Hide Assignment InformationInstructions
BMGT 495 – Project 3: Internal Environmental Analysis (Week 6)
NOTE: All submitted work is to be your original work (and only yours). You may not use any work from another student, the Internet or an online clearinghouse. You are expected to understand the Academic Dishonesty and Plagiarism Policy, and know that it is your responsibility to learn about instructor and general academic expectations with regard to proper citation of sources as specified in the APA Publication Manual, 6th Ed. (Students are held accountable for in-text citations and an associated reference list only).
Project 3 is due Sunday at 11:59 p.m. eastern time of week 6 unless otherwise changed by the instructor.
Purpose:
This project is the third of four projects. Students will perform an internal environmental analysis using the tools and concepts learned in the course to date. You will also draw from previous business courses to develop an understanding of how organizations develop and manage strategies to establish, safeguard and sustain its position in a competitive market.
Students also have the opportunity to review an organization’s objectives and goals and the key functional areas within the organization. Performing an internal environment analysis helps assess a firm’s internal resources and capabilities and plays a critical role in formulating strategy by identifying a firm’s strengths to capitalize on so that it can effectively overcome weaknesses.
Outcomes Met With This Project:
- utilize a set of useful analytical skills, tools, and techniques for analyzing a company strategically;
- integrate ideas, concepts, and theories from previously taken functional courses including, accounting, finance, market, business and human resource management;
- analyze and synthesize strengths, weaknesses, opportunities, and threats (SWOT) to generate, prioritize, and implement alternative strategies in order to revise a current plan or write a new plan and present a strategic plan.
Instructions:
Step 1: Specific Company for All Four Projects
The companies that your instructor has assigned to you for Project 1 is the company you will use for this project. The assigned company must be used for this project and in subsequent projects in the course. Students must complete the project using the assigned company. Deviating from the assigned company will result in a zero for the project.
After reading the course material, you will complete the steps below.
Step 2: Course Materials and Research
Note: Your report is based on the results of the research performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites or any pre-prepared document, video or source material. A zero will be earned for not doing your own analysis.
Library Resources
On the main navigation bar in the classroom select, Resources and then select Library. Select Databases by Title (A – Z). Select M from the alphabet list, and then select Mergent Online. You may also use Market Line and should be looking at the focal company’s Annual Report or 10K report. You are not depending on any one resource to complete the analysis. It is impossible to complete a Porter’s Five Forces, competitive analysis or OT by using only course material.
You should not be using obscure articles, GlassDoor, or Chron or similar articles.
Research for Financial Analysis:
Financial Research
Research for Industry Analysis
CSI Market
UMGC library is available for providing resources and services. Seek library support for excellence in your academic pursuit.
Library Support
Extensive library resources and services are available online, 24 hours a day, seven days a week at
https://www.umgc.edu/library/index.cfm
to support you in your studies. The UMGC Library provides research assistance in creating search strategies, selecting relevant databases, and evaluating and citing resources in a variety of formats via its Ask a Librarian service at
https://www.umgc.edu/library/libask/index.cfm
.
Scholarly Research in OneSearch is allowed.
To search for only scholarly resources, you are expected to place a check mark in the space for “Scholarly journals only” before clicking search.
You should not be using obscure articles, GlassDoor, or Chron or similar articles.
Research for Financial Analysis: Financial Research
Research for Industry Analysis CSI Market
Step 3: How to Set Up the Report
- The document has to be written in Word or rtf. No other format is acceptable. No pdf files will be graded. Use 12-point font for a double-spaced report. The final product cannot be longer than 16 pages in length, which includes all tables and matrices but excludes the title page and reference page. Do no use an Appendix. Those items identified in the technical analysis should appear under the appropriate heading in the paper. It is important to format the tables/matrices to fit the report and to present the analysis in a clear concise manner.
- Create a title page with title, your name, the course number, the instructor’s name;
- Use this template to complete the project: Project 3 Template.
Step 4: Strategic Role of Corporate Strengths/Weaknesses in the Internal Strategy Analysis
There are three levels of strategy: corporate level strategy, business level strategy and functional level strategy. Corporate level strategies are related to businesses or markets the focal company successfully can compete within. Corporate level strategies affect the entire organization and are formulated by top management using input from middle and lower management. Decision making about corporate level strategies are considered complex, affect the entire company and relate to an organization’s resource capabilities. Corporate level strategies align with an organization’s mission statement and ideally are designed around goals and objectives.
Perform an analysis on:
- Corporate-level strategies
- Create a partial SWOT table and performs a SW analysis and discuss the strategic inferences/implications (Discuss what strategies would allow the company to capitalize on its major strengths and what strategies would allow the company to improve upon its major weaknesses.)
- Create an IFE matrix analysis. Make sure to explain how the matrix was developed and discuss the strategic inferences/implications
- Develop a Grand Strategy Matrix. Make sure to explain how the matrix was developed and discuss the strategic inferences/implications at a corporate level and business-unit-level.
Step 5: Strategic Role of Internal Resources/Departments/Processes
Perform an analysis on:
- Business-level strategies
Evaluate the company’s product line, target market
Identify and explain business-level strategies - Functional-level strategies
Assess the company’s organizational structure, the organizational culture, marketing production, operations, finance and accounting, and R&D that can be accomplished by viewing the company’s website, interviews, and surveys.
Explain how these strategies align with the company’s vision and mission statements.
Step 6: Strategic Financial Analysis for the Last Reported Fiscal Year
- Use the company’s income statement and balance sheet to calculate no less than a total of ten (10) key financial ratios to the business that are relevant to the focal company. There must be a mix of four different key categories inclusive of the leverage, liquidity, profitability, and efficiency ratios so that the ratios do not all come from the same category. The specific ratios selection must come from the following categories.
- Leverage Ratios (Long term debt ratio, Total debt ratio, Debt-to-equity ratio, Times interest earned ratio, and Cash coverage ratio).
- Liquidity Ratios (Net working capital to total assets ratio, current ratio, quick ratio, and cash ratio)
- Efficiency Ratios (Asset turnover ratio, Average collection period, Inventory turnover ratio, and Days sales outstanding)
- Profitability Ratios (Net profit margin, Return on assets, and Return on equity)
- The selection of the ratios has to be relevant to the focal company so it is important to choose wisely.
- Quote industry financial average ratios that correlate to the 10 financial ratios selected for the focal company. You may find the industry averages by going to the library. If you are unable to find on your own, reach out to the librarian as these resources are readily available.
- Discuss the corporate financial standing based on a financial ratio analysis. Include whether the company’s financial ratio is a strength, a weakness or a neutral factor.
Note: If copied directly from the Internet, a zero will be assigned. When placing any table or figure in a table, it must be explained in detail.
Step 7: Composite Analysis
A composite analysis is one in which you will bring in a combination of relevant factors from the various analyses (EFE Matrix, IFE matrix, CPM matrix, SWOT, Grand Strategy Matrix and QSPM). The QSPM is a tool that helps determine the relative attractiveness of feasible alternative strategies based on the external and internal key success factors.
- Develop a Quantitative Strategic Planning Matrix (QSPM) analysis. Make sure to discuss how the matrix was developed and discuss the strategic inferences/implications.
- Develop a composite analysis on internal factor strategy analysis based on the qualitative and quantitative analytical outcomes from those steps above.
Step 8: Review the Paper
Read the paper to ensure all required elements are present.
The following are specific requirements that you will follow. Use the checklist to mark off that you have followed each specific requirement.
Checklist
Specific Project Requirements
Proofread your paper
Read and use the grading rubric while completing the paper to ensure all requirements are met that will lead to the highest possible grade.
Third person writing is required. Third person means that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link:
http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person
.
Contractions are not used in business writing, so do not use them.
Paraphrase and do not use direct quotations. Paraphrase means you do not use more than four consecutive words from a source document. Removing quotation marks and citing is inappropriate. Instead put a passage from a source document into your own words and attribute the passage to the source document. There should be no passages with quotation marks. Using more than four consecutive words from a source document would require direct quotation marks. Changing words from a passage does not exclude the passage from having quotation marks. If more than four consecutive words are used from source documents, this material will not be included in the grade.
You are expected to use the research and weekly course materials to develop the analysis and support the reasoning. There should be a robust use of the course material. Material used from a source document must be cited and referenced. A reference within a reference list cannot exist without an associated in-text citation and vice versa. Changing words from a passage does not exclude the passage from having quotation marks.
Use in-text citations and provide a reference list that contains the reference associated with each in-text citation.
You may not use books in completing this problem set unless part of the course material. Also, do not use a dictionary, Wikipedia or Investopedia or similar sources. You may not use Fern Fort University, Ibis World or any other for-fee website.
Provide the page or paragraph number in every in-text citation presented. Since the eBook does not have page numbers, include the chapter title and topic heading. If using a video, provide the minutes and second of the cited material.
Step 9: Submit the paper in the Assignment Folder (The assignment submitted to the Assignment Folder will be considered the student’s final product and therefore ready for grading by the instructor. It is incumbent upon the student to verify the assignment is the correct submission. No exceptions will be considered by the instructor).
Self-Plagiarism: Self-plagiarism is the act of reusing significant, identical or nearly identical portions of one’s own work. You cannot re-use any portion of a paper or other graded work that was submitted to another class even if you are retaking this course. You also will not reuse any portion of previously submitted work in this class. A zero will be assigned to the assignment if self-plagiarized. Faculty do not have the discretion to accept self-plagiarized work.
NOTE: All submitted work is to be your original work. You may not use any work from another student, the Internet or an online clearinghouse. You are expected to understand the Academic Dishonesty and Plagiarism Policy, and know that it is your responsibility to learn about instructor and general academic expectations with regard to proper citation of sources as specified in the APA Publication Manual, 6th Ed. (Students are held accountable for in-text citations and an associated reference list only).
Saylor URL: http://www.saylor.org/books Saylor.org
206
Chapter 7
Competing in International Markets
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are the main benefits and risks of competing in international markets?
2. What is the “diamond model,” and how does it help explain why some firms compete better in
international markets than others?
3. What are the various global strategies that firms can adopt?
4. What forms of involvement are available to firms that seek to compete in international markets?
Kia Picks Up Speed
Kia is enjoying accelerated growth within the global automobile industry.
On June 2, 2011, South Korean automaker Kia announced plans for a major expansion of its American
production facility. Capacity at Kia Motors Manufacturing Georgia Inc. (KMMG) was slated to expand 20
percent from 300,000 to 360,000 vehicles per year. In addition to the crossover utility vehicle Sorento,
the plant would begin making a sedan named the Optima in September 2011. The expansion of the plant
was estimated to cost $100 million and was expected to create 1,000 new jobs. [1]
This ambitious growth was made possible by Kia’s superb performance in the US market. KMMG had
started building vehicles less than two years earlier after being constructed for a cost of $1 billion. In
2010, yearly sales in the United States climbed above 350,000 vehicles. Kia’s overall share of the US
market increased in 2010 for the sixteenth consecutive year. In May 2011, Kia sold more than 48,000 cars
and trucks in United States, an increase of more than 53 percent from May 2010 sales levels. The Optima
led the way with a whopping 210 percent increase in sales.
Kia was not the only beneficiary of its success. KMMG’s location of West Point, Georgia, had been
economically devastated when its homegrown textile company, WestPoint Home, shut down its local
Chapter 7 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
207
factories to take advantage of lower labor prices overseas. Following a fierce competition with towns in
Mississippi, Kentucky, and other states, West Point was selected in 2006 as the site of Kia’s first US
manufacturing facility. To win the plant, state and local authorities offered Kia more than $400 million
worth of incentives, including tax breaks, free land, and infrastructure creation.
Georgia’s return on this investment included two thousand new jobs at the plant as well as hundreds of
jobs at suppliers that set up shop to support KMMG. The neighboring state of Alabama benefited from
KMMG’s success too. As of June 2011, nearly sixty companies spread across twenty-three Alabama
counties supplied parts or services to KMMG. [2]
The name “Kia” means to arise or come up out of Asia. [3] This name is very appropriate; Kia rose from
humble beginnings as a maker of bicycle parts in 1944 to become a global player in the automobile
industry. As of 2011, Kia was producing more than 2.1 million vehicles per year in eight countries. Kias
were sold in 172 countries. Kia employed more than 44,000 people and enjoyed annual revenues in excess
of $20 billion. Fellow South Korean automaker Hyundai owned just over 33 percent of Kia, and the two
firms strengthened each other through collaboration. When taking all of these facts into consideration,
Kia’s slogan—The Power to Surprise—had to make its rivals wonder what surprises the Korean upstart
might have in store for them next.
Workers in Georgia build Sorentos for South Korea–based Kia.
Saylor URL: http://www.saylor.org/books Saylor.org
208
Image courtesy of IFCAR,
http://upload.wikimedia.org/wikipedia/commons/9/98/2011_Kia_Sorento_LX_2_–_02-13-
2010 .
[1] http://www.kmmgusa.com/2011/06/kia-motors-manufacturing-georgia- begins-expansion-projects-to-support-
increased-volume-beginning -in-2012/
[2] Kent, D. 2011, June 19. Kia production in Georgia helping companies across Alabama. al.com. Retrieved from
http://blog.al.com/businessnews/2011/06/kia_production_in_georgia_help.html
[3] Frequently asked questions. Kia website. Retrieved from http://www.kia.com/#/faq/
Saylor URL: http://www.saylor.org/books Saylor.org
209
7.1 Advantages and Disadvantages of Competing in
International Markets
L E A R N I N G O B J E C T I V E S
1. Understand the potential benefits of competing in international markets.
2. Understand the risks faced when competing in international markets.
As Kia’s experience illustrates, international business is a huge segment of the world’s economic
activity. Amazingly, current projections suggest that, within a few years, the total dollar value of
trade across national borders will be greater than the total dollar value of trade within all of the
world’s countries combined. One driver of the rapid growth of internal business over the past two
decades has been the opening up of large economies such as China and Russia that had been mostly
closed off to outside investors.
