Strategic Management Tutorial work - Week 1 - 5 PDF

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TUTORIAL 1:DISCUSSION QUESTION 1. What do you mean by strategy? How is a business model different firm a strategy? A strategy is a set of related actions that managers take to increase performance goals of their company. Business model is the managers’ conceptions of how strategies should work together to enable their company to gain a completive advantage. In other words, a business model describes how these strategies should fit together into a whole picture to enable the company to achieve superior profitability and profit growth. 2. What do you think are the sources of sustained superior profitability? The sustained superior profitability can be achieved through efficient and effective use of the capital invested in a company. Simply put, the sustained superior profitability is when the company keeps increasing profits as a result of decreasing expenses or increasing revenue, or both. This can be achieved by encouraging creativity and innovation, investments into Research & Development, low operating costs, high-volume production, strong market research and marketing strategies, superior products/services offered and many others. Strategic planning process definitely facilitates an achievement of the sustained super profitability. However, the managers should also be able to recognize and acknowledge the emergent strategies caused by unforeseen circumstance, serendipity or autonomous actions of business/functional managers in order to sustain the superior profitability over time. 3. What are the strength of formal strategic planning? What are the weaknesses? Formal strategic planning ensures consistency between the strategies of corporate, business and functional managers and it also provides a sense of direction for the company. Furthermore, formal strategic planning may challenge the prevailing status quo in the company. Formal planning also forces the management to design the organizational culture and structure as well as control mechanisms which otherwise, may be left off. Additionally, formal planning enables the company to evaluate the progress made towards the achievement of specific goals. One of the most important weaknesses is the fact that businesses are operating in a highly uncertain, complex and ambiguous environment. Consequently, the formal strategic plans are very likely to be negatively affected by unforeseen conditions. Rapid changes in the industry/national/world dynamics require flexible approach and quick adjustments that are profoundly impossible in the formal strategic planning. Moreover, the formal strategic planning if often criticized for not involving the lower-level managers (business and functional managers) sufficiently. In fact, the formal strategy planning is usually a duty of top corporate managers who are not deeply involved in the every-day actives of the company. In addition, the formal strategy planning does not account for serendipitous discoveries and events that may result in missed lucrative opportunities. Last but not least, the formal strategic planning is performed by people who are fallible beings affected by cognitive biases.

4. Can you think of an example in you own life where cognitive biases resulted in you making a

poor decision? When I was looking for accommodation during my first year of university, I was truly convenience that renting a private room would be a chapter option than choosing a student accommodation. To assure myself, I asked a number of people for their opinion but I purposely chose individuals who were likely to confirm my preexisting belief. In a nutshell, I was affected by a confirmation bias. As a result, I ended up renting the room privately which turned out to be more expensive than student accommodation. To avoid the confirmation bias, I should have asked for more people for their opinion. I could have also avoided that mistake by spending the equal amount of time on analyzing the pros and cons of choosing the student accommodation, instead of focusing entirely on private accommodation options. In addition, I could have used devil’s advocacy technique to avoid cognitive biases and the consequential poor decision. 5. Discuss the accuracy of the following statement: Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events. Taking into consideration the high frequency of technological advances, it seems clear that formal strategic planning may preclude the firms competing in high-tech industries from adapting to the rapidly changing business dynamics. It is important for high-tech firms to keep their strategies relatively flexible in order to be able to react to the unforeseen events quickly by adjusting their strategy and operations correspondingly. If the company strictly follows the formal strategic planning, it may fail to react to the threats imposed by external environment and unforeseen and consequently, loose its market share. 6. Pick the current or a past president of the US and evaluate his performance against the leadership characteristics. On the basis of this comparison, do you think that the president is a good strategic leader? Key characterizes of good strategic leaders that lead to high performance include:  vision, eloquence and consistent,  articulation of the business model,  commitment,  being well-informed,  willingness to delegate and empower,  astute use of power and  emotional intelligence. Based on these skills, I am of the opinion that is Barack Obama is a good strategic leader. However, they’re certain characteristic that could, and probably should be improved. To start with, Obama had a clear vision of America when applying for a second term. He was focusing much on civil and human rights, creating a system that ‘works for everyone’, combating climate change and many others. In the speeches, Obama was communicating his vision and ideas in a coherent way and he seemed to be truly committed to his political position and duties. In addition, being the president and having to appoint the Cabinet, definitely requires good delegation skills. Obama’s strong interpersonal skills as well as friendly, emphatic and passionate attitude suggest a high degree of emotional intelligence. These attributes are

particularly apparent during his pubic appearances. Unfortunately, Barack Obama has not been articulating his business model in a clear way. In fact, the majority of politicians fails to communicate how they are planning to achieve their goals and what actions they are going to undertake in order to move forward. Nevertheless, in certain areas such as climate change, Obama introduced a clear and comprehensive plan of reducing America’s dependency on fossil fuels and stimulating green energy segment.

