STRATEGIC MANAGEMENT AND BUSINESS POLICY FIRST TERM EXAM, 2008/09 ACADEMIC YEAR 1.-Corresponding to topic 6. There is growing awareness that companies had moved far from Victorian times, when they were (as Charles Handy put it) “properties with tangible assets worked by hands whose time owners bought”. They had become properties whose most valuable asset was intangible—the knowledge which exists in the heads and hearts of employees or in formal databases, patents, copyrights and so on. Taking this idea, explain briefly the different sources of knowledge and the different elements of the firm’s intellectual capital. 2.-Corresponding to topic 1. In a study of British managers, Henry Mintzberg found that they worked without interruption for more than half an hour “about once every two days”. He also found that senior managers spent more than three-quarters of their time in oral communication. “In other words,” he concluded, “the job of managing is fundamentally one of processing information, notably by talking and especially by listening.” To be a good manager you have to be a good listener. Following this, indicate the main aptitudes demanded to executives nowadays. 3.-Corresponding to topic 2. In 1982 Richard Rumelt demonstrated that there was a statistical link between corporate strategy and profitability, showing that somewhat diversified companies performed better than highly diversified ones. Could you explain, in brief, the content of the corporate level of a firm competitive strategy? Use the different elements of a competitive strategy. 4.-Corresponding to topic 3. “Net Geners” (Net Generation or Generation Y) are, roughly, people born in the 1980s and 1990s. A survey of 4,200 young graduates from 44 countries published in December 2008 by PricewaterhouseCoopers, found that they want many of the same things from work as previous generations, including long tenure with a small number of employers. And they are willing to put in the hours to get them, if they are treated well. Indeed, “Net Geners” may be just the kind of employees that companies need to help them deal with the recession’s hazards. For one thing, they are accomplished at juggling many tasks at once. For another, they are often eager to move to new roles or countries at the drop of a hat—which older workers with families and other commitments may find harder to do. Such flexibility can be a boon in difficult times. “In the economic downturn what we are really looking for is hungry 25 to 35 years old who are willing to travel,” says Frank Meehan, the boss of a fast-growing mobile-phone applications business that is part of Hutchison Whampoa, a conglomerate based in Hong Kong. Looking for new trends and challenges in current society and in business environment, in which dimension or dimensions of a PEST analysis would you include what has been described about “Net Geners”? Why? 5.-Corresponding to topic 5. Warburton Ltd. is a hundred-year-old family company, one of the largest independent bakeries in Great Britain; it produces more than three million loaves of bread per week. Warburton's bread is known for its high quality and is often sold at double the price of a normal loaf. To guarantee its quality, Warburton has always used red spring wheat from western Canada (CWRS). At the end of the 1980's, however, it began to get warnings of a drop in quality that threatened its capacity to charge such high prices for its bread. 1 Research carried out revealed which varieties of wheat - specifically Teal, Pasqua and Columbus - were best suited to its production system, leading to the bread that best satisfied the taste of Warburton's customers. To ensure that the company obtained only those varieties, Warburton began conversations with the Canadian Wheat Board (CWB) to sign "contracts that would preserve our identity", for specific varieties of wheat. The contracts agreed were supervised by Agricore and Paterson Co. Warburton specified the quantity of wheat required - more than 100,000 tons annually - and the grain storage companies took responsibility for obtaining it from farmers by means of production contracts. Warburton's contracts are awarded annually to farmers who have a reputation for producing good harvests of high quality CWRS wheat. In these contracts, the farmers undertake to produce wheat of the specified variety. The crops must be grown from certified seed, and the farmer must employ the cultivation, harvesting and crop protection techniques specified. The producer must also present a report on the weather conditions, the materials used and the yield of the harvest, together with a sample of the wheat. If the storage company is satisfied, it will purchase the entire harvest. In reality, more than the detailed tests of each sample, the trustworthiness and reputation of the producer are critic al; the contracts tend to be awarded to longstanding members and customers. In return for meeting these standards, the farmers contracted receive a premium of $20/ton over the official CWB price for an identical grain. This premium is paid in cash, directly by Warburton, together with the regular CWB payment. For its part, Warburton accepts all the wheat contracted that meets the standards agreed, which it purchases directly from the CWB, and pays an agreed additional sum to cover the administrative and logistic costs, particularly the handling of the merchandise. The shipments of Canadian wheat are exported to Warburton every six or eight weeks, and the storage companies have to give an assurance that the wheat is "of preserved identity" - e.g. that it maintains the correct characteristics