The United States enjoys the world’s largest economy. As an illustration of the power of the
American economy, consider that, as of early 2011, the economy of just one state—California—would
be the eighth largest in the world if it were a country, ranking between Italy and Brazil. [1] The size of
the US economy has led American commerce to be very much intertwined with international
markets. In fact, it is fair to say that every business is affected by international markets to some
degree. Tiny businesses such as individual convenience stores and clothing boutiques sell products
that are imported from abroad. Meanwhile, corporate goliaths such as General Motors (GM), Coca-
Cola, and Microsoft conduct a great volume of business overseas.
Access to New Customers
Perhaps the most obvious reason to compete in international markets is gaining access to new customers.
Although the United States enjoys the largest economy in the world, it accounts for only about 5 percent
of the world’s population. Selling goods and services to the other 95 percent of people on the planet can be
very appealing, especially for companies whose industry within their home market are saturated ().
Few companies have a stronger “All-American” identity than McDonald’s. Yet McDonald’s is increasingly
reliant on sales outside the United States. In 2006, the United States accounted for 34 percent of
Saylor URL: http://www.saylor.org/books Saylor.org
210
McDonald’s revenue, while Europe accounted for 32 percent and 14 percent was generated across Asia,
the Middle East, and Africa. By 2011, Europe was McDonald’s biggest source of revenue (40 percent), the
US share had fallen to 32 percent, and the collective contribution of Asia, the Middle East, and Africa had
jumped to 23 percent. With less than one-third of its sales being generated in its home country,
McDonald’s is truly a global powerhouse.
Levi’s jeans are appreciated by customers worldwide, as shown by this balloon featured at the Putrajaya
International Hot Air Balloon Fiesta.
Image courtesy of Kevin Poh, http://www.flickr.com/photos/kevinpoh/4446228896.
Saylor URL: http://www.saylor.org/books Saylor.org
211
China and India are increasingly attractive markets to US firms. The countries are the two most populous
in the world. Both nations have growing middle classes, which means that more and more people are able
to purchase goods and services that are not merely necessities of life. This trend has created tremendous
opportunities for some firms. In the first half of 2010, for example, GM sold more vehicles in China than it
sold in the United States (1.2 million vs. 1.08 million). This gap seemed likely to expand; in the first half of
2010, GM’s sales in China increased nearly 50 percent relative to 2009 levels, while sales in the United
States rose 15 percent. [2]
Lowering Costs
Many firms that compete in international markets hope to gain cost advantages. If a firm can increase it
sales volume by entering a new country, for example, it may attain economies of scale that lower its
production costs. Going international also has implications for dealing with suppliers. The growth that
overseas expansion creates leads many businesses to purchase supplies in greater numbers. This can
provide a firm with stronger leverage when negotiating prices with its suppliers.
Offshoring has become a popular yet controversial means for trying to reduce costs. Offshoring involves
relocating a business activity to another country. Many American companies have closed down operations
at home in favor of creating new operations in countries such as China and India that offer cheaper labor.
While offshoring can reduce a firm’s costs of doing business, the job losses in the firm’s home country can
devastate local communities. For example, West Point, Georgia, lost approximately 16,000 jobs in the
1990s and 2000s as local textile factories were shut down in favor of offshoring. [3]Fortunately for the
town, Kia’s decision to locate its first US factory in West Point has improved the economy in the past few
years. In another example, Fortune Brands saved $45 million a year by relocating several factories to
Mexico, but the employee count in just one of the affected US plants dropped from 1,160 to 350.
A growing number of US companies are finding that offshoring is not providing the benefits they had
expected. This has led to a new phenomenon known asreshoring, whereby jobs that had been sent
overseas are returning home. In some cases, the quality provided by workers overseas is not good enough.
Carbonite, a seller of computer backup services, found that its call center in Boston was providing much
strong customer satisfaction than its call center in India. The Boston operation’s higher rating was
Saylor URL: http://www.saylor.org/books Saylor.org
212
attained even though it handled the more challenging customer complaints. As a result, Carbonite plans
to shift 250 call center jobs back to the United States by the end of 2012.
In other cases, the expected cost savings have not materialized. NCR had been making ATMs and self-
service checkout systems in China, Hungary, and Brazil. These machines can weigh more than a ton, and
NCR found that shipping them from overseas plants back to the United States was extremely expensive.
NCR hired 500 workers to start making the ATMs and checkout systems at a plant in Columbus, Georgia.
NCR’s plans call for 370 more jobs to be added at the plant by 2014. Similarly, General Electric
announced plans to hire approximately 1,300 workers in Louisville, Kentucky, starting in the fall of 2011.
These workers will make water heaters and refrigerators that had been produced overseas. [4]
Diversification of Business Risk
A familiar cliché warns “don’t put all of your eggs in one basket.” Applied to business, this cliché suggests
that it is dangerous for a firm to operate in only one country. Business risk refers to the potential that an
operation might fail. If a firm is completely dependent on one country, negative events in that country
could ruin the firm. Just like spreading one’s eggs into multiple baskets reduces the chances that all eggs
will be broken, business risk is reduced when a firm is involved in multiple countries.
Saylor URL: http://www.saylor.org/books Saylor.org
213
Firms can reduce business risk by competing in a variety of international markets. For example,
the ampm convenience store chain has locations in the United States, Mexico, Brazil, and Japan.
Image courtesy of MASA, http://upload.wikimedia.org/wikipedia/commons/d/db/Ampm.JPG.
Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If
Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the
financial consequences could have been grave. Because these firms operate in many countries, however,
they were protected from being ruined by events in Japan. In other words, these firms diversified their
business risk by not being overly dependent on their Japanese operations.
American cigarette companies such as Philip Morris and R. J. Reynolds are challenged by trends within
the United States and Europe. Tobacco use in these areas is declining as more laws are passed that ban
smoking in public areas and in restaurants. In response, cigarette makers are attempting to increase their
operations within countries where smoking remains popular to remain profitable over time.
In 2006, for example, Philip Morris spent $5.2 billion to purchase a controlling interest in Indonesian
cigarette maker Sampoerna. This was the biggest acquisition ever in Indonesia by a foreign company.
Tapping into Indonesia’s population of approximately 230 million people was attractive to Philip Morris
in part because nearly two-thirds of men are smokers, and smoking among women is on the rise. As of
2007, Indonesia was the fifth-largest tobacco market in the world, trailing only China, the United States,
Russia, and Japan. To appeal to local preferences for cigarettes flavored with cloves, Philip Morris
introduced a variety of its signature Marlboro brand called Marlboro Mix 9 that includes cloves in its
formulation. [5]
Trends in the decline of cigarette use in the United
States and Europe may snuff out profits enjoyed by
brands such as Marlboro.
Saylor URL: http://www.saylor.org/books Saylor.org
214
Image courtesy of Autodesigner, http://en.wikipedia.org/wiki/File:Marlboroultralights.JPG.
Figure 7.2 Entering New Markets: Worth the Risk?
Image courtesy of The Fayj, http://www.flickr.com/photos/fayjo/333325967/
Political Risk
Although competing in international markets offers important potential benefits, such as access to new
customers, the opportunity to lower costs, and the diversification of business risk, going overseas also
poses daunting challenges. Political risk refers to the potential for government upheaval or interference
with business to harm an operation within a country (). For example, the term “Arab Spring” has been
used to refer to a series of uprisings in 2011 within countries such as Tunisia, Egypt, Libya, Bahrain, Syria,
Saylor URL: http://www.saylor.org/books Saylor.org
215
and Yemen. Unstable governments associated with such demonstrations and uprisings make it difficult
for firms to plan for the future. Over time, a government could become increasingly hostile to foreign
businesses by imposing new taxes and new regulations. In extreme cases, a firm’s assets in a country are
seized by the national government. This process is callednationalization. In recent years, for example,
Venezuela has nationalized foreign-controlled operations in the oil, cement, steel, and glass industries.
Countries with the highest levels of political risk tend to be those such as Somalia, Sudan, and Afghanistan
whose governments are so unstable that few foreign companies are willing to enter them. High levels of
political risk are also present, however, in several of the world’s important emerging economies, including
India, the Philippines, Russia, and Indonesia. This creates a dilemma for firms in that these risky settings
also offer enormous growth opportunities. Firms can choose to concentrate their efforts in countries such
as Canada, Australia, South Korea, and Japan that have very low levels of political risk, but opportunities
in such settings are often more modest. [6]
Economic Risk
Economic risk refers to the potential for a country’s economic conditions and policies, property rights
protections, and currency exchange rates to harm a firm’s operations within a country. Executives who
lead companies that do business in many different countries have to take stock of these various
dimensions and try to anticipate how the dimensions will affect their companies. Because economies are
unpredictable, economic risk presents executives with tremendous challenges.
Consider, for example, Kia’s operations in Europe. In May 2009, Kia reported increased sales in ten
European countries relative to May 2008. The firm enjoyed a 62 percent year-to-year increase in Slovakia,
58 percent in Austria, 50 percent in Gibraltar, 49 percent in Sweden, 43 percent in Poland, 24 percent in
Germany, 21 percent in the United Kingdom, 13 percent in the Czech Republic, 6 percent in Belgium, and
3 percent in Italy. [7] As Kia’s executives planned for the future, they needed to wonder how economic
conditions would influence Kia’s future performance in Europe. If inflation and interest rates were to
increase in a particular country, this would make it more difficult for consumers to purchase new Kias. If
currency exchange rates were to change such that the euro became weaker relative to the South Korean
won, this would make a Kia more expensive for European buyers.
Saylor URL: http://www.saylor.org/books Saylor.org
216
Cultural Risk
Cultural risk refers to the potential for a company’s operations in a country to struggle because of
differences in language, customs, norms, and customer preferences (). The history of business is full of
colorful examples of cultural differences undermining companies. For example, a laundry detergent
company was surprised by its poor sales in the Middle East. Executives believed that their product was
being skillfully promoted using print advertisements that showed dirty clothing on the left, a box of
detergent in the middle, and clean clothing on the right.
A simple and effective message, right? Not exactly. Unlike English and other Western languages, the
languages used in the Middle East, such as Hebrew and Arabic, involve reading from right to left. To
consumers, the implication of the detergent ads was that the product could be used to take clean clothes
and make the dirty. Not surprisingly, few boxes of the detergent were sold before this cultural blunder was
discovered.
A refrigerator manufacturer experienced poor sales in the Middle East because of another cultural
difference. The firm used a photo of an open refrigerator in its prints ads to demonstrate the large amount
of storage offered by the appliance. Unfortunately, the photo prominently featured pork, a type of meat
that is not eaten by the Jews and Muslims who make up most of the area’s population. [8] To get a sense of
consumers’ reactions, imagine if you saw a refrigerator ad that showed meat from a horse or a dog. You
would likely be disgusted. In some parts of world, however, horse and dog meat are accepted parts of
diets. Firms must take cultural differences such as these into account when competing in international
markets.
Cultural differences can cause problems even when the cultures involved are very similar and share the
same language. RecycleBank is an American firm that specializes in creating programs that reward people
for recycling, similar to airlines’ frequent-flyer programs. In 2009, RecycleBank expanded its operations
into the United Kingdom. Executives at RecycleBank became offended when the British press referred to
RecycleBank’s rewards program as a “scheme.” Their concern was unwarranted, however. The
word scheme implies sneakiness when used in the United States, but a scheme simply means a service in
the United Kingdom. [9]Differences in the meaning of English words between the United States and the
Saylor URL: http://www.saylor.org/books Saylor.org
217
United Kingdom are also vexing to American men named Randy, who wonder why Brits giggle at the
mention of their name.
K E Y T A K E A W A Y
Competing in international markets involves important opportunities and daunting threats. The
opportunities include access to new customers, lowering costs, and diversification of business risk. The
threats include political risk, economic risk, and cultural risk.
E X E R C I S E S
1. Is offshoring ethical or unethical? Why?
2. Do you expect reshoring to become more popular in the years ahead? Why or why not?
3. Have you ever seen an advertisement that was culturally offensive? Why do you think that companies are
sometimes slow to realize that their ads will offend people?
[1] Stateside substitutes. 2011, January 2011. The Economist. Retrieved
fromhttp://www.economist.com/blogs/dailychart/2011/01/comparing_us_states_ countries
[2] Isidore, C. 2010. July 2. GM’s Chinese sales top US. CNNMoney. Retrieved from
http://money.cnn.com/2010/07/02/news/companies/gm_china/index.htm
[3] Copeland, L. 2010, March 25. Kia breathes life into old Georgia textile mill town. USA Today. Retrieved
from http://www.usatoday.com/news/nation/2010-03-24-boomtown_N.htm
[4] Isidore, C. 2011, June 17. Made in USA: Overseas jobs come home. CNNMoney. Retrieved from
http://money.cnn.com/2011/06/17/news/economy/made_in_usa/index.htm
[5] T2M. 2007, July 3. Clove-flavored Marlboro now in Indonesia [Web blog post]. Retrieved from http://www.the-
two-malcontents.com/2007/07/clove-flavored-marlboro- now-in-indonesia
[6] Kostigen, T. 2011, February 25. Beware: The world’s riskiest countries. Market Watch.Wall Street Journal.
