilized to support specific strategies. Discuss the issues with measuring organizational performance and how organizations can establish proper controls to achieve objectives. TOPICS OUTLINE COVERED 1. Measuring Performance a. Appropriate Measures b. Types of Controls c. Activity-Based Costing d. Enterprise Risk Management e. Primary Measures of Corporate Performance 2. Balanced Scorecard Approach: Using Key Performance Measures a. Primary Measures of Divisional and Functional Performance b. Responsibility Centers 3. Using Benchmarking to Evaluate Performance 4. Strategic Information Systems a. Enterprise Resource Planning b. Radio Frequency Identification and Near Field Communication c. Divisional and Functional IS Support 5. Problems in Measuring Performance a. Short-Term Orientation b. Goal Displacement c. Guidelines for Proper Control d. Aligning Incentives

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 12-1. Explain why ROI might not be the best measure of firm performance? The most commonly used measure of corporate performance is ROI. It is simply the result of dividing net income before taxes by the total amount invested in the company. Although using ROI has several advantages, it can be easily manipulated. 12-2. What are the best methods for evaluating the performance of the top management team? Through its strategy, audit, and compensation committees, a board of directors closely evaluates the job performance of the top management team. The CEO’s ability to establish strategic direction, build a management team, and provide leadership are more critical for the organization in the long run. 12-3.

Why is strategic control important in monitoring the process of strategy implementation?

Strategic control is very important in the strategy implementation process. Strategic control requires careful monitoring and evaluation of the strategy management process as a whole to ensure that it is functioning to meet organizational objectives. Strategic control focuses on the activities involved in external and internal analyses, setting the mission statement, strategy formulation, and strategy implementation. Strategic control can ensure that all steps of the strategy management process are appropriate, effective, and functioning properly. 12-4.

What are some examples of behavior controls? Output controls? Input controls?

Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the behaviors through the use of objectives and performance targets or milestones. Input controls focus on resources, such as knowledge, skills, abilities, values, and employee motivation. Some examples of behavior controls are company procedures, quotas of sales calls to potential customers, and rules regarding attendance and tardiness. Some examples of output controls are sales quotas, cost reduction or profit objectives, and surveys of customer satisfaction. Some examples of input controls are years of education and experience. Although output controls, with their emphasis on the “bottom line,” are generally considered superior to behavior controls, behavior controls are very appropriate when results are hard to measure and a clear cause–effect relationship exists between activities (behaviors) and results. Input controls are the least useful and are most appropriate when output is difficult to measure and there is no clear cause–effect relationship between behavior and performance (such as in college teaching). 12-5.

How does EVA improve our knowledge of performance over ROI, ROE, or EPS?

Economic value added (EVA) is being increasingly recommended as an improvement over traditional measures because of EVA’s strong relationship to a company’s stock price. It uses stock price to measure the difference between the pre-strategy and post-strategy value of a corporation. However, EVA is often difficult to calculate. It is for this reason that simpler measures such as ROI, ROE, and EPS continue to have widespread usage. Like the traditional measures, shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. Another limitation of EVA is its concern with only one aspect of the task environment—the shareholder. The conclusion seems clear: there is no one best measure or group of measures. The key is to use those measures that have the most value to those most affected by corporate performance and to keep them in perspective by understanding their advantages and limitations. 12-6.

Is the balanced scorecard a useful tool for developing, controlling, and enhancing the strategy implementation process of an organization? Why or why not?

The balanced scorecard is a very useful tool in the strategy implementation process of an organization. This approach supports the success of the strategy implementation process by articulating a holistic vision, enhancing a

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strategic feedback system, and facilitating strategy review. It can be used as a supplement for traditional financial measures by assessing performance from the perspectives of customers, internal business processes, and learning and growth. The scorecard can help senior managers link long-term strategy with short-term tactics. Reviewing feedback using the balanced scorecard leads to a better understanding of the strategy implementation process and reveals whether organizational objectives are being met. Big organizations such as Philips Electronics, UPS, Thomson Reuters, and Wells Fargo actively use the balanced scorecard to align their business activities to their vision and strategy as well as to monitor organizational performance against strategic goals. 12-7.

Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible?