and has remained separated from other varieties - throughout the entire process of handling the wheat. Warburton pays a rate to these companies for supervising the contracts and preserving the identity of the wheat. Warburton has set up a research laboratory and a pilot bakery (the Warburton Technical Centre in Brandon, Manitoba), where it carries out its own quality tests, refines its baking technology, and experiments with new varieties of wheat and new combinations. The Technical Centre is also in continuous contact with the storage companies and the producers; it gives its approval to the shipments on the basis of its analysis of the samples from the harvests, and based on the reports that the producers are obliged to provide. You are asked to: Analyse Warburton's creation of value from the point of view of its chain and system of value. 6.-Corresponding to topic 4. Schneider beer is produced by the company CCU. CCU entered the competitive and concentrated Argentinean market in 1995. It had an expansion plan that called, first, for the acquisition of regional breweries to provide a firm business base, and then for the formation of an alliance with a strategic partner of world class, which would allow CCU to introduce a major international brand. Schneider is positioned as a beer with a fair and accessible price, preferred by consumers who know about beer. To achieve this market positioning, the company devotes about 6% of the sales revenue to marketing effort. Analysis of the sector Degree of concentration of the brewery sector: The brewery sector in Argentina can be considered as concentrated, since there are a few companies that have large market shares, and the rest of the market is shared among a large number of small competitors. 2 Market shares: • Quilmes: 66% • Brahma: 16% • CCU: 11% • Isenbeck: 7% Existing competitors: This sector is very competitive, because there are very few companies that control the market. However Quilmes has a powerful presence, and since it has the biggest market share, it can generally impose its leadership by means of various strategies. Principally, the strategies of the different companies are based on combinations of the following variables: • Price. • Product differentiation. • Marketing effort. • Market share. • Target segment or segments. Competition 1. Quilmes The Quilmes brand belongs to the company Cervecería y Maltería Quilmes. Quilmes was born in 1888 by the work of its founder, Otto Bemberg, but several decades had to pass, with various successful publicity campaigns and some serious blunders, for Quilmes beer to become the favourite brand of Argentinean drinkers. Currently, the data indicate that Quilmes has a share of between 60% and 65% of the Argentinean market. The image of Quilmes The image of Quilmes beer comprises: the label with two blue bands and one white band in the middle, the logo of Quilmes in black letters, then underneath the word "Crystal" and, lastly, a container of dark glass that reinforces the yellow colour of the beer. The brand began by being associated with one of the most traditional values in Argentina: football. The strategy of Quilmes and its alliance with the football clubs (and with the national team) include sponsorship of sports events, promotions linked to clubs, and publicity on the players' shirts. But the relationship with sport is not limited to football: Quilmes also has alliances with rugby and horse riding/show jumping. In total, the company spends 15% of the sales revenue on marketing, the result of which is to position the brand as a Premium beer. 2. Brahma The Brahma brand belongs to "Compañía Cervecera Brahma". It is Brasilian in origin, and entered the Argentinean market at the beginning of the 1980's as an imported beer. However, a decade later, the Company decided to manufacture the product locally. Currently, the Brahma brand occupies second place in the beer market of Argentina, with a market share of 16%. Strategies: the great launching of Brahma The Brahma brand was already well-known by the Argentinean consumers, particularly by all those who spent their summer holidays on the beaches of Brazil, where the brand featured in beach promotions with T-shirts and caps, and from the various kinds of publicity that reached Argentina from Brazil. Brahma had one big point in its favour: the Argentinean consumers already knew the brand. The principal strategy was to reach the consumer with low prices. The advertising campaigns were, therefore, accompanied by promotions and discounts. The Company allocated 14.5% of sales revenue to merchandising efforts. 3. Isenbeck Isenbeck beer is made by Cervecería Argentina SA. Isenbeck came on to the local market in 1994 but, in origin, this beer dates back to 1769, when the wife of Konrad Cramer began making it in the locality of Hamm, in the German region of Westfalia. It was taken over by the Warsteiner Group of Germany. Isenbeck is a Premium beer made with natural ingredients and without chemical additives. 