Retrieved from http://www.marketwatch.com/story/beware-the -worlds-riskiest-countries-2011-02-25
[7] Kia sales climb strongly in 10 countries in May [Press release]. Kia website. Retrieved from http://www.kia-
press.com/press/corporate/20090605-kia%20sales%20 climb%20strongly%20in%2010%20countries.aspx
[8] Ricks, D. A. 1993. Blunders in international business. Cambridge, MA: Blackwell.
Saylor URL: http://www.saylor.org/books Saylor.org
218
[9] Maltby, E. 2010, January 19. Expanding abroad? Avoid cultural gaffes. Wall Street Journal. Retrieved from
http://online.wsj.com/article/SB100014240527487036 57604575005511903147960.html
Saylor URL: http://www.saylor.org/books Saylor.org
219
7.2 Drivers of Success and Failure When Competing in
International Markets
L E A R N I N G O B J E C T I V E S
1. Explain the elements of the “diamond model.”
2. Understand how the model helps to explain success and failure in international markets.
The title of a book written by newspaper columnist Thomas Friedman attracted a great deal of attention
when the book was released in 2005. In The World Is Flat: A Brief History of the 21st Century, Friedman
argued that technological advances and increased interconnectedness is leveling the competitive playing
field between developed and emerging countries. This means that companies exist in a “flat world”
because economies across the globe are converging on a single integrated global system. [1] For executives,
a key implication is that a firm’s being based in a particular country is ceasing to be an advantage or
disadvantage.
While Friedman’s notion of business becoming a flat world is flashy and attention grabbing, it does not
match reality. Research studies conducted since 2005 have found that some firms enjoy advantages based
on their country of origin while others suffer disadvantages. A powerful framework for understanding how
likely it is that firms based in a particular country will be successful when competing in international
markets was provided by Professor Michael Porter of the Harvard Business School. [2] The framework is
formally known as “the determinants of national advantage,” but it is often referred to more simply as
“the diamond model” because of its shape.
According to the model, the ability of the firms in an industry whose origin is in a particular country (e.g.,
South Korean automakers or Italian shoemakers) to be successful in the international arena is shaped by
four factors: (1) their home country’s demand conditions, (2) their home country’s factor conditions, (3)
related and supporting industries within their home country, and (4) strategy, structure, and rivalry
among their domestic competitors.
Demand Conditions
Saylor URL: http://www.saylor.org/books Saylor.org
220
Within the diamond model, demand conditions refer to the nature of domestic customers.
It is tempting to believe that firms benefit when their domestic customers are perfectly willing to purchase
inferior products. This would be a faulty belief! Instead, firms benefit when their domestic customers
have high expectations.
Japanese consumers are known for insisting on very high levels of quality, aesthetics, and reliability.
Japanese automakers such as Honda, Toyota, and Nissan reap rewards from this situation. These firms
have to work hard to satisfy their domestic buyers. Living up to lofty quality standards at home prepares
these firms to offer high-quality products when competing in international markets. In contrast, French
car buyers do not stand out as particularly fussy. It is probably not a coincidence that French automakers
Renault and Peugeot have struggled to gain traction within the global auto industry.
Demand conditions also help to explain why German automakers such as Porsche, Mercedes-Benz, and
BMW create excellent luxury and high-performance vehicles. German consumers value superb
engineering. While a car is simply a means of transportation in some cultures, Germans place value on the
concept of fahrvergnügen, which means “driving pleasure.” Meanwhile, demand for fast cars is high in
Germany because the country has built nearly eight thousand miles of superhighways known as
autobahns. No speed limits for cars are enforced on more than half of the eight thousand miles. Many
Germans enjoy driving at 150 miles per hour or more, and German automakers must build cars capable of
safely reaching and maintaining such speeds. When these companies compete in the international arena,
the engineering and performance of their vehicles stand out.
Factor Conditions
Factor conditions refer to the nature of raw material and other inputs that firms need to create goods and
services. Examples include land, labor, capital markets, and infrastructure. Firms benefit when
they have good access to factor conditions and face challenges when they do not. Companies based in the
United States, for example, are able to draw on plentiful natural resources, a skilled labor force, highly developed
transportation systems, and sophisticated capital markets to be successful. The dramatic growth of Chinese
manufacturers in recent years has been fueled in part by the availability of cheap labor.
Saylor URL: http://www.saylor.org/books Saylor.org
221
In some cases, overcoming disadvantages in factor conditions leads companies to develop unique skills.
Japan is a relatively small island nation with little room to spare. This situation has led Japanese firms to
be pioneers in the efficient use of warehouse space through systems such as just-in-
time inventory management (JIT). Rather than storing large amounts of parts and material, JIT
management conserves space—and lowers costs—by requiring inputs to a production process to arrive at
the moment they are needed. Their use of JIT management has given Japanese manufacturers an
advantage when they compete in
international markets.
Related and Supporting Industries
Could Italian shoemakers create some of the world’s best shoes if Italian leather makers were not among
the world’s best? Possibly, but it would be much more difficult. The concept
of related and supporting industries refers to the extent to which firms’ domestic suppliers and other
complementary industries are developed and helpful.
Italian shoemakers such as Salvatore Ferragamo, Prada, Gucci, and Versace benefit from the availability
of top-quality leather within their home country. If these shoemakers needed to rely on imported leather,
they would lose flexibility and speed.
Fine Italian shoes, such as those found at the famous Via Montenapoleone in Milan, are usually
made of fine Italian leather.
Saylor URL: http://www.saylor.org/books Saylor.org
222
Image courtesy of Warburg, http://en.wikipedia.org/wiki/File:Milan_Montenapoleone_16.JPG.
The auto industry is a setting where related and supporting industries are very important. Electronics are
key components of modern vehicles. South Korean automakers Kia and Hyundai can leverage the
excellent electronics provided by South Korean firms Samsung and LG. Similarly, Honda, Nissan, and
Toyota are able to draw on the skills of Sony and other Japanese electronics firms. Unfortunately, for
French automakers Renault and Peugeot, no French electronics firms are standouts in the international
arena. This situation makes it difficult for Renault and Peugeot to integrate electronics into their vehicles
as effectively as their South Korean and Japanese rivals.
In extreme cases, the poor condition of related and supporting industries can undermine an operation.
Otabo LLC, a small custom shoe company, was forced to shut down its Florida factory in 2008. Otabo
struggled to find technicians that had the skills needed to fix its shoemaking machines. Meanwhile, there
are very few suppliers of shoelaces, soles, eyelets, and other components in the United States because
about 99 percent of the shoes purchased in the United States are imported, mostly from China. The few
available suppliers were unwilling to create the small batches of customized materials that Otabo wanted.
In the end, the American factory simply could not get access to many of the supplies needed to create
shoes. [3] Production was shifted to China, where all the needed supplies can be found easily and cheaply.
Firm Strategy, Structure, and Rivalry
The concept of firm strategy, structure, and rivalry refers to how challenging it is to survive domestic
competition. The Olympics offer a good analogy for illustrating the positive aspects of very challenging
domestic situations. If the competition to make a national team in gymnastics is fierce, the gymnasts
who make the team will have been pushed to stretch their abilities and performance. In contrast,
gymnasts who faced few contenders in their quest to make a national team will not have been tested
with the same level of intensity. When the two types meet at the Olympics, the gymnasts who overcame
huge hurdles to make their national teams are likely to have an edge over athletes from countries with
few skilled gymnasts.
Saylor URL: http://www.saylor.org/books Saylor.org
223
Companies that have survived intense rivalry within their home markets are likely to have developed
strategies and structures that will facilitate their success when they compete in international markets.
Hyundai and Kia had to keep pace with each other within the South Korean market before expanding
overseas. The leading Japanese automakers—Honda, Nissan, and Toyota—have had to compete not only
with one another but also with smaller yet still potent domestic firms such as Isuzu, Mazda, Mitsubishi,
Subaru, and Suzuki. In both examples, the need to navigate potent domestic rivals has helped firms later
become fearsome international players.
Succeeding despite difficult domestic competition prepares firms to expand their kingdoms into
international markets.
Image courtesy of Chrisloader,
http://en.wikipedia.org/wiki/File:Leicester_Square_Burger_King .
If, in contrast, domestic competition is fairly light, a company may enjoy admirable profits within its
home market. However, the lack of being pushed by rivals will likely mean that the firm struggles to reach
its potential in creativity and innovation. This undermines the firm’s ability to compete overseas and
makes it vulnerable to foreign entry into its home market. Because neither Renault nor Peugeot has been
a remarkable innovator historically, these French automakers have enjoyed fairly gentle domestic
competition. Once the auto industry became a global competition, however, these firms found themselves
Saylor URL: http://www.saylor.org/books Saylor.org
224
trailing their Asian rivals.
K E Y T A K E A W A Y
The likelihood that a firm will succeed when it competes in international markets is shaped by four
aspects of its domestic market: (1) demand conditions; (2) factor conditions; (3) related and supporting
industries; and (4) strategy, structure, and rivalry among its domestic competitors.
E X E R C I S E S
1. Which of the four elements of the diamond model do you believe has the strongest influence on a firm’s
fate when it competes in international markets?
2. Automakers in China and India have yet to compete on the world stage. Based on the diamond model,
would these firms be likely to succeed or fail within the global auto industry?
[1] Friedman, T. L. 2005. The world is flat: A brief history of the 21st century. New York, NY: Farrar, Straus and
Giroux.
[2] Porter, M. E. 1990. The competitive advantage of nations, New York, NY: Free Press.
[3] Aeppel, T. 2008, March 3. US shoe factory finds supplies are Achilles’ heel. Wall Street Journal. Retrieved from
http://online.wsj.com/article/SB120450124543206313.html
Saylor URL: http://www.saylor.org/books Saylor.org
225
7.3 Types of International Strategies
L E A R N I N G O B J E C T I V E S
1. Understand what a multidomestic strategy involves and be able to offer an example.
2. Understand what a global strategy involves and be able to offer an example.
3. Understand what a transnational strategy involves and be able to offer an example.
A firm that has operations in more than one country is known as a multinational corporation (MNC).
The largest MNCs are major players within the international arena. Walmart’s annual worldwide
sales, for example, are larger than the dollar value of the entire economies of Austria, Norway, and
Saudi Arabia. Although Walmart tends to be viewed as an American retailer, the firm earns more
than one-quarter of its revenues outside the United States. Walmart owns significant numbers of
stores in Mexico (1,730 as of mid-2011), Central America (549), Brazil (479), Japan (414), the United
Kingdom (385), Canada (325), Chile (279), and Argentina (63). Walmart also participates in joint
ventures in China (328 stores) and India (5). [1] Even more modestly sized MNCs are still very
powerful. If Kia were a country, its current sales level of approximately $21 billion would place it in
the top 100 among the more than 180 nations in the world.
Multinationals such as Kia and Walmart must choose an international strategy to guide their efforts
in various countries. There are three main international strategies available: (1) multidomestic, (2)
global, and (3) transnational (Figure 7.10 “International Strategy”). Each strategy involves a different
approach to trying to build efficiency across nations and trying to be responsiveness to variation in
customer preferences and market conditions across nations.
Multidomestic Strategy
A firm using a multidomestic strategy sacrifices efficiency in favor of emphasizing responsiveness to local
requirements within each of its markets. Rather than trying to force all of its American-made shows on
viewers around the globe, MTV customizes the programming that is shown on its channels within dozens
of countries, including New Zealand, Portugal, Pakistan, and India. Similarly, food company H. J. Heinz
Saylor URL: http://www.saylor.org/books Saylor.org
226
adapts its products to match local preferences. Because some Indians will not eat garlic and onion, for
example, Heinz offers them a version of its signature ketchup that does not include these two ingredients.
Figure 7.10 International Strategy
Saylor URL: http://www.saylor.org/books Saylor.org
227
Images courtesy of kenny-lex,http://www.flickr.com/photos/kenny_lex/3059058350/ (top left);
Pete,http://www.flickr.com/photos/comedynose/3542592243/ (bottom right); Ged
Carroll,http://www.flickr.com/photos/renaissancechambara/4241378353/ (top left); Creative
Tools,http://www.flickr.com/photos/creative_tools/4293407348/ (bottom right); Windell
Oskay, http://www.flickr.com/photos/oskay/4578993380/ (bottom right); Andrew
Maiman,http://www.flickr.com/photos/amaiman/5550834826/ (top right);
Bodo,http://www.flickr.com/photos/64448029@N05/5901416357/ (top right).
Baked beans flavored with curry? This H. J. Heinz
product is very popular in the United Kingdom.
Image courtesy of Gordon Joly,
http://upload.wikimedia.org/wikipedia/commons/f/f4
/Curry_Beanz .
Global Strategy
A firm using a global strategy sacrifices responsiveness to local requirements within each of its markets in
favor of emphasizing efficiency. This strategy is the complete opposite of a multidomestic strategy. Some
minor modifications to products and services may be made in various markets, but a global strategy
stresses the need to gain economies of scale by offering essentially the same products or services in each
market.
Microsoft, for example, offers the same software programs around the world but adjusts the programs to
match local languages. Similarly, consumer goods maker Procter & Gamble attempts to gain efficiency by
creating global brands whenever possible. Global strategies also can be very effective for firms whose
Saylor URL: http://www.saylor.org/books Saylor.org
228
product or service is largely hidden from the customer’s view, such as silicon chip maker Intel. For such
firms, variance in local preferences is not very important.
Transnational Strategy
A firm using a transnational strategy seeks a middle ground between a multidomestic strategy and a
global strategy. Such a firm tries to balance the desire for efficiency with the need to adjust to local
preferences within various countries. For example, large fast-food chains such as McDonald’s and
Kentucky Fried Chicken (KFC) rely on the same brand names and the same core menu items around the
world. These firms make some concessions to local tastes too. In France, for example, wine can be
purchased at McDonald’s. This approach makes sense for McDonald’s because wine is a central element of
French diets.