This is a wide-open question meant to generate discussion. The chapter does not mention this issue. There is some feeling that a large number of controls do constrain creative impulses. The argument seems to be that a person’s mind must be able to run free without constraint in order to generate new innovative concepts. Data from advertising agencies and R&D labs do suggest that corporations emphasizing creativity tend to reduce the number of controls used. Control is not ignored, however. Data is just not collected on intermediate activities such as time in the office or manner of dress. The emphasis tends to be on the end result of activities (output controls) rather than upon the activities themselves (behavior controls). Control and creativity are thus compatible if the controls are appropriate and used properly. Creative types may be like artists in that to be successful, they need both talent and discipline. Most creative types, however, choose to impose their own form of discipline on themselves. To the extent that managers attempt to regulate the activities that go into creativity, they may destroy the very thing they are trying to nurture. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A12-1. Why bother with shareholder value or a stakeholder scorecard? Isn’t it simpler to evaluate a corporation and its SBUs just by using standard measures such as ROI or earnings per share? The answer to the second question is a simple yes. The standard measures, such as sales, profits, earnings per share, return on investment, and so on, are certainly easier to grasp and more commonly used than any of the proposed “improved” models. Then why bother with these interesting measures such as ROVA or shareholder value as measured by economic value added (EVA)? The answer to the question hinges on one’s willingness to overlook the limitations of commonly accepted measures as listed in detail in the text. Nevertheless, the proposed measures have problems of their own. The stakeholder scorecard, as proposed by Freeman, seems to violate guidelines one and two from the text. Although the scorecard provides much more information on a corporation’s task environment than does any set of traditional measures, it runs the risk of overwhelming management with too many controls. Are all of them meaningful and useful? Unless the scorecard includes some priorities indicating which measures are most important (and least important) to the corporation, it may just create confusion. The other danger is that if priorities are placed on the measures, the emphasis may very well end up being on the standard measures of sales, EPS, and ROI! Nevertheless, Freeman’s set of measures does at least point out that management needs to consider more than just the standard measures of performance.

Economic value added (EVA), a measure of shareholder value, is being increasingly touted as an improvement over traditional measures. Based on the assumption that the stock market is the ultimate decider of corporate performance, an emphasis on this measure forces management to especially monitor all forces that can affect stock price and dividend rate. In the long run, this may be an excellent measure, but it is hard to see how it is an improvement over ROI (if ROI is used in a long-term manner) other than its relationship to stock price. Like the traditional measures, shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. Another limitation is this measure’s concern with only one aspect of the task environment—the shareholder. The conclusion seems clear: there is no one best measure or group of

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measures. The key is to use those measures that have the most value to those most affected by corporate performance and to keep them in perspective by understanding their advantages and limitations. In contrast, the balanced scorecard combines financial measures that tell the results of actions already taken with operational measures on customer satisfaction, internal processes, and the corporation’s innovation and improvement activities—the drivers of future financial performance. This may be the best way to measure overall corporate performance. A12-2. Is benchmarking just another fad or is it really useful for all firms? Why? Benchmarking involves learning how other successful companies do something and imitating or perhaps even improving on their techniques. Pioneered in the United States by Xerox Corporation, benchmarking is similar to the time-tested practice of “reverse engineering” in which a company buys the product of another company to take it apart in order to learn how it is made. Given that Xerox developed the concept of competitive benchmarking in the early 1980s, it appears that the concept is here to stay. It is especially useful to companies that are falling behind others in the industry. Xerox developed the concept when management realized that Japanese companies were slowly taking over the copier market by making and selling products superior to those of Xerox at a cheaper price. Because this is a situation that is bound to affect various companies in the future, benchmarking is likely to be increasingly adopted. Unlike MBO, TQM, or reengineering, almost everyone who uses benchmarking finds it to be very useful and well worth the time and money it takes to do it. A12-3. Why are goal displacement and short-run orientation likely side effects of the monitoring of performance? What can a corporation do to avoid them? Goal displacement and short-run orientation are likely side effects of evaluation and control because no system can be all-inclusive. Goal displacement occurs because people find it easier to focus on a surrogate of performance (the measure) than on the performance itself. To the extent that the measure tends to be confused with what it is supposed to be measuring, work activities will be oriented more toward the measures and less toward actual performance. A short-term orientation occurs not because of poor measures, but because most managers tend to want quick feedback. Those activities that require a great deal of time before feedback occurs tend to be neglected for those activities providing more immediate feedback. The measures by themselves do not cause a short-term orientation; rather, it is the time frames in which they are used that cause the result. ROI, for example, can be calculated over a five-year period just as well as a one-year period. The measures, however, do cause managers to focus their activities and to want feedback on how they are doing. To the extent that short-run performance is measured and rewarded, a short-term orientation is a natural result. In order to avoid these negative side effects, a corporation should consider the guidelines for proper control given in the chapter. Emphasis should be especially placed on measuring all meaningful activities and results regardless of measurement difficulty and upon using long-term controls. As long as we are dealing with human beings, however, we must keep in mind that these side effects will never go away completely. A good control system can only hope to minimize them.