3 According to estimates, Isenbeck has around 7% of the beer market in Argentina. At first, the publicity strategies were focused on the launching of Isenbeck in Argentina, with the 'Premium' attribute of the beer being promoted strongly. Once the image of the brand was established in the local market and consumers began to recognise it, Isenbeck started testing new strategies for getting consumers to relate to the brand. It was aimed mainly at the consumers of national beers, and was positioned for its excellent price-quality relationship. The percentage of sales revenue allocated to marketing is around 5%. Market It is difficult to identify the beer consumer with any particular social class, given that beer consumption is generalised throughout society. But the segments can be differentiated by the brands consumed. The segment S1 is characterised by consuming premium and imported brands. The segment S2, the biggest consumer, chooses national brands; the trade-off between price and perceived benefit determines product choice, since a "quality" product can be acquired for a modest price. The lowest segment (S3) bases its choices solely on the price factor. You are asked: Taking into account that the principal brands of beer that exist in the country are Quilmes, Brahma, Isenbeck and CCU., analyse the strategic groups operating in the brewery sector in Argentina, considering the strategic variables mentioned and representing the map of strategic groups with the dimensions: Market share-Marketing effort. 7.-Corresponding to topic 7. ALPHABET, a corporation comprising five different Strategic Business Units, presents the following data: SBU NA(0) SI(-1) SI(-2) SMC(0) NPAT(0) SB(0) %ROI (average of the sector) A 1,500 1,200 400 150 2,675 100 10 B 1,600 320 160 100 1,000 160 20 C 1,400 3,500 3,200 2,000 100 1,400 30 D 1,130 3,200 3,000 1,500 400 1,130 15 E 1,430 1,600 1,500 400 900 750 6 NA: Net Assets (book value). S I: Sales of the Industry. SMC: Sales of the Main Competitor. NPAT: Net Profit after Tax. SB: Sales of the SBU. ROI: Return on Net Assets (or Return on Investments). It is considered that a strong market growth rate (MGR) should be above 15%, and that the industry growth rate will keep stable in the period under analysis. Additional information to be taken into account is that a ROI below 10% is considered low and above 20% high. At this moment, this corporation has the priority of maintaining all its businesses, for which it could support a global negative Net Cash Flow, but never over 1% of its global net assets, in absolute value, without particular limits for each SBU. You are requested to: Propose the strategy to be followed by this corporation using the following boxes: BCG, GE-Mackinsey, and Profit-Investment. NOTES: ITEM 1 2 3 4 5 6 7 POINTS 0.75 0.75 0.75 0.75 1 1.5 1.5 -Time available for the exam: 2 hours and 15 minutes. -Any comment you consider necessary to clarify your answer, please reason it in your exam sheet. 4 SOLUTION 1.-Corresponding to topic 6. LEVELS Individual Team Organizational Inter-organizational SOURCES OF KNOWLEDGE People Technology (databases, patents, copyrights, etc.) Organization (processes, etc.) Environment ELEMENTS OF INTELLECTUAL CAPITAL Human capital Technological capital Organizational capital Relational (or social) capital 2.-Corresponding to topic 1. As a leader, expertise in business matters and skills in managing people (communication skills). As a strategist, organizational capabilities; capacity for negotiating and solving conflicts. A strong market-customer orientation; flexibility and ability for managing change. 3.-Corresponding to topic 2. Corporate strategy sets out to delineate the scope of activity of the company and to assign the capacities and resources among the various businesses operated by the corporate entity. The benefits of synergy are sought by taking advantage of the complementary aspects of these distinctive businesses. 4.-Corresponding to topic 3. This is a socio-cultural change in current society, with clear implications in the economy system. 5.-Corresponding to topic 5. The most relevant activities in its value chain are: Technology Development (research) and Procurement. Nevertheless, it is essential to highlight that value creation in this case is mainly due to the contract scheme agreed with suppliers (vertical linkage). 6.-Corresponding to topic 4. DIMENSIONS PRICE DIFFERENCIATION MARKETING MARKET SEGMENT EFFORT SHARE TARGETED QUILMES High High High High S1 BRAHMA Low Low High Low S3 CCU Intermediate Intermediate Low Low S2 ISENBECK Intermediate Intermediate Low Low S2 Watch out: -Direct correlation between price and differentiation dimensions 5 -Stable and lucrative industry structure: a clear leadership, with few differentiated brands targeting different segments of the market (although following different strategies). Map of Strategic Groups: G1 = Quilmes. G2 = Brahma. G3 = Isenbeck and CCU. 100 G1 Market Share (%) G3 G2 0 0 Marketing Effort (%) 15 7.-Corresponding to topic 7. Total Net Assets = 1,500 + 1,600 + 1,400 + 1,130 + 1,430 = 7,060 Limit for a negative Net Cash Flow = 7,060 x 0.01 = 70,60 BCG Matrix MGR = [SI(-1) / (SI(-2)] – 1 RMS(0) = SB(0) / SMC(0) NCF(0) = NPAT(0) – INVESTMENT(0) = NPAT(0) - MGR x NA(0) SBU A B C D E TOTAL MGR (%) 200 100 9.38 6.67 6.67 RMS 0.67 1.6 0.7 0.75 1.875 INVESTMENT 3,000 1,600 131. 25 75.33 95.33 NCF -325 -600 -31.25 324. 67 804. 67 173. 08 TIPO Question Mark Star Dog Dog Cash Cow 6 BOSTON CONSULTING GROUP BOX MGR A 200 % 100 % B 15 % C 9,38 % 6,67 % E 1,875 D 1,6 1 0,75 0,7 0.67 RMS Profit/Investment Matrix SBU A B C D E TOTAL NA(0) 1,500 1,600 1,400 1,130 1,430 7,060 NPAT(0) %NA %NPAT 2,675 21.25 52.71 1,000 22.66 19.70 100 19.83 1.97 400 16.01 7.88 900 20.25 17.73 5,075 100. 00 100. 00 7 100 N E 90 T 80 P R 70 60 O F A 50 I T 40 S 30 A. 20 T. 10 B E D C (%) 10 20 30 40 50 60 70 80 90 100 NET ASSETS (%) General Electric-McKinsey Matrix SBU A B C D E TOTAL NA(0) 1,500 1,600 1,400 1,130 1,430 7,060 NPAT 2,675 1,000 100 400 900 5,075 Industry’s Company’s ROI (%) ROI (%) 10 178. 33 20 62.50 30 7.14 15 35.40 6 62.94 8 MARKET ATTRACTIVENESS (industry’s ROI) GENERAL ELECTRIC-MACKINSEY BOX C B 20 % D 10 % A E 20 10 COMPETITIVE STRENGTH (company’s ROI) 9