K E Y T A K E A W A Y
Multinational corporations choose from among three basic international strategies: (1) multidomestic, (2)
global, and (3) transnational. These strategies vary in their emphasis on achieving efficiency around the
world and responding to local needs.
E X E R C I S E S
1. Which of the three international strategies is Kia using? Is this the best strategy for Kia to be using?
2. Identify examples of companies using each of the three international strategies other than those
described above. Which company do you think is best positioned to compete in international markets?
[1] Standard & Poor’s stock report on Walmart.
Saylor URL: http://www.saylor.org/books Saylor.org
229
7.4 Options for Competing in International Markets
L E A R N I N G O B J E C T I V E S
1. Understand the various options for entering an international market.
2. Be able to provide an example of a firm using each option.
When the executives in charge of a firm decide to enter a new country, they must decide how to enter
the country. There are five basic options available: (1) exporting, (2) creating a wholly owned
subsidiary, (3) franchising, (4) licensing, and (5) creating a joint venture or strategic alliance. These
options vary in terms of how much control a firm has over its operation, how much risk is involved,
and what share of the operation’s profits the firm gets to keep.
Exporting
Exporting involves creating goods within a firm’s home country and then shipping them to another
country. Once the goods reach foreign shores, the exporter’s role is over. A local firm then sells the goods
to local customers. Many firms that expand overseas start out as exporters because exporting offers a low-
cost method to find out whether a firm’s products are appealing to customers in other lands. Some Asian
automakers, for example, first entered the US market though exporting. Small firms may rely on
exporting because it is a low-cost option.
Once a firm’s products are found to be viable in a particular country, exporting often becomes
undesirable. A firm that exports its goods loses control of them once they are turned over to a local firm
for sale locally. This local distributor may treat customers poorly and thereby damage the firm’s brand.
Also, an exporter only makes money when it sells its goods to a local firm, not when end users buy the
goods. Executives may want their firm rather than a local distributor to enjoy the profits that are made
when products are sold to individual customers.
Creating a Wholly Owned Subsidiary
A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can
develop a wholly owned subsidiary through agreenfield venture, meaning that the firm creates the entire
Saylor URL: http://www.saylor.org/books Saylor.org
230
operation itself. Another possibility is purchasing an existing operation from a local company or another
foreign operator.
Regardless of whether a firm builds a wholly owned subsidiary “from scratch” or acquires an existing
operation, having a wholly owned subsidiary can be attractive because the firm maintains complete
control over the operation and gets to keep all of the profits that the operation makes. A wholly owned
subsidiary can be quite risky, however, because the firm must pay all of the expenses required to set it up
and operate it. Kia, for example, spent $1 billion to build its US factory. Many firms are reluctant to spend
such sums in more volatile countries because they fear that they may never recoup their investments.
Franchising
Franchising has been used by many firms that compete in service industries to develop a worldwide
presence. Subway, The UPS Store, and Hilton Hotels are just a few of the firms that have done so.
Franchising involves an organization (called a franchisor) granting the right to use its brand name,
products, and processes to other organizations (known as franchisees) in exchange for an up-front
payment (a franchise fee) and a percentage of franchisees’ revenues (a royalty fee).
Franchising is an attractive way to enter foreign markets because it requires little financial investment by
the franchisor. Indeed, local franchisees must pay the vast majority of the expenses associated with
getting their businesses up and running. On the downside, the decision to franchise means that a firm will
get to enjoy only a small portion of the profits made under its brand name. Also, local franchisees may
behave in ways that the franchisor does not approve. For example, Kentucky Fried Chicken (KFC) was
angered by some of its franchisees in Asia when they started selling fish dishes without KFC’s approval. It
is often difficult to fix such problems because laws in many countries are stacked in favor of local
businesses. Last, franchises are only successful if franchisees are provided with a simple and effective
business model. Executives thus need to avoid expanding internationally through franchising until their
formula has been perfected.
Saylor URL: http://www.saylor.org/books Saylor.org
231
Licensing
While franchising is an option within service industries, licensing is most frequently used in
manufacturing industries. Licensing involves granting a foreign company the right to create a company’s
product within a foreign country in exchange for a fee. These relationships often center on patented
technology. A firm that grants a license avoids absorbing a lot of costs, but its profits are limited to the
fees that it collects from the local firm. The firm also loses some control over how its technology is used.
A historical example involving licensing illustrates how rapidly events can change within the international
arena. By the time Japan surrendered to the United States and its Allies in 1945, World War II had
crippled the country’s industrial infrastructure. In response to this problem, Japanese firms imported a
Saylor URL: http://www.saylor.org/books Saylor.org
232
great deal of technology, especially from American firms. When the Korean War broke out in the early
1950s, the American military relied on Jeeps made in Japan using licensed technology. In just a few years,
a mortal enemy had become a valuable ally.
Strategy at the Movies
Gung Ho
Can American workers survive under Japanese management? Although this sounds like the premise for a
bad reality TV show, the question was a legitimate consideration for General Motors (GM) and Toyota in
the early 1980s. GM was struggling at the time to compete with the inexpensive, reliable, and fuel-efficient
cars produced by Japanese firms. Meanwhile, Toyota was worried that the US government would limit the
number of foreign cars that could be imported. To address these issues, these companies worked together
to reopen a defunct GM plant in Fremont, California, in 1984 that would manufacture both companies’
automobiles in one facility. The plant had been the worst performer in the GM system; however, under
Toyota’s management, the New United Motor Manufacturing Incorporated (NUMMI) plant became the
best factory associated with GM—using the same workers as before! Despite NUMMI’s eventual success,
the joint production plant experienced significant growing pains stemming from the cultural differences
between Japanese managers and American workers.
The NUMMI story inspired the 1986 movie Gung Ho in which a closed automobile manufacturing plant
in Hadleyville, Pennsylvania, was reopened by Japanese car company Assan Motors. While Assan Motors
and the workers of Hadleyville were both excited about the venture, neither was prepared for the
differences between the two cultures. For example, Japanese workers feel personally ashamed when they
make a mistake. When manager Oishi Kazihiro failed to meet production targets, he was punished with
“ribbons of shame” and forced to apologize to his employees for letting them down. In contrast, American
workers were presented in the film as likely to reject management authority, prone to fighting at work,
and not opposed to taking shortcuts.
When Assan Motors’ executives attempted to institute morning calisthenics and insisted that employees
work late without overtime pay, the American workers challenged these policies and eventually walked off
Saylor URL: http://www.saylor.org/books Saylor.org
233
the production line. Assan Motors’ near failure was the result of differences in cultural norms and
values. Gung Ho illustrates the value of understanding and bridging cultural differences to facilitate
successful cross-cultural collaboration, value that was realized in real life by NUMMI.
Joint Ventures and Strategic Alliances
Within each market entry option described earlier, a firm either maintains strong control of operations
(wholly owned subsidiary) or it turns most control over to a local firm (exporting, franchising, and
licensing). In some cases, however, executives find it beneficial to work closely with one or more local
partners in a joint venture or a strategic alliance. In a joint venture, two or more organizations each
contribute to the creation of a new entity. In a strategic alliance, firms work together cooperatively, but no
new organization is formed. In both cases, the firm and its local partner or partners share decision-
making authority, control of the operation, and any profits that the relationship creates.
Joint ventures and strategic alliances are especially attractive when a firm believes that working closely
with locals will provide it important knowledge about local conditions, facilitate acceptance of their
involvement by government officials, or both. In the late 1980s, China was a difficult market for American
businesses to enter. Executives at KFC saw China as an attractive country because chicken is a key
element of Chinese diets. After considering the various options for entering China with its first restaurant,
KFC decided to create a joint venture with three local organizations. KFC owned 51 percent of the venture;
having more than half of the operation was advantageous in case disagreements arose. A Chinese bank
owned 25 percent, the local tourist bureau owned 14 percent, and the final 10 percent was owned by a
local chicken producer that would supply the restaurant with its signature food item.
Having these three local partners helped KFC navigate the cumbersome regulatory process that was in
place and allowed the American firm to withstand the scrutiny of wary Chinese officials. Despite these
advantages, it still took more than a year for the store to be built and approved. Once open in 1987,
however, KFC was an instant success in China. As China’s economy gradually became more and more
open, KFC was a major beneficiary. By the end of 1997, KFC operated 191 restaurants in 50 Chinese cities.
By the start of 2011, there were approximately 3,200 KFCs spread across 850 Chinese cites. Roughly 90
Saylor URL: http://www.saylor.org/books Saylor.org
234
percent of these restaurants are wholly owned subsidiaries of KFC—a stark indication of how much doing
business in China has changed over the past twenty-five years.
As of early 2011, KFC was opening a new store in China every eighteen hours on average.
Image courtesy of Wikimedia,
http://upload.wikimedia.org/wikipedia/commons/f/fb/Kfc_of_china .
K E Y T A K E A W A Y
When entering a new country, executives can choose exporting, creating a wholly owned subsidiary,
franchising, licensing, and creating a joint venture or strategic alliance. The key issues of how much
Saylor URL: http://www.saylor.org/books Saylor.org
235
control a firm has over its operation, how much risk is involved, and what share of the operation’s profits
the firm gets to keep all vary across these options.
E X E R C I S E S
1. Do you believe that KFC would have been so successful in China today if executives had tried to make
their first store a wholly owned subsidiary? Why or why not?
2. The typical joint venture only lasts a few years. Why might joint ventures dissolve so quickly?
Saylor URL: http://www.saylor.org/books Saylor.org
236
7.5 Conclusion
This chapter explains competition in international markets. Executives must consider the benefits
and risks of competing internationally when making decisions about whether to expand overseas.
Executives also need to determine the likelihood that their firms will succeed when they compete in
international markets by examining demand conditions, factor conditions, related and supporting
industries, and strategy, structure, and rivalry among its domestic competitors. When a firm does
venture overseas, a decision must be made about whether its international strategy will be
multidomestic, global, or transnational. Finally, when leading a firm to enter a new market,
executives can choose to manage the operation via exporting, creating a wholly owned subsidiary,
franchising, licensing, and creating a joint venture or strategic alliance.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a
different industry. Find examples of each international strategy for your industry. Discuss which strategy
seems to be the most successful in your selected industry.
2. This chapter discussed Kia and other automakers. If you were assigned to turn around a struggling
automaker such as General Motors or Chrysler, what actions would you take to revive the company’s
prospects within the global auto industry?
SaylorURL: http://www.saylor.org/books Saylor.org
273
Chapter 9
Executing Strategy through Organizational Design
L E A R N I N G O B JE C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are the basic building blocks of organizational structure?
2. What types of structures exist, and what are advantages and disadvantages of each?
3. What is control and why is it important?
4. What are the different forms of control and when should they be used?
5. What are the key legal forms of business, and what implications does the choice of a business form have
for organizational structure?
Can Oil Well Services Fuel Success for GE?
Chapter 9 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
274
General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the
sixth largest in the United States.
Image courtesy of The General Electric Company,
http://en.wikipedia.org/wiki/File:Early_General_Electric_logo_1899 .
In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of
John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides
services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities
of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was
acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it
clear that they had big plans within the oil well services business.
While many executives would struggle to integrate three new companies into their firms, experts expected
GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group PLC,
for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE.”[1] In other words, this
analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The
way that GE was organized fueled this belief.
GE’s organizational structure includes six divisions, each devoted to specific product categories: (1)
Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions,
(4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three
subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire
organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser
into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions
within the Energy division.
In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations.
This division was responsible for all sales of GE products and services outside the United States. The
Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt
expected that countries other than the United States will account for 60 percent of GE’s sales in the
Saylor URL: http://www.saylor.org/books Saylor.org
275
future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth
& Operations was further divided into twelve geographic regions: China, India, Southeast Asia,
Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan. [2]
Finally, like many large companies, GE also provided some centralized services to support all its units.
These support areas included public relations, business development, legal, global research, human
resources, and finance. By having entire units of the organization devoted to these functional areas, GE
hoped not only to minimize expenses but also to create consistency across divisions.
Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well
services operations would need the help of GE’s public relations and legal departments in the future.
Other important questions about GE’s acquisitions remained open as well. In particular, would the
organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the
culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect,
and the incompatibility of organizational cultures is one reason why.
GE fits a dizzying array of businesses into a relatively simple organizational chart.
Saylor URL: http://www.saylor.org/books Saylor.org
276
Adapted from company document posted at
http://www.ge.com/pdf/company/ge_organization_chart
The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly
intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless
professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay
was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in
favor of it.”
In the context of business, execution refers to how well a firm such as GE implements the strategies that
executives create for it. This involves the creation and operation of both an appropriate organizational
structure and an appropriate organizational control processes. Executives who skillfully orchestrate
structure and control are likely to lead their firms to greater levels of success. In contrast, those executives
who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same
way Coach McKay viewed his offense: as worthy of execution.
[1] Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg
Businessweek. Retrieved fromhttp://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-
service-unit-shares-surge.html
[2] GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release]. 2010, November 8.
GE website. Retrieved from http://www.genewscenter.com/ Press-Releases/GE-Names-Vice-Chairman-John-Rice-
to-Lead-GE-Global-Growth-Operations-2c8a.aspx
Saylor URL: http://www.saylor.org/books Saylor.org
277
9.1 The Basic Building Blocks of Organizational Structure
L E A R N I N G O B JE C T I V E S
1. Understand what division of labor is and why it is beneficial.
2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an
organizational structure.
Division of Labor
General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines,
and loans. One way that GE could produce its lightbulbs would be to have individual employees work on
one lightbulb at a time from start to finish. This would be very inefficient, however, so GE and most other
organizations avoid this approach. Instead, organizations rely ondivision of labor when creating their
products. Division of labor is a process of splitting up a task (such as the creation of lightbulbs)
into a series of smaller tasks, each of which is performed by a specialist.
Saylor URL: http://www.saylor.org/books Saylor.org
279
The leaders at the top of organizations have long known that division of labor can improve efficiency.
Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating
responsibility to other judges offered perhaps the earliest known example.
In the eighteenth century, Adam Smith’s book The Wealth of Nations quantified the
tremendous advantages that division of labor offered for a pin factory. If a worker performed all the
various steps involved in making pins himself, he could make about twenty pins per day. By breaking the
process into multiple steps, however, ten workers could make forty-eight thousand pins a day. In other
words, the pin factory was a staggering 240 times more productive than it would have been without
relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford
and other industrial pioneers who sought to create efficient organizations.
Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.
While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate
different tasks and the people who perform
them.
The solution is organizational structure, which is
defined as how tasks are assigned and grouped together with formal reporting relationships. Creating a
structure that effectively coordinates a firm’s activities increases the firm’s likelihood of success.
Meanwhile, a structure that does not match well with a firm’s needs undermines the firm’s chances of
prosperity.
Saylor URL: http://www.saylor.org/books Saylor.org
280
Division of labor was central to Henry Ford’s development of assembly lines in his automobile
factory. Ford noted, “Nothing is particularly hard if you divide it into small jobs.”
Image courtesy of the Ford Company, http://en.wikipedia.org/wiki/File:A-line1913 .
Vertical and Horizontal Linkages
Most organizations use a diagram called an organizational chart to depict their structure. These
organizational charts show how firms’ structures are built using two basic building blocks: vertical
linkages and horizontal linkages.Vertical linkages tie supervisors and subordinates together. These
linkages show the lines of responsibility through which a supervisor delegates authority to subordinates,
oversees their activities, evaluates their performance, and guides them toward improvement when
necessary. Every supervisor except for the person at the very top of the organization chart also serves as a
subordinate to someone else. In the typical business school, for example, a department chair supervises a
set of professors. The department chair in turn is a subordinate of the dean.
Most executives rely on the unity of command principle when mapping out the vertical linkages in an
organizational structure. This principle states that each person should only report directly to one
supervisor. If employees have multiple bosses, they may receive conflicting guidance about how to do
Saylor URL: http://www.saylor.org/books Saylor.org
281
their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of
General Electric, for example, the head of the Energy division reports only to the chief executive officer. If
problems were to arise with executing the strategic move discussed in this chapter’s opening vignette—
joining the John Wood Group PLC with GE’s Energy division—the head of the Energy division reports
would look to the chief executive officer for guidance.
Horizontal linkages are relationships between equals in an organization. Often these linkages are called
committees, task forces, or teams. Horizontal linkages are important when close coordination is needed
across different segments of an organization. For example, most business schools revise their
undergraduate curriculum every five or so years to ensure that students are receiving an education that
matches the needs of current business conditions. Typically, a committee consisting of at least one
professor from every academic area (such as management, marketing, accounting, and finance) will be
appointed to perform this task. This approach helps ensure that all aspects of business are represented
appropriately in the new curriculum.
Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages.
As noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal
groupings to maximize familiarity and trust. We organize our stores and company into a variety of
interlocking teams. Most teams have between 6 and 100 Team Members and the larger teams are divided
further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership
Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking team
structure continues all the way upwards to the Executive Team at the highest level of the
company.” [1] This emphasis on teams is intended to develop trust throughout the organization, as well as
to make full use of the talents and creativity possessed by every employee.
Informal Linkages
Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In
the long-running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—
employee at a nuclear power plant. In one episode, Homer gains power and influence with the plant’s
owner, Montgomery Burns, which far exceeds Homer’s meager position in the organization chart, because
Saylor URL: http://www.saylor.org/books Saylor.org
282
Mr. Burns desperately wants to be a member of the bowling team that Homer captains. Homer tries to use
his newfound influence for his own personal gain and naturally the organization as a whole suffers.
Informal linkages such as this one do not appear in organizational charts, but they nevertheless can have
(and often do have) a significant influence on how firms operate.
K E Y T A K E A W A Y
The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of
the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps
managers to organize better the different individuals and job functions within a firm.
E X E R C I S E S
1. How is division of labor used when training college or university football teams? Do you think you could
use a different division of labor and achieve more efficiency?
2. What are some formal and informal linkages that you have encountered at your college or university?
What informal linkages have you observed in the workplace?
[1] John Mackey’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved
fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/
Saylor URL: http://www.saylor.org/books Saylor.org
283
9.2 Creating an Organizational Structure
L E A R N I N G O B JE C T I V E S
1. Know and be able to differentiate among the four types of organizational structure.
2. Understand why a change in structure may be needed.
Within most firms, executives rely on vertical and horizontal linkages to create a structure that they
hope will match the needs of their firm’s strategy. Four types of structures are available to executives:
(1) simple, (2) functional, (3) multidivisional, and (4) matrix. Like snowflakes, however, no two
organizational structures are exactly alike. When creating a structure for their firm, executives will
take one of these types and adapt it to fit the firm’s unique circumstances. As they do this,
executives must realize that the choice of structure will influence their firm’s strategy in the future.
Once a structure is created, it constrains future strategic moves. If a firm’s structure is designed to
maximize efficiency, for example, the firm may lack the flexibility needed to react quickly
to exploit new opportunities.
Simple Structure
Many organizations start out with a simple structure. In this type of structure, an organizational chart is
usually not needed. Simple structures do not rely on formal systems of division of labor.
If the firm is a sole proprietorship, one person performs all the tasks the organization
needs to accomplish. For example, on the TV series The Simpsons, both bar owner Moe Szyslak and the
Comic Book Guy are shown handling all aspects of their respective businesses.
Saylor URL: http://www.saylor.org/books Saylor.org
284
There is a good reason most sole proprietors do not bother creating formal organizational charts.
If the firm consists of more than one person, tasks tend to be distributed among them in an informal
manner rather than each person developing a narrow area of specialization. In a family-run restaurant or
bed and breakfast, for example, each person must contribute as needed to tasks, such as cleaning
restrooms, food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic
decision making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm
makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure,
organizations that use this type of structure tend to have very few rules and regulations. The process of
evaluating and rewarding employees’ performance also tends to be informal.
The informality of simple structures creates both advantages and disadvantages. On the plus side, the
flexibility offered by simple structures encourages employees’ creativity and individualism. Informality
has potential negative aspects, too. Important tasks may be ignored if no one person is specifically
assigned accountability for them. A lack of clear guidance from the top of the organization can create
confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus
when relying on a simple structure, the owner of a firm must be sure to communicate often and openly
with employees.
Functional Structure
Saylor URL: http://www.saylor.org/books Saylor.org
285
As a small organization grows, the person in charge of it often finds that a simple structure is no longer
adequate to meet the organization’s needs. Organizations become more complex as they grow, and this
can require more formal division of labor and a strong emphasis on hierarchy and vertical links. In many
cases, these firms evolve from using a simple structure to relying on a functional structure.
Within a functional structure, employees are divided into departments that each handle activities related
to a functional area of the business, such as marketing, production, human resources, information
technology, and customer service. Each of these five areas would be headed up by a manager
who coordinates all activities related to her functional area. Everyone in a company that works on marketing
the company’s products, for example, would report to the manager of the marketing department. The marketing
managers and the managers in charge of the other four areas in turn would report to the chief executive officer.
An example of a functional structure
Reproduced with permission
Using a functional structure creates advantages and disadvantages. An important benefit of adopting a
functional structure is that each person tends to learn a great deal about his or her particular function. By
being placed in a department that consists entirely of marketing professionals, an individual has a great
opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled
specialists. Second, grouping everyone that serves a particular function into one department tends to keep
costs low and to create efficiency. Also, because all the people in a particular department share the same
Saylor URL: http://www.saylor.org/books Saylor.org
286
background training, they tend to get along with one another. In other words, conflicts within
departments are relatively rare.
Using a functional structure also has a significant downside: executing strategic changes can be very slow
when compared with other structures. Suppose, for example, that a textbook publisher decides to
introduce a new form of textbook that includes “scratch and sniff” photos that let students smell various
products in addition to reading about them. If the publisher relies on a simple structure, the leader of the
firm can simply assign someone to shepherd this unique new product through all aspects of the
publication process.
If the publisher is organized using a functional structure, however, every department in the organization
will have to be intimately involved in the creation of the new textbooks. Because the new product lies
outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately for
the books’ authors, the publication process will be halted whenever a functional area does not live up to its
responsibilities in a timely manner. More generally, because functional structures are slow to execute
change, they tend to work best for organizations that offer narrow and stable product lines.
The specific functional departments that appear in an organizational chart vary across organizations that
use functional structures. In the example offered earlier in this section, a firm was divided into five
functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology, and (5)
customer service. In the TV show The Office, a different approach to a functional structure is used at the
Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided into six functional
areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5) human resources, and (6)
accounting. A functional structure was a good fit for the branch at the time because its product line was
limited to just selling office paper.
Saylor URL: http://www.saylor.org/books Saylor.org
287
Multidivisional Structure
Many organizations offer a wide variety of products and services. Some of these organizations sell their
offerings across an array of geographic regions. These approaches require firms to be very responsive to
Saylor URL: http://www.saylor.org/books Saylor.org
288
customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many
firms abandon the use of a functional structure as their offerings expand. Often the new choice is
a multidivisional structure. In this type of structure, employees are divided into departments based on
product areas and/or geographic regions.
General Electric (GE) is an example of a company organized this way. As shown in the organization chart
that accompanies this chapter’s opening vignette, most of the company’s employees belong to one of six
product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and
Transportation) or to a division that is devoted to all GE’s operations outside the United States (Global
Growth & Operations).
A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE makes a
strategic move such as acquiring the well-support division of John Wood Group PLC, only the relevant
division (in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy. In
contrast, if GE was organized using a functional structure, the transition would be much slower because
all the divisions in the company would need to be involved. A multidivisional structure also helps an
organization to better serve customers’ needs. In the summer of 2011, for example, GE’s Capital division
started to make real-estate loans after exiting that market during the financial crisis of the late
2000s. [1] Because one division of GE handles all the firm’s loans, the wisdom and skill needed to decide
when to reenter real-estate lending was easily accessible.
Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that
do not fit with the company’s overall strategy. McDonald’s experienced this kind of situation in 2002. In
particular, the French division of McDonald’s ran a surprising advertisement in a magazine called Femme
Actuelle. The ad included a quote from a nutritionist that asserted children should not eat at a McDonald’s
more than once per week. Executives at McDonald’s headquarters in suburban Chicago were concerned
about the message sent to their customers, of course, and they made it clear that they strongly disagreed
with the nutritionist.
Another downside of multidivisional structures is that they tend to be more costly to operate than
functional structures. While a functional structure offers the opportunity to gain efficiency by having just
Saylor URL: http://www.saylor.org/books Saylor.org
289
one department handle all activities in an area, such as marketing, a firm using a multidivisional structure
needs to have marketing units within each of its divisions. In GE’s case, for example, each of its seven
divisions must develop marketing skills. Absorbing the extra expenses that are created reduces a firm’s
profit margin.
GE’s organizational chart highlights a way that firms can reduce some of these expenses: the
centralization of some functional services. As shown in the organizational chart, departments devoted to
important aspects of public relations, business development, legal, global research, human resources, and
finance are maintained centrally to provide services to the six product divisions and the geographic
division. By consolidating some human resource activities in one location, for example, GE creates
efficiency and saves money.
An additional benefit of such moves is that consistency is created across divisions. In 2011, for example,
the Coca-Cola Company created an Office of Sustainability to coordinate sustainability initiatives across
the entire company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of
the Office of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-
Cola had “made significant progress with our sustainability initiatives, but our current approach needs
focus and better integration.” [2] In other words, a department devoted to creating consistency across
Coca-Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.
Matrix Structure
Within functional and multidivisional structures, vertical linkages between bosses and subordinates are
the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships. [3] In particular,
these structures create cross-functional teams that each work on a different project. This offers several
benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and
creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers.
In particular, a person without managerial experience can be put in charge of a relatively small project as
a test to see whether the person has a talent for leading others.
Saylor URL: http://www.saylor.org/books Saylor.org
290
Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates
the unity of command principle because each employee is assigned multiple bosses. Specifically, any given
individual reports to a functional area supervisor as well as one or more project supervisors. This creates
confusion for employees because they are left unsure about who should be giving them direction.
Violating the unity of command principle also creates opportunities for unsavory employees to avoid
responsibility by claiming to each supervisor that a different supervisor is currently depending on their
efforts.
The potential for conflicts arising between project managers within a matrix structure is another concern.
Chances are that you have had some classes with professors who are excellent speakers while you have
been forced to suffer through a semester of incomprehensible lectures in other classes. This mix of
experiences reflects a fundamental reality of management: in any organization, some workers are more
talented and motivated than others. Within a matrix structure, each project manager naturally will want
the best people in the company assigned to her project because their boss evaluates these managers based
on how well their projects perform. Because the best people are a scarce resource, infighting and politics
can easily flare up around which people are assigned to each project.
Given these problems, not every organization is a good candidate to use a matrix structure. Organizations
such as engineering and consulting firms that need to maximize their flexibility to service projects of
limited duration can benefit from the use of a matrix. Matrix structures are also used to organize research
and development departments within many large corporations. In each of these settings, the benefits of
organizing around teams are so great that they often outweigh the risks of doing so.
Saylor URL: http://www.saylor.org/books Saylor.org
291
Strategy at the Movies
Office Space
How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an
employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero.
Initech’s use of a matrix structure meant that each employee had multiple bosses, each representing a
different aspect of Initech’s business. High-tech firms often use matrix to gain the flexibility needed to
manage multiple projects simultaneously. Successfully using a matrix structure requires excellent
communication among various managers—however, excellence that Initech could not reach. When
Saylor URL: http://www.saylor.org/books Saylor.org
292
Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses—and a
parade of his coworkers—admonished him. This fiasco and others led to Gibbons to become cynical about
his job.
Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant
Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s
manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to
enliven their uniforms. A series of mixed messages about the restaurant’s policy on flair led Joanna to
emphatically proclaim—both verbally and nonverbally—her disdain for the manager. She then quit her job
and stormed out of the restaurant.
Office Space illustrates the importance of organizational design decisions to an organization’s culture and
to employees’ motivation levels. A matrix structure can facilitate resource sharing and collaboration but
may also create complicated working relationships and impose excessive stress on employees. Chotchkie’s
organizational structure involved simpler working relationships, but these relationships were strained
beyond the breaking point by a manager’s eccentricities. In a more general sense, Office Spaceshows that
all organizational structures involve a series of trade-offs that must be carefully managed.
Boundaryless Organizations
Most organizational charts show clear divisions and boundaries between different units. The value of a
much different approach was highlighted by former GE CEO Jack Welch when he created the term
boundaryless organization. A boundaryless organization is one that removes the usual barriers between
parts of the organization as well as barriers between the organization and others. [4] Eliminating all
internal and external barriers is not possible, of course, but making progress toward being boundaryless
can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of
fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids
organizational charts, management layers, and supervisors despite having approximately nine thousand
employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L.
Gore emerge based on performance and they attract followers to their ideas over time. As one employee
noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.” [5]
Saylor URL: http://www.saylor.org/books Saylor.org
293
The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative
thinking that led to their most famous product, GORE-TEX.
Image courtesy of adifansnet, http://www.flickr.com/photos/adifans/3706215019.
An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During
2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders
from the National Guard (who are controlled by state governments) and from active-duty military units
(who are controlled by federal authorities). According to one National Guard officer, “It was just like a
solid wall was between the two entities.” [6]Efforts were needlessly duplicated in some geographic areas
while attention to other areas was delayed or inadequate. For example, poor coordination caused the
evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The
results were immense human suffering and numerous fatalities.
Saylor URL: http://www.saylor.org/books Saylor.org
294
In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.
Image courtesy of Kyle Niemi,
http://upload.wikimedia.org/wikipedia/commons/3/3d/KatrinaNewOrleansFlooded_edit2 .
To avoid similar problems from arising in the future, barriers between the National Guard and active-duty
military units are being bridged by special military officers called dual-status commanders. These
individuals will be empowered to lead both types of units during a disaster recovery effort, helping to
ensure that all areas receive the attention they need in a timely manner.
Reasons for Changing an Organization’s Structure
Saylor URL: http://www.saylor.org/books Saylor.org
295
Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s
structure over time and make changes to it if certain danger signs arise. For example, a structure might
need to be adjusted if decisions with the organization are being made too slowly or if the organization is
performing poorly. Both these problems plagued Sears Holdings in 2008, leading executives to reorganize
the company.
Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by
Ben Franklin also illustrates a fundamental truth about structure: If the parts that make up a firm do not work
together, the firm is likely to fail.
Image courtesy of Wikipedia, http://upload.wikimedia.org/wikipedia/commons/9/9c/Benjamin_Franklin_-
_Join_or_Die .
Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as
clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and
finance), (3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer,
Craftsman, and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S.
Lampert noted that “by creating smaller focused teams that are clearly responsible for their units, we
Saylor URL: http://www.saylor.org/books Saylor.org
296
[will] increase autonomy and accountability, create greater ownership and enable faster, better
decisions.” [7] Unfortunately, structural changes cannot cure all a company’s ills. As of July 2011, Sears’s
stock was worth just over half what it had been worth five years earlier.
Sometimes structures become too complex and need to be simplified. Many observers believe that this
description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical
emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For
any given project, a small team of people reported to one of forty-seven boards. The boards averaged
fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council
also averaged fourteen members. The councils reported to an operating committee consisting of
Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and
reported directly to the operating committee. These arrangements are so complex and time consuming
that some top executives spend 30 percent of their work hours serving on more than ten of the boards,
councils, and the operating committee.
Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive
moves quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-
Packard (HP) started promoting a warranty service that provides free support and upgrades within the
computer network switches market. Because Cisco’s response to this initiative had to work its way
through multiple committees, the firm did not take action until April 2009. During the delay, Cisco’s
share of the market dropped as customers embraced HP’s warranty. This problem and others created by
Cisco’s overly complex structure were so severe that one columnist wondered aloud “has Cisco’s John
Chambers lost his mind?” [8] In the summer of 2011, Chambers reversed course and decided to return
Cisco to a more traditional structure while reducing the firm’s workforce by 9 percent. Time will tell
whether these structural changes will boost Cisco’s stock price, which remained flat between 2006 and
mid-2011.
K E Y T A K E A W A Y
Executives must select among the four types of structure (simple, functional, multidivisional, and matrix)
available to organize operations. Each structure has unique advantages, and the selection of structures
involves a series of trade-offs.
Saylor URL: http://www.saylor.org/books Saylor.org
297
E X E R C I S E S
1. What type of structure best describes the organization of your college or university? What led you to
reach your conclusion?
2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from
movies that provide examples or insights relevant to understanding organizational structure?
[1] Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments.
Retrieved fromhttp://www.pionline.com/article/20110725/PRINTSUB/110729949
[2] McWilliams, J. 2011, May 19. Coca-Cola names Bea Perez chief sustainability officer.Atlantic-Journal
Constitution. Retrieved from http://www.ajc.com/business/coca-cola-names-bea-951741.html
[3] This discussion of matrix structures is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from
facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.
[4] Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of
organizational structure. San Francisco, CA: Jossey-Bass.
[5] Hamel, G. 2007, September 27. What Google, Whole Foods do best. CNNMoney. Retrieved from
http://money.cnn.com/2007/09/26/news/companies/management_hamel. fortune/index.htm
[6] Elliott, D. 2011, July 3. New type of commander may avoid Katrina-like chaos. Yahoo! News. Retrieved from
http://news.yahoo.com/type-commander-may-avoid-katrina-chaos-153 143508.html
[7] Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com /story.cfm?ID=41613.
[8] Blodget, H. 2009, August 6. Has Cisco’s John Chambers lost his mind? Business Insider. Retrieved
from http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8
Saylor URL: http://www.saylor.org/books Saylor.org
298
9.3 Creating Organizational Control Systems
L E A R N I N G O B JE C T I V E S
1. Understand the three types of control systems.
2. Know the strengths and weaknesses of common management fads.
In addition to creating an appropriate organizational structure, effectively executing strategy
depends on the skillful use of organizational control systems. Executives create strategies to try to
achieve their organization’s vision, mission, and goals. Organizational control systems allow
executives to track how well the organization is performing, identify areas of concern, and then take
action to address the concerns. Three basic types of control systems are available to executives: (1)
output control, (2) behavioral control, and (3) clan control. Different organizations emphasize
different types of control, but most organizations use a mix of all three types.
Output Control
Output control focuses on measurable results within an organization. Examples from the business world
include the number of hits a website receives per day, the number of microwave ovens an assembly line
produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 “Output
Controls”). In each of these cases, executives must decide what level of performance is acceptable,
communicate expectations to the relevant employees, track whether performance meets expectations, and
then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida,
were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The
corrective action was simple: they started receiving their pay via direct deposit rather than through the
mail.
Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as
part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent
of Delta’s flights had arrived on time during 2010. This performance led Delta to rank dead last among the
major US airlines and fifteenth out of eighteen total carriers. [1] In response, Delta took important
corrective steps. In particular, the airline added to its ability to service airplanes and provided more
Saylor URL: http://www.saylor.org/books Saylor.org
299
customer service training for its employees. Because some delays are inevitable, Delta also announced
plans to staff a Twitter account called Delta Assist around the clock to help passengers whose flights are
delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a $198 million
profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices. [2]
Output control also plays a big part in the college experience. For example, test scores and grade point
averages are good examples of output measures. If you perform badly on a test, you might take corrective
action by studying harder or by studying in a group for the next test. At most colleges and universities, a
student is put on academic probation when his grade point average drops below a certain level. If the
student’s performance does not improve, he may be removed from his major and even dismissed. On the
positive side, output measures can trigger rewards too. A very high grade point average can lead to
placement on the dean’s list and graduating with honors.
While most scholarships require a high GPA, comedian David Letterman created a scholarship for
a “C” student at Ball State University. Ball State later named a new communications and media
building after its very famous alumnus.
Image courtesy of Kyle
Flood,http://upload.wikimedia.org/wikipedia/commons/e/eb/David_Letterman_building .
Saylor URL: http://www.saylor.org/books Saylor.org
300
Behavioral Control
While output control focuses on results, behavioral control focuses on controlling the actions that
ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate
behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees
that they must wash their hands before returning to work. The dress codes that are enforced within
many organizations are another example of behavioral control. To try to prevent employee theft, many firms
have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile
factories dictate to workers how many minutes they can spend in restrooms during their work shift.
Behavioral control also plays a significant role in the college experience. An illustrative (although perhaps
unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate
students’ behavior; specifically, to force students to attend class. Meanwhile, if you were to suggest that a
rule should be created to force professors to update their lectures at least once every five years, we would
not disagree with you.
Outside the classroom, behavioral control is a major factor within college athletic programs. The National
Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules, policies, and
procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate its rules at
one time or another. Critics suggest that the behavioral controls instituted by the NCAA have reached an
absurd level. Nevertheless, some degree of behavioral control is needed within virtually all organizations.
Creating an effective reward structure is key to effectively managing behavior because people tend to focus
their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that
seem positive on the surface but that can actually undermine organizational goals under some
circumstances. For example, restaurant servers are highly motivated to serve their tables quickly because
doing so can increase their tips. But if a server devotes all his or her attention to providing fast service,
other tasks that are vital to running a restaurant, such as communicating effectively with managers, host
staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and strive to align
Saylor URL: http://www.saylor.org/books Saylor.org
301
rewards with behaviors. For example, waitstaff who consistently behave as team players could be assigned
to the most desirable and lucrative shifts, such as nights and weekends.
Although some behavioral controls are intended for employees and not customers, following them
is beneficial to everyone.
Image courtesy of Sterilgutassistentin,
http://en.wikipedia.org/wiki/File:Manhattan_New_York_City_2009_PD_20091130_209.JPG.
Clan Control
Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral
control), clan control is an informal type of control. Specifically, clan control relies on shared traditions,
expectations, values, and norms to lead people to work toward the good of their organization.
Clan control is often used heavily in settings where creativity is vital, such as many high-
tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The
creativity of a research scientist would be likely to be stifled, for example, if she were given a quota of
Saylor URL: http://www.saylor.org/books Saylor.org
302
patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral
control).
Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent
of their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’ for
employees to submit new ideas and to comment on others’ ideas. Google executives routinely make
themselves available two to three times per week for employees to visit with them to present their ideas.
These informal meetings have generated a number of innovations, including personalized home pages
and Google News, which might otherwise have never been adopted.
As part of the team-building effort at Google, new employees are known as Noogles and are given
a propeller hat to wear.
Image courtesy of Tduk Alex Lozupone,http://en.wikipedia.org/wiki/File:Noogler .
Saylor URL: http://www.saylor.org/books Saylor.org
303
Some executives look to clan control to improve the performance of struggling organizations. In 2005,
Florida officials became fed up with complaints about surly clerks within the state’s driver’s license
offices. The solution was to look for help with training employees from two companies that are well-
known for friendly, engaged employees and excellent customer service. The first was The Walt Disney
Company, which offers world-famous hospitality at its Orlando theme parks. The second was regional
supermarket chain Publix, a firm whose motto stressed that “shopping is a pleasure” in its stores. The goal
of the training was to build the sort of positive team spirit Disney and Publix enjoy. The state’s highway
safety director summarized the need for clan control when noting that “we’ve just got to change a little
culture out there.” [3]
Clan control is also important on many college campuses. Philanthropic and social organizations such as
clubs, fraternities, and sororities often revolve around shared values and team spirit. More broadly, many
campuses have treasured traditions that bind alumni together across generations. Purdue University, for
example, proudly owns the world’s largest drum. The drum is beaten loudly before home football games
to fire up the crowd. After athletic victories, Auburn University students throw rolls of toilet paper into
campus oak trees. At Clark University, Rollins College, and Emory University, time-honored traditions
that involve spontaneously canceling classes surprise and delight students. These examples and
thousands of others spread across the country’s colleges and universities help students feel like they
belong to something special.
Management Fads: Out of Control?
Don’t chase the latest management fads. The situation dictates which approach best accomplishes the
team’s mission.
– Colin Powell
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad
arises when some element of popular culture becomes enthusiastically embraced by a group of people.
Over the past few decades, for example, fashion fads have included leisure suits (1970s), “Members Only”
jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also
Saylor URL: http://www.saylor.org/books Saylor.org
304
usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle
creates “buzz” and publicity but also ensures that its appeal is only temporary. [4]
Fads also seem to be a predictable aspect of the business world. As with cultural fads, many
provocative business ideas go through a life cycle of creating buzz, captivating a group of
enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly
endless supply of popular management books whose premises range from the intriguing to
the absurd. Within the topic of leadership, for example, various books promise to reveal the “leadership
secrets” of an eclectic array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun,
and Santa Claus.
Beyond the striking similarities between cultural and business fads, there are also important differences.
Most cultural fads are harmless, and they rarely create any long-term problems for those that embrace
them. In contrast, embracing business fads could lead executives to make bad decisions. As our quote
from Colin Powell suggests, relying on sound business practices is much more likely to help executives to
execute their organization’s strategy than are generic words of wisdom from Old St. Nick.
Many management fads have been closely tied to organizational control systems. For example, one of the
best-known fads was an attempt to use output control to improve
performance. Management by objectives (MBO) is a process wherein managers and employees work
together to create goals. These goals guide employees’ behaviors and serve as the benchmarks for
assessing their performance. Following the presentation of MBO in Peter Drucker’s 1954 book The
Practice of Management, many executives embraced the process as a cure-all for organizational problems
and challenges.
Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an
objective for every aspect of employees’ activities eventually discovered that this was unrealistic. The
creation of explicit goals can conflict with activities involving tacit knowledge about the organization.
Intangible notions such as “providing excellent customer service,” “treating people right,” and “going the
extra mile” are central to many organizations’ success, but these notions are difficult if not impossible to
Saylor URL: http://www.saylor.org/books Saylor.org
305
quantify. Thus, in some cases, getting employees to embrace certain values and other aspects of clan
control is more effective than MBO.
Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in
Japan in the 1960s and were first introduced in the United States in 1972. A quality circle is a formal
group of employees that meets regularly to brainstorm solutions to organizational problems. As the name
“quality circle” suggests, identifying behaviors that would improve the quality of products and the
operations management processes that create the products was the formal charge of many quality circles.
While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent
that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the
production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions
often results in a product that simply cannot satisfy customers’ needs. Many products with perfect quality,
for example, would be created too slowly and at too great a cost to compete in the market effectively. Thus
trade-offs among quality, speed, cost, and flexibility are inevitable.
Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many
organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly
discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the
rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These
discussions were thought to lead individuals to greater understanding of themselves and others. The
anticipated results were more enlightened workers and a greater spirit of teamwork.
Research on social psychology has found that groups are often far crueler than individuals. Unfortunately,
this meant that the candid nature of T-group discussions could easily degenerate into accusations and
humiliation. Eventually, the T-group fad gave way to recognition that creating potentially hurtful
situations has no place within an organization. Hints of the softer side of T-groups can still be observed in
modern team-building fads, however. Perhaps the best known is the “trust game,” which claims to build
trust between employees by having individuals fall backward and depend on their coworkers to catch
them.
Saylor URL: http://www.saylor.org/books Saylor.org
306
Improving clan control was the basis for the fascination with organizational culture that was all the rage
in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from
America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they
viewed as stellar performers and distilled eight similarities that were shared across the companies. Most
of the similarities, including staying “close to the customer” and “productivity through people,” arose from
powerful corporate cultures. The book quickly became an international sensation; more than three million
copies were sold in the first four years after its publication.
Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both
the popular press and academic research revealed that many of Peters and Waterman’s “excellent”
companies quickly had fallen on hard times. Basic themes such as customer service and valuing one’s
company are quite useful, but these clan control elements often cannot take the place of holding
employees accountable for their performance.
The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment,
“good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are
likely to enjoy performance improvements. Empowerment, for example, builds on important research
findings regarding employees—many workers have important insights to offer to their firms, and these
workers become more engaged in their jobs when executives take their insights seriously. Relying too
heavily on a fad, however, seldom turns out well.
Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s
executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some
Companies Make the Leap…and Others Don’t as a detailed blueprint for running their companies.
Overall, executives should understand that management fads usually contain a core truth that can help
organizations improve but that a balance of output, behavioral, and clan control is needed within most
organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who
yield to trends and fads and popular opinion.”
K E Y T A K E A W A Y
Saylor URL: http://www.saylor.org/books Saylor.org
307
Organizational control systems are a vital aspect of executing strategy because they track performance
and identify adjustments that need to be made. Output controls involve measurable results. Behavioral
controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values,
expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control
processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually
realize that an array of sound business practices is needed to create effective organizational controls.
E X E R C I S E S
1. What type of control do you think works most effectively with you and why?
2. What are some common business practices that you predict will be considered fads in the future?
3. How could you integrate each type of control intro a college classroom to maximize student learning?
[1] Yamanouchi, K. 2011, February 10. Delta ranks near bottom in on-time performance.Atlanta-Journal
Constitution. Retrieved from http://www.ajc.com/business/delta-ranks-near-bottom-834380.html
[2] Yamanouchi, K. 2011, July 27. Delta has $198 million profit, says 2,000 took buyouts.Atlanta-Journal
Constitution. Retrieved from http://www.ajc.com/business/delta-has-198-million-1050461.html
[3] Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved
fromhttp://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml
[4] This discussion of management fads is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from
facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.
Saylor URL: http://www.saylor.org/books Saylor.org
308
9.4 Legal Forms of Business
L E A R N I N G O B JE C T I V E S
1. Know the three basic legal forms of business.
2. Know the two specialized types of corporations.
Choosing a Form of Business
The legal form a firm chooses to operate under is an important decision with implications for how a firm
structures its resources and assets. Several legal forms of business are available to executives. Each
involves a different approach to dealing with profits and losses (Figure 9.10 “Business Forms”).
There are three basic forms of business. A sole proprietorship is a firm that is owned by one person. From
a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means
that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however,
the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a
sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal
assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for
example, there are a number of self-employed repair people, plumbers, and electricians who work alone
on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses
associated with operating an office.
In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole
proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also
responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise
complements the others. For example, an accountant who specializes in preparing individual tax returns
and another who has mastered business taxes might choose to join forces to offer customers a more
complete set of tax services than either could offer alone.
From a practical standpoint, a partnership allows a person to take time off without closing down the
business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida.
Saylor URL: http://www.saylor.org/books Saylor.org
309
When Lawrence suffered a serious injury a few years ago, Sander was able to take over supervising his
projects and see them through to completion. Had Lawrence been a sole proprietor, his customers would
have suffered greatly. However, a person who chooses to be part of a partnership rather than operating
alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up
costing you a lot of money. Thus developing trust and confidence in one’s partner is very important.
Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between
a corporation on the one hand and a sole proprietorship and a partnership on the other is that
corporations involve the separation of ownership and management. Corporations sell shares of ownership
that are publicly traded in stock markets, and they are managed by professional executives. These
executives may own a significant portion of the corporation’s stock, but this is not a legal requirement.
Another unique feature of corporations is how they deal with profits and losses. Unlike in sole
proprietorships and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive
profits or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits
and losses tend to be reflected in whether the firm’s stock price rises or falls. When a shareholder sells her
stock, the firm’s performance while she has owned the stock will influence whether she makes a profit
relative to her stock purchase. Shareholders can also benefit from profits if a firm’s executives decide to
pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends
that these profits support are both taxed. This double taxation is a big disadvantage of corporations.
A specialized type of corporation called an S corporation avoids double taxation. Much like in a
partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with
each owner’s share of the firm. Although this is an attractive feature, an S corporation would be
impractical for most large firms because the number of shareholders in an S corporation is capped,
usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For
smaller firms, such as many real-estate agencies, the S corporation is an attractive form of business.
A final form of business is very popular, yet it is not actually recognized by the federal government as a
form of business. Instead, the ability to create a limited liability company (LLC) is granted in state laws.
LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not personally
Saylor URL: http://www.saylor.org/books Saylor.org
310
responsible for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible
manner (like in a partnership). When paying federal taxes, however, an LLC must choose to be treated as
a corporation, a partnership, or a sole proprietorship. Many home builders (including Sander &
Lawrence), architectural businesses, and consulting firms are LLCs.
K E Y T A K E A W A Y
The three major forms of business in the United States are sole proprietorships, partnerships, and
corporations. Each form has implications for how individuals are taxed and resources are managed and
deployed.
E X E R C I S E S
1. Why are so many small firms sole proprietorships?
2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this
form of business over others?
3. Why might different forms of business be more likely to rely on a different organizational structure?
Saylor URL: http://www.saylor.org/books Saylor.org
311
9.5 Conclusion
This chapter explains elements of organizational design that are vital for executing strategy. Leaders
of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make
decisions about the delegation of authority and responsibility when organizing activities within their
firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting
point for more complex decisions that lead to the creation of formal organizational charts. While
small businesses rarely create organization charts, firms that embrace functional, multidivisional,
and matrix structures often have reporting relationships with considerable complexity. To execute
strategy effectively, managers also depend on the skillful use of organizational control systems that
involve output, behavioral, and clan controls. Although introducing more efficient business practices
to improve organizational functioning is desirable, executives need to avoid letting their firms
become “out of control” by being skeptical of management fads. Finally, the legal form a business
takes is an important decision with implications for a firm’s organizational structure.
Saylor URL: http://www.saylor.org/books Saylor.org
312
E X E R C I S E S
1. The following chart is an organizational chart for the US federal government. What type of the four
structures mentioned in this chapter best fits what you see in this chart?
2. How does this structure explain why the government seems to move at an incredibly slow pace?
3. What changes could be made to speed up the government? Would they be beneficial?
SaylorURL: http://www.saylor.org/books Saylor.org
237
Chapter 8
Selecting Corporate-Level Strategies
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. Why might a firm concentrate on a single industry?
2. What is vertical integration and what benefits can it provide?
3. What are the two types of diversification and when should they be used?
4. Why and how might a firm retrench or restructure?
5. What is portfolio planning and why is it useful?
What’s the Big Picture at Disney?
Walt Disney remains a worldwide icon five decades after his death.
Image courtesy of Wikipedia,
http://en.wikipedia.org/wiki/File:Walt_Disney_Snow_white_1937_trailer_screenshot_(13) .
Chapter 8 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
238
The animated film Cars 2 was released by Pixar Animation Studios in late June 2011. This sequel to the
smash hit Cars made $66 million at the box office on its opening weekend and appeared likely to be yet
another commercial success for Pixar’s parent corporation, The Walt Disney Company. By the second
weekend after its release, Cars 2 had raked in $109 million.
Although Walt Disney was a visionary, even he would have struggled to imagine such enormous numbers
when his company was created. In 1923, Disney Brothers Cartoon Studio was started by Walt and his
brother Roy in their uncle’s garage. The fledgling company gained momentum in 1928 when a character
was invented that still plays a central role for Disney today—Mickey Mouse. Disney expanded beyond
short cartoons to make its first feature film, Snow White and the Seven Dwarves, in 1937.
Following a string of legendary films such as Pinocchio (1940), Fantasia(1940), Bambi (1942),
and Cinderella (1950), Walt Disney began to diversify his empire. His company developed a television
series for the American Broadcasting Company (ABC) in 1954 and opened the Disneyland theme park in
1955. Shortly before its opening, the theme park was featured on the television show to expose the
American public to Walt’s innovative ideas. One of the hosts of that episode was Ronald Reagan, who
twenty-five years later became president of the United States. A larger theme park, Walt Disney World,
was opened in Orlando in 1971. Roy Disney died just two months after Disney World opened; his brother
Walt had passed in 1966 while planning the creation of the Orlando facility.
The Walt Disney Company began a series of acquisitions in 1993 with the purchase of movie studio
Miramax Pictures. ABC was acquired in 1996, along with its very successful sports broadcasting company,
ESPN. Two other important acquisitions were made during the following decade. Pixar Studios was
purchased in 2006 for $7.4 billion. This strategic move brought a very creative and successful animation
company under Disney’s control. Three years later, Marvel Entertainment was acquired for $4.24 billion.
Marvel was attractive because of its vast roster of popular characters, including Iron Man, the X-Men, the
Incredible Hulk, the Fantastic Four, and Captain America. In addition to featuring these characters in
movies, Disney could build attractions around them within its theme parks.
With annual revenues in excess of $38 billion, The Walt Disney Company was the largest media
conglomerate in the world by 2010. It was active in four key industries. Disney’s theme parks included not
Saylor URL: http://www.saylor.org/books Saylor.org
239
only its American locations but also joint ventures in France and Hong Kong. A park in Shanghai, China,
is slated to open by 2016. The theme park business accounted for 28 percent of Disney’s revenues.
Disney’s presence in the television industry, including ABC, ESPN, Disney Channel, and ten television
stations, accounted for 45 percent of revenues. Disney’s original business, filmed entertainment,
accounted for 18 percent of revenue. Merchandise licensing was responsible for 7 percent of revenue. This
segment of the business included children’s books, video games, and 350 stores spread across North
American, Europe, and Japan. The remaining 2 percent of revenues were derived from interactive online
technologies. Much of this revenue was derived from Playdom, an online gaming company that Disney
acquired in 2010. [1]
By mid-2011, questions arose about how Disney was managing one of its most visible subsidiaries. Pixar’s
enormous success had been built on creativity and risk taking. Pixar executives were justifiably proud that
they made successful movies that most studios would view as quirky and too off-the-wall. A good example
is 2009’s Up!, which made $730 million despite having unusual main characters: a grouchy widower, a
misfit “Wilderness Explorer” in search of a merit badge for helping the elderly, and a talking dog. Disney
executives, however, seemed to be adopting a much different approach to moviemaking. In a February
2011 speech, Disney’s chief financial officer noted that Disney intended to emphasize movie franchises
such as Toy Story and Cars that can support sequels and sell merchandise.