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SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE America’s Most Admired Companies This exercise is a good opportunity to discuss the measures used by Fortune magazine to evaluate a corporation’s overall performance. The survey measures what it calls “eight key attributes of reputation.” They are Innovation, People Management, Use of Corporate Assets, Social Responsibility, Quality of Management, Financial Soundness, Long-Term Investment Value, and Quality of Products/Services. This survey has been used in research as a surrogate for a measure of social responsibility, but has been criticized because overall profitability tends to affect (thus contaminate) the individual measures as well as the overall measure of any company. Select some of the projects from the exercise in the textbook to assign individual students or student teams to investigate. Have them present their findings to the class. How useful is Fortune’s survey of most admired companies compared to its 100 Best Companies to Work For? How much do the lists overlap?

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CHAPTER THIRTEEN SUGGESTIONS FOR CASE ANALYSIS This chapter discusses case analysis and the case method as a means of examining strategic management in action. It presents various techniques and approaches to the analysis of complex strategy cases. The basics of financial analysis from ratio analysis to common-size statements and adjusting for inflation are presented as a way to begin serious analysis of business policy/strategic management cases. The strategic audit and the strategic audit worksheet are described as helpful tools to organize facts and to begin in-depth analysis of a corporation. The chapter ends with appendixes providing suggested techniques for case analysis and presentation, plus a list of useful resources for additional research at the library or on the Internet. LEARNING OBJECTIVES 1. 2.

Explain the issues involved in researching a case situation. Analyze financial statements using ratio analysis, common-size statements, Z-values, and economic measures. Employ the strategic audit as a method of organizing and analyzing case information.

3.

TOPICS OUTLINE COVERED 1. The Case Method 2. Researching the Case Situation 3. Financial Analysis: A Place to Begin a. Analyzing Financial Statements b. Common-Size Statements c. Z-Value and the Index of Sustainable Growth d. Useful Economic Measures 4. Format for Case Analysis: The Strategic Audit SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 13-1. What ratios would you use to begin your analysis of a case? In order to analyze a case, we must examine some of the most important financial rations. These would include liquidity ratios, profitability ratios, activity ratios, and leverage ratios. 13-2. What are the five crucial steps to follow in basic financial analysis? The five steps in basic financial analysis are: (1) scrutinize historical income statements and balance sheets; (2) compare historical statements over time; (3) calculate changes that occur in individual categories from year to year; (4) determine the change as a percentage; and (5) adjust for inflation. 13-3.

Why should you begin a case analysis with a financial analysis? When are other approaches appropriate?

Starting with a financial analysis of a case is a good way to assess the seriousness of the situation. Because one of the key objectives of any business corporation is to earn a profit, much can be learned by considering how it is doing financially. If the firm is doing badly financially, the student will need to consider short-term problems (“How does it avoid bankruptcy?”) as well as long-term problems (“How can it position itself in the market to take advantage of its strengths?”). If the firm is doing well financially, the student has free reign to take a long-range viewpoint and consider how a good firm can do better. Nevertheless, the best place to begin a case is to assess the firm’s current performance. This may be quickly done by using financial data found in its annual report. If not available, a logical starting point is whatever problems are given in the case. This would be especially appropriate when the case under

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consideration focuses on only one aspect of a corporation’s functioning, such as conflict between a board of directors and top management. The basic rule of thumb for beginning a case analysis is to look for problem areas wherever they may be. 13-4.

What are common-size financial statements? What is their value to case analysis? How are they calculated?

A useful approach to the analysis of financial statements is to convert both the income statement and balance sheet into common-size statements. Convert every category from dollar terms to percentages. For the income statement, net sales represent 100%, so calculate the percentage of each category so that the categories sum to the net sales percentage (100%). For the balance sheet, give the total assets a value of 100%, and calculate other asset and liability categories as percentages of the total assets. (Individual asset and liability items, such as accounts receivable and accounts payable, can also be calculated as a percentage of net sales.) To more easily note category changes, plot the annual percentages over a five-year period for each of the categories, such as cost of goods sold and accounts receivable. Connect the dots to view trends in each category. A poor trend indicates an underlying problem needing attention. When you convert statements to this form, it is relatively easy to note the percentage that each category represents of the total. Comparisons of these percentages over the years can point out areas for additional analysis. To get a proper picture, however, make comparisons with industry data, if available, to see if fluctuations are merely reflecting industry-wide trends. If a firm’s trends are generally in line with those of the rest of the industry, there is a lower likelihood of problems than if the firm’s trends are worse than industry averages. These statements are especially helpful in developing scenarios and pro forma statements, because they provide a series of historical relationships (for example, cost of goods sold to sales, interest to sales, and inventories as a percentage of assets). 13-5.