TURORIAL 2: DISCUSSION QUESTIONS 1. How prevalent has the agency problem been in corporate America during the past decade? It seem that the agency problem has been prevalent in corporate America and there have been many examples of companies and their executives being engaged in unethical, and sometimes illegal behaviours. In facts, the interests of principals and agents are not the same; agents (senior executives) are motivated by desires for stars, power and income. A study from 2010 evaluated the relationship between the performance of CEOs and their pay, no relationship has been found. In addition the studies, there many companies such as Hollinger, Enron, WorldCom, HealthSouth and many other that have experiences serious financial and legal problems as a result of self-interest-seeking executives. Nevertheless, in recent years many principals have implanted comprehensive measurement and control systems in order to reduce the scope and frequency of the problem and thus, to align their interest with the interest of the agents. Who benefited the most from the late 1990s boom in initial public offerings of Internet companies: investors (stockholders) in those companies, managers, or investment banker? I think that investment bankers and investors benefited the most from the boom in late 1990s. First of all, investment bankers provide services and guide the companies that want to go public. Investment bankers charge a fee for their assistance, therefore, they benefited the most from the boom in IPOs of Internet companies. Simply put, a high number of companies using their services to go pubic created large revenue for investment banks. In regards to the investor, the level of benefits gained from the boom was hugely depended on the time of their investment. Those who managed to buy initial public offerings and sell them before the market collapse, definitely earned high profits. Those who didn’t sell the stock before the market collapse and the price drop, might have experienced losses. 2. Why is maximising ROIC consistent with maximising return to stockholders? ROIC is a good measure of how efficiently managers are using the capital invested in the company to generate profits. In other words, ROIC points out how the capital resources provided by stockholders are turned into profits. When ROIC is maximised, the value added to shareholder’s equity (after covering all company expenses) is also maximised. Maximising ROIC results in the increasing value of a company and thus the increasing value of a share of stock in the company. Since the stockholder receive a return in a from of dividends and capital appreciation in the market value of a share, the increase in value of a share of stock (caused by ROIC maximization) lead to higher returns to stockholders. 3. How might a company configure its strategy-making process to reduce the probability that manager will pursue their own self-interest at the expense of stockholders? There are many corporate governance mechanisms that may facility the reduction of the scope and frequency of the agency problem, including the objective board of directors, stockbased compensation (stock options and stock grants), financial statements and auditors and the threat of corporate takeover. In addition to above mentioned governance mechanisms, the company can implant strategic control system as a part of their strategic-making process to try to reduce the agency problem. To implant this control system, the company should start with a clear definition of standards and target which will perform as a benchmark, then the

company should create system for measuring and monitoring performance. Once achieved, the company can compere actual performance against the targets, evaluate the results and take corrective actions if necessity. One type of strategic control system is the balanced scorecard model that incorporates financial and performance measures in order to provide the comprehensive image of the present and future performance of the company. Moreover, when analysing internal environment as a part of strategy-making process, companies may look into the employee incentive systems and what are the most effective ways to motivate their employees. 4. In a public corporation, should the CEO of the company also be allowed to be the chairman of the board? What problems might this present? I believe that the CEO of the company should not be allowed to be the chairman of the board since it this type of arrangement is likely to decrease the objectiveness of the board. First of all, the CEO can nominate inside directors who will behave in a favourable way and will be unlike to call CEOs’ actions into question. By the same token, the CEO can nominate the outside directors based toward his or her interest. Furthermore, the CEO who is also a chairman may manipulate an agenda and proceedings of board discussions so that their actions and behaviour are in the center of attention. It also allows the CEO to manipulate data in a favourable way, leading to information asymmetry. Taking into consideration all of the above mentioned disadvantages of the CEO being also the chairman of the board, it becomes clear why 43% of form on Standard & Poor’s 500 index split these two positions into separate jobs. 5. Under what conditions is it ethically defensible to outsource production to companies in the developing world that have much lower labour costs when such actions involve laying off long-term employees in the firm’s home country? I think that outsourcing the production process to the developing country at the cost of longterm domestic employees is simply unethical. When facing this ethical dilemma, manager may use an argument of maximizing the long-term profitability and profit growth of the company as a reason to outsource the production process. However, by prioritizing the corporate goals, the managers violate the fundament rights other stakeholders such as employees and communities (local and abroad). 6. Is it ethical for a firm faced with a labor shortage to employ illegal immigrant to meet its needs? It is definitely not ethical for a company to employ illegal immigrant to meet their labour requirements. Simply put, this kind of business behaviour violates the fundament rights of stakeholders such as communities, the general public, the government and employees-illegal immigrants. This dilemma is not only about breaking the law but also about the social impact on the local community and the immigrants well-being. In fact, working illegally increase the likelihood of unfair compensation for the work, unsafe work conditions etc. One may argue that hiring illegal immigrant benefits both sides financially. Nevertheless, this is a short-term approach that may have detrimental legal consequences for the company itself and for the immigrants.