When the reviews of Pixar’s Cars 2 came out in June, it seemed that Disney’s preferences were the driving
force behind the movie. The film was making money, but it lacked Pixar’s trademark artistry. One movie
critic noted, “With Cars 2, Pixar goes somewhere new: the ditch.” Another suggested that “this frenzied
sequel seldom gets beyond mediocrity.” A stock analyst that follows Disney perhaps summed up the
situation best when he suggested that Cars 2 was “the worst-case scenario.…A movie created solely to
drive merchandise. It feels cynical. Parents may feel they’re watching a two-hour commercial.” [2] Looking
to the future, Pixar executives had to wonder whether their studio could excel as part of a huge firm.
Would Disney’s financial emphasis destroy the creativity that made Pixar worth more than $7 billion in
the first place? The big picture was definitely unclear.
Saylor URL: http://www.saylor.org/books Saylor.org
240
Will John Lassiter, Pixar’s chief creative officer, be prevented from making more quirky films
like Up! by parent company Disney?
Image courtesy of Nicolas Genin,
http://upload.wikimedia.org/wikipedia/commons/b/bc/John_Lasseter-Up-66th_Mostra .
When dealing with corporate-level strategy, executives seek answers to a key question: In what industry
or industries should our firm compete? The executives in charge of a firm such as The Walt Disney
Company must decide whether to remain within their present domains or venture into new ones. In
Disney’s case, the firm has expanded from its original business (films) and into television, theme parks,
and several others. In contrast, many firms never expand beyond their initial choice of industry.
[1] Standard & Poor’s stock report on The Walt Disney Company.
[2] Stewart, J. B. 2011, June 1. A collision of creativity and cash. New York Times. Retrieved
from http://www.nytimes.com/2011/07/02/business/02stewart.html
Saylor URL: http://www.saylor.org/books Saylor.org
241
8.1 Concentration Strategies
L E A R N I N G O B J E C T I V E S
1. Name and understand the three concentration strategies.
2. Be able to explain horizontal integration and two reasons why it often fails.
For many firms, concentration strategies are very sensible. These strategies involve trying to compete
successfully only within a single industry. McDonald’s, Starbucks, and Subway are three firms that
have relied heavily on concentration strategies to become dominant players.
Market Penetration
There are three concentration strategies: (1) market penetration, (2) market development, and (3) product
development. A firm can use one, two, or all three as part of its efforts to excel within an industry.[1]
Market penetration involves trying to gain additional share of a firm’s existing markets using existing products.
Often firms will rely on advertising to attract new customers with existing markets.
Nike, for example, features famous athletes in print and television ads designed to take market share
within the athletic shoes business from Adidas and other rivals. McDonald’s has pursued market
penetration in recent years by using Latino themes within some of its advertising. The firm also maintains
a Spanish-language website at http://www.meencanta.com; the website’s name is the Spanish translation
of McDonald’s slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers through initiatives
such as this website.
Saylor URL: http://www.saylor.org/books Saylor.org
242
Nike relies in part on a market penetration strategy within the athletic shoe business.
Image courtesy of Jean-Louis Zimmermann,
Market Development
Market development involves taking existing products and trying to sell them within new markets. One
way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped beyond
selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks to
reach consumers that do not visit its coffeehouses.
Saylor URL: http://www.saylor.org/books Saylor.org
243
Starbucks’ market development strategy has allowed fans to buy its beans in grocery stores.
Image courtesy of Claire Gribbin,http://en.wikipedia.org/wiki/File:Starbucks_coffee_beans .
Entering new geographic areas is another way to pursue market development. Philadelphia-based Tasty
Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining states.
The firm’s products have become something of a cult hit among customers, who view the products as
much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In April 2011,
Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made this
acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake’s products
within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.
Product Development
Product development involves creating new products to serve existing markets. In the 1940s, for example,
Disney expanded its offerings within the film business by going beyond cartoons and creating movies
Saylor URL: http://www.saylor.org/books Saylor.org
244
featuring real actors. More recently, McDonald’s has gradually moved more and more of its menu toward
healthy items to appeal to customers who are concerned about nutrition.
In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their
customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink industry is
a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce new
varieties—such as Coke Zero and Pepsi Cherry Vanilla—in an attempt to take market share from each
other and from their smaller rivals.
Product development is a popular strategy in the soft-drink industry, but not all developments pay
off. Coca-Cola Black (a blending of cola and coffee flavors) was launched in 2006 but discontinued
in 2008.
Image courtesy of Barry,
Saylor URL: http://www.saylor.org/books Saylor.org
245
Seattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm
introduces a holiday-themed set of unusual flavors. Jones Soda’s 2006 set focus on the flavors of
Thanksgiving. It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas.
The flavors of Christmas were the focus of 2007’s set, which included Sugar Plum, Christmas Tree, Egg
Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via a
poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of these
holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the unusual
flavors each year will grab customers’ attention and get them to try—and become hooked on—Jones
Soda’s more traditional flavors.
Horizontal Integration: Mergers and Acquisitions
Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquiring
or merging with one of their rivals. This strategic move is known as horizontal integration.
An acquisition takes place when one company purchases another company. Generally, the acquired company is
smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly
sized companies. Disney was much bigger than Miramax and Pixar when it joined with these
firms in 1993 and 2006, respectively, thus these two horizontal integration moves are considered to be acquisitions.
Horizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed
at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers
of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and
Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of these six
corporations believed that greater efficiency could be achieved by combining forces with a former rival.
Considering horizontal integration alongside Porter’s five forces model highlights that such moves also
reduce the intensity of rivalry in an industry and thereby make the industry more profitable.
Some purchased firms are attractive because they own strategic resources such as valuable brand names.
Acquiring Tasty Baking was appealing to Flowers Foods, for example, because the name Tastykake is well
known for quality in heavily populated areas of the northeastern United States. Some purchased firms
Saylor URL: http://www.saylor.org/books Saylor.org
246
have market share that is attractive. Part of the motivation behind Southwest Airlines’ purchase of
AirTran was that AirTran had a significant share of the airline business in cities—especially Atlanta, home
of the world’s busiest airport—that Southwest had not yet entered. Rather than build a presence from
nothing in Atlanta, Southwest executives believed that buying a position was prudent.
Horizontal integration can also provide access to new distribution channels. Some observers were puzzled
when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed
martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that
Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network
television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help
Zuffa gain mainstream exposure of its product. [2]
Saylor URL: http://www.saylor.org/books Saylor.org
247
The combination of UFC and Strikeforce into one company may accelerate the growing popularity
of mixed martial arts.
Image courtesy of hydropeek,
Despite the potential benefits of mergers and acquisitions, their financial results often are very
disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder
wealth while fewer than one in six increases shareholder wealth. [3] Some of these moves struggle because
the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests that Disney
and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a
target company than that company is worth and the buyer never earns back the premium it paid.
In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge
losses. [4] For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year
later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler
in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion
worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious when considering
using horizontal integration.
K E Y T A K E A W A Y S
A concentration strategy involves trying to compete successfully within a single industry.
Market penetration, market development, and product development are three methods to grow within
an industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but
executives need to be cautious about horizontal integration because the results are often poor.
E X E R C I S E S
1. Suppose the president of your college or university decided to merge with or acquire another school.
What schools would be good candidates for this horizontal integration move? Would the move be a
success?
Saylor URL: http://www.saylor.org/books Saylor.org
248
2. Given that so many mergers and acquisitions fail, why do you think that executives keep making
horizontal integration moves?
3. Can you identify a struggling company that could benefit from market penetration, market development,
or product development? What might you advise this company’s executives to do differently?
[1] Ansoff, H. I. 1957. Strategies for diversification. Harvard Business Review, 35(5), 113–124.
[2] Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward global domination. SI.com.
Retrieved from http://sportsillustrated.cnn.com/2011/writers/jeff_wagenheim/03/12/strikeforce-
purchased/index.html
[3] Henry, D. 2002, October 14. Mergers: Why most big deals don’t pay off. Business Week, 60–70.
[4] Hitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating value for
stakeholders. New York, NY: Oxford University Press.
Saylor URL: http://www.saylor.org/books Saylor.org
249
8.2 Vertical Integration Strategies
L E A R N I N G O B J E C T I V E S
1. Understand what backward vertical integration is.
2. Understand what forward vertical integration is.
3. Be able to provide examples of backward and forward vertical integration.
When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain
(Figure 8.3 “Vertical Integration at American Apparel”). This approach can be very attractive when a
firm’s suppliers or buyers have too much power over the firm and are becoming increasingly
profitable at the firm’s expense. By entering the domain of a supplier or a buyer, executives can
reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical
integration alongside Porter’s five forces model highlights that such moves can create greater profit
potential. Firms can pursue vertical integration on their own, such as when Apple opened stores
bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.
In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm
controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the
fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills
themselves. Having control over all elements of the production process ensured the stability and
quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never
before seen in the steel industry.
Figure 8.3 Vertical Integration at American Apparel
Saylor URL: http://www.saylor.org/books Saylor.org
250
Saylor URL: http://www.saylor.org/books Saylor.org
251
Images courtesy of alossix, http://www.flickr.com/photos/alossix/2588175535/ (top
middle),http://www.flickr.com/photos/alossix/2588242383/ (top
left),http://www.flickr.com/photos/alossix/2589149772/ (bottom left); Dov
Charney, http://www.flickr.com/photos/dovcharney/2885342063/ (top right); Nicolas
Nova, http://www.flickr.com/photos/nnova/3399896671/(background);
vmiramontes,http://www.flickr.com/photos/vmiramontes/4376957889/ (bottom right).
Today, oil companies are among the most vertically integrated firms. Firms such as ExxonMobil and
ConocoPhillips can be involved in all stages of the value chain, including crude oil exploration,
drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline,
distributing fuel to gas stations, and operating gas stations.
The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the
Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least
some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy
Services (which created the cement casing for the rig on the ocean floor) and Cameron International
Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the
disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.
Saylor URL: http://www.saylor.org/books Saylor.org
252
The 2010 explosion of the Deepwater Horizon oil rig cost eleven lives and released nearly five
million barrels of crude oil into the Gulf of Mexico.
Image courtesy of US Coast Guard,
http://en.wikipedia.org/wiki/File:Deepwater_Horizon_offshore_drilling_unit_on_fire_2010 .
Vertical integration also creates risks. Venturing into new portions of the value chain can take a firm
into very different businesses. A lumberyard that started building houses, for example, would find
that the skills it developed in the lumber business have very limited value to home construction. Such
a firm would be better off selling lumber to contractors.
Vertical integration can also create complacency. Consider, for example, a situation in which an
aluminum company is purchased by a can company. People within the aluminum company may
believe that they do not need to worry about doing a good job because the can company is
guaranteed to use their products. Some companies try to avoid this problem by forcing their
subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the
subsidiary in the first place.
Saylor URL: http://www.saylor.org/books Saylor.org
253
Backward Vertical Integration
A backward vertical integration strategy involves a firm moving back along the value chain and entering a
supplier’s business. Some firms use this strategy when executives are concerned that a supplier has too
much power over their firms. In the early days of the automobile business, Ford Motor Company created
subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach ensured
that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior
quality.
To ensure high quality, Ford relied heavily on backward vertical integration in the early days of
the automobile industry.
Image courtesy of Ford Corporation, http://en.wikipedia.org/wiki/File:Ford_1939 .
Although backward vertical integration is usually discussed within the context of manufacturing
businesses, such as steelmaking and the auto industry, this strategy is also available to firms such as
Disney that compete within the entertainment sector. ESPN is a key element of Disney’s operations within
the television business. Rather than depend on outside production companies to provide talk shows and
movies centered on sports, ESPN created its own production company. ESPN Films is a subsidiary of
Saylor URL: http://www.saylor.org/books Saylor.org
254
ESPN that was created in 2001. ESPN Films has created many of ESPN’s best-known programs, including
Around the Horn and Pardon the Interruption. By owning its own production company, ESPN can ensure
that it has a steady flow of programs that meet its needs.
Forward Vertical Integration
A forward vertical integration strategy involves a firm moving further down the value chain to enter a
buyer’s business. Disney has pursued forward vertical integration by operating more than three hundred
retail stores that sell merchandise based on Disney’s characters and movies. This allows Disney to capture
profits that would otherwise be enjoyed by another store. Each time a Hannah Montana book bag is sold
through a Disney store, the firm makes a little more profit than it would if the same book bag were sold by
a retailer such as Target.
Forward vertical integration also can be useful for neutralizing the effect of powerful buyers. Rental car
agencies are able to insist on low prices for the vehicles they buy from automakers because they purchase
thousands of cars. If one automaker stubbornly tries to charge high prices, a rental car agency can simply
buy cars from a more accommodating automaker. It is perhaps not surprising that Ford purchased Hertz
Corporation, the world’s biggest rental car agency, in 1994. This ensured that Hertz would not drive too
hard of a bargain when buying Ford vehicles. By 2005, selling vehicles to rental car companies had
become less important to Ford and Ford was struggling financially. The firm then reversed its forward
vertical integration strategy by selling Hertz.
eBay’s purchase of PayPal and Apple’s creation of Apple Stores are two recent examples of forward
vertical integration. Despite its enormous success, one concern for eBay is that many individuals avoid
eBay because they are nervous about buying and selling goods online with strangers. PayPal addressed
this problem by serving, in exchange for a fee, as an intermediary between online buyers and sellers.
eBay’s acquisition of PayPal signaled to potential customers that their online transactions were completely
safe—eBay was now not only the place where business took place but eBay also protected buyers and
sellers from being ripped off.
Saylor URL: http://www.saylor.org/books Saylor.org
255
Apple’s ownership of its own branded stores set the firm apart from computer makers such as Hewlett-
Packard, Acer, and Gateway that only distribute their products through retailers like Best Buy and Office
Depot. Employees