Financial statement analysis is considered useful for students in handling and analyzing case studies. Is this true? Why?

For a student, the role and use of financial information are important aspects of analyzing a case study. After all, financial data represents the factual results of a company's strategy and structure. Although analyzing financial statements can be quite complex, a general idea of a company's financial position can be determined through the use of ratio analysis. These ratios can be compared to the industry average, aggregate economy, and the company's past performance. There are important ratios, such as debt to equity and receivables turnover days or payables days. In their simplest form, these ratios are used to find out how to utilize assets, capital, and liabilities effectively. However, it should be noted that deviation from the average is not necessarily bad—sometimes it simply warrants further investigation. 13-6.

When is inflation an important issue in conducting case analysis? Why bother?

The impact of inflation upon daily life strikes a person when watching old movies on television. For example, in the movie The Man in the Grey Flannel Suit, the character played by Gregory Peck works in public relations for a corporation located in New York City in the mid-1950s. He was earning $7,000 and was being interviewed by the president of a large radio/television network for an important job paying $9,000. By 2005, earning only $9,000 in New York City would not even keep a family above the poverty level. If the movie were done now, the character played by Gregory Peck would be demanding ten times that amount! Fifty years of inflation make a big difference. Adjusting for inflation is very useful when the case being analyzed takes place over a time period when there was a great deal of inflation. The danger in ignoring inflation when doing financial analysis is that one can miss key data signaling a corporation’s slow decline over time. Chief executive officers wish to keep their jobs and will tend to bias figures in their favor, especially in annual reports. Sales and profits stated in current or historical dollars (or whatever currency is being used) may seem to show substantial growth, but when they’re converted to constant dollars (or whatever currency is being used), they may show a steady decline. There are two methods of adjusting for inflation. One is to use whatever base year is being used in that country. In

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the United States, 1967 has been used as the base year for many years. It equaled 100 and other years were adjusted around it. Given that in the United States (like any other country), politicians dislike people seeing how much inflation has been occurring, a new, more recent base year (1982–84) has been selected to replace 1967—a simple, but insidious disguise. Dividing sales and net income by the CPI factor in Table 13.2 for a particular year will change the reported figures to 1982–84 constant dollars. Another approach is to adjust previous years in a financial statement using the most recent year as the base year, again using an index of inflation like the Consumer Price Index (CPI). Divide the CPI factors for the other years by the one for the most recent year to obtain the appropriate adjustment factors to use in dividing into the reported figures for the previous years. 13-7.

Why is a strategic audit recommended for those conducting case study analysis?

A strategic audit is a review of an organization’s business plan and strategies to identify weaknesses and shortcomings. It evaluates how appropriate an organization’s business strategy is and how well the organization is positioned for strategy implementation. Therefore, it is useful for students engaging in the process of case study analysis. A strategic audit enables the successful development of an organization and helps managers assess whether internal processes are heading towards their strategic goals. Based on audit results, managers can adjust operations to maximize progress toward goals and minimize the risks and threats arising from inefficient operations. A strategic audit can be used by any organization that is facing challenges to profitable growth. It is considered to be an ideal tool for slow-growing organizations that are searching for new growth opportunities while making sure that strategic risks are managed and controlled. Strategic auditing is also ideally suited for new ventures that want to take advantage of opportunities as an economy rebounds. ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS These are not found in the text and may be used by the instructor for classroom discussion or exams. A13-1. What are the pros and cons of using the strategic audit as a framework for case analysis? The advantages of using the strategic audit are presented clearly in the chapter. Its limitations are, however, not so obvious. Like everything else in the world, a technique’s strengths can also serve as its weaknesses. For example, Chapter 1 states that the strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis of various corporate activities to be made. The problem with any checklist is that the user may tend to use it almost automatically. Even though all the questions in the audit may not be relevant to a specific situation, a person may unthinkingly use them without considering that there may be other, perhaps more important questions that need to be raised but are not on the list of questions. The value of asking this question is to get students to realize that the strategic audit is only a tool to help them organize their analysis. Use this question as an opportunity to remind them that it is up to them to develop whatever questions are most appropriate to the case under consideration and not to do their analysis on “automatic pilot.” ADDITIONAL TEACHING SUGGESTIONS AND MATERIALS Following are some teaching suggestions and materials you may find helpful in teaching the business policy/strategic management course. These may be of some value to you. Feel free to use them as-is or modify them to suit your needs. • The first is a suggested assignment to get students to do ratio analysis and to construct scenarios. • The second is a way to use EFAS and IFAS Tables, and SFAS Matrix to boost class participation in case discussion. • The third is an example of a “cut sheet” for use in evaluating oral and written case presentations. I.