TURORIAL 3: CLOSING CASE QUESTIONS 1. Explain why the wide-bodied segment of the large commercial jet aircraft industry can only profitably support two players are present. What are the implications of your answers for barriers to entry into this segment? The wide-bodied segment of the large commercial jet aircraft industry can be only profitable for Boeing and Airbus due to the extremely high entry barriers reinforced by substantial economies of scale, absolute cost advantage, high customer switching costs and absolute cost advantage. The costs and risks of entering the wide-bodied segment industry are so high that no other company can afford competing with Boeing and Airbus. Simply put, only these two aircraft producers have resources to develop and bring new wide-bodied jests into the market. In addition, the demand for the products needs to be high so that the companies can see profit-making opportunities in developing new aircraft. In fact, it may take 10 years for Boeing to break even on their latest Boeing 787. Provided that the demand for Boeing is much higher than for its competitors (excluding Airbus), it would take Comac or Bombardier even longer to make any profit on the investment. These high entry barriers effectively keep potential competitor out of the large commercial aircraft segment. 2. Are entry-barrier into the narrow-bodied segment the same as those into the wide-bodied segment? Explain you answer? The entry barriers into the narrow-bodied segment seem to be much lower than the entry barriers into the wide-bodied segment. This statement can be supported by the recent changes in the competitive landscape of the narrow-bodied segment. In fact, in last years, three new companies entered the industry offering smaller narrow-bodied jets. In fact, these new entrants (Comac, Bombardier and Embraer) have recognised the increasing demand for narrow-bodied jets. Importantly, the entry barriers into this segment are still extremely high but they are more attainable than the entry barriers into the wide-bodied segment. This is particularly applicable to Bombardier and Embraer which can use their supplier contacts and experience from developing and manufacturing regional jets and consequently, achieve economies of scale. 3. Given future predictions for demand, how do you think the industry as a whole will do over the next twenty years? How might you forecast differ for the wide-bodied and narrow-bodied segments? Since Boeing predicts that over the next 20 years the airline traffic will continue to grow at 5 % per annum, the aircraft industry will keep growing at a steady rate. Taking into consideration the growing interconnection between countries (and regions within countries), people will most likely increase the number of business sand leisure plane trips during the next twenty years. Nevertheless, the growth may not be even for the wide-bodied and narrow-bodied segments. The increasing number of domestic flight worldwide will increase demand for narrow-bodied aircraft. This trend can be demonstrated by the high number of orders for smaller narrow-bodied jets produced by Comac, Bombardier and Embraer. If these three companies keep growing over the next decades, they may create a significant pressure on the profits of Airbus and Boeing. In regards to the forecast for the wide-bodied aircraft, the demand will keep increasing but at a slower rate than for the narrowbodied segment. In addition, if the profits of Airbus and Boeing start stagnating or decreasing, these two current industry leaders will be less willing to develop new models of wide-boded aircraft since the cost are extremely high. In addition, there will be a great focus on improving fuel efficiency in both narrow-bodied and wide-bodied segments. 4. If you were a new entrant into the bottom part of the narrow-bodied industry, as a Comac and Bombardier, what would be your long-term development strategy?

The long-term strategy would be to develop an expertise in the narrow-bodied industry, create substantial economy of scale and gain customer loyalty. Once achieved, the companies should focus on improving their narrow-bodied aircraft, paying a special attention to fuel efficiency. Even if these new entrants keep growing and developing successfully, it will be extremely had directly compete with credible and reputable companies like Boeing and Airbus. Hence, new entrants may consider joining forces and creating alliances in order to become more competitive. In addition, new entrants should not rush into the wide-bodied segment. In fact, developing and brining into the market large jet aircraft is extremely costly and can be achieved only through economies of scale and absolute cost advantage (also brand loyalty). Once Comac or Bombardier achieve a strong brand position, they may consider developing wide-bodied aircraft. Nevertheless, new entrants should carefully monitor the external environment that may create some new opportunities (mainly technology innovations) for new entrants. 5. What can Boeing and Airbus do to deter further entry into industry, and/or keep new entrant boxed into the bottom end of the market (that is, smaller narrow-bodied jets)? In order deter further entry into industry; Boeing and Airbus need to raise the entry barriers by making it more costly. Simply put, the greater the cost potential competitors (Comac, Bombardier) must bear to enter the industry, the greater the barriers to entry, and the weaker willingness to do so. Both companies should try to increase the customer loyalty by providing excellent customer service, superior quality and the most innovative products. At the same time, Boeing and Airbus can negotiate exclusive contacts with clients and suppliers. As a matter of fact, selling products in bundles is already a common practise in the industry but the companies may try to offer bigger bundles (particularly focusing on narrow-bodied jets) by offering a slightly cheaper price or adding other customer-value factors. This type of tactic should increase customer loyalty an also increase the switching costs for the clients. If possible, the overall production of aircraft should also be increased in order to boost the benefits of economies of scale. Last but not least, bot companies should provide their employees with excellent work conditions and environment in order to boost their job satisfaction so that they will be less willing to move to Comac or Bombardier.

TUTORIAL 4: DISCUSSION QUESTIONS 1. What are the primary implications of the material discussed in this chapter for strategy formulation? Pro...