ASSIGNMENT FOR RATIO ANALYSIS AND SCENARIO CONSTRUCTION

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This is an assignment developed by Tom Wheelen to encourage students to learn how to do ratio analysis and to construct scenarios. He uses this at the beginning of case analysis so students will be able to use these techniques in their case analyses later in the course. Ratio Analysis Compare the last year of financial ratios for the case to the ratios of the industry. List any ratios that you feel are significant or important. You should include the ratio from the case and the industry, a definition of the ratio, and what that ratio means to the company in the case. To find the industry ratios, first locate the Standard Industrial Classification (SIC) for the company. The SIC can be found in the Standard Industrial Classification Manual. Industrial Norms and Key Business Ratios, by Standard and Poor’s, lists industry ratios by SIC. Be sure you use the industry ratios for the same year as the ratios in the case. Scenario Construction There will be three paragraphs for the scenario. The first paragraph will cover the economic conditions for the time period after the case (3–5 years). You should include economic statistics. The second paragraph will cover the industry outlook for the company in the case. The last paragraph will cover the outlook for the company in the case for the next 3–5 years. Explain why you chose your pro forma percentages in light of your strategic factors and implementations. You can use Moody’s Industrial Manual, Value Line Investment Survey, economic books, or other sources to find this information. Be sure to give the sources for all the information you used. II.

IMPROVING DAILY CLASS PARTICIPATION USING EFAS, IFAS, AND SFAS

We have sometimes found it difficult to get quality daily class participation from our undergraduate students after assigning a case for open class discussion. We suggest the following: 1. Have each class member prepare individually or as a team (a) EFAS and IFAS Tables, and an SFAS Matrix or (b) just an SFAS Matrix for the assigned case. 2. Ask each class member to write down his/her Total Weighted Score(s) for the case under discussion on a separate sheet of paper, sign it, and hand it in to the instructor. 3. Ask various individuals to list on the board the items, ratings, and weights for each form to be discussed. Discuss how the weights and ratings were determined. 4. Compare the Total Weighted Scores listed on the board with those listed on the papers handed in earlier. Ask the students to defend their ratings. 5. Ask the students if they would buy stock in or take a job with this company. The Total Weighted Scores now seem to take on real meaning. III.

USING A CUT SHEET TO GRADE ORAL AND WRITTEN CASE PRESENTATIONS

On the next page is an example of a “cut sheet” Tom Wheelen developed to help his teaching assistants grade oral and written case reports in his strategic management course. The cut sheet is very useful for grading case reports in large classes. The total number of points available is 67 points.

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Cut Sheet for Written/Oral Presentations 67 = 100 A+ 66 = 98.5 65 = 97.0 64 = 95.5 A 63 = 94.0

62 = 92.5 A61 = 91.0 60 = 89.5 B+ 59 = 88.0

58 = 86.5 B 57 = 85.0 56 = 83.5 B55 = 82.0 54 = 80.5 53 = 79.0 C+

52 = 77.5 51 = 76.0 C 50 = 74.5

WT. PRESENTATION/LOGICAL ORDER

5

ADDRESS TOP MANAGEMENT

1

PAST PERFORMANCE

4 4

MISSION OBJECTIVES STRATEGIES POLICIES

4

BOARD OF DIRECTORS TOP MANAGEMENT

4

SOCIETAL (O&T) TASK (O&T) CORPORATE STRUCTURE (S&W)

8 CORPORATE CULTURE (S&W) MARKETING (S&W) FINANCE (S&W) RESEARCH AND DEVELOPMENT (S&W) OPERATIONS (S&W) HUMAN RESOURCES (S&W) MANAGEMENT INFORMATION SYSTEMS (S&W) STRATEGIC FACTORS

8

STRATEGIC ALTERNATIVES

4

RECOMMENDATION (PRIORITY)

8

EVALUATION AND CONTROL

4

RATIO ANALYSIS

2

SCENARIO

5

PRO FORMA

1

EXHIBITS

5

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49 = 73.0 C48 = 71.5 47 = 70.0 46 = 68.5 D+ 45 = 67.0

44 = 65.5 D 43 = 64.0 42 = 62.5 D41 = 61.0 40 = 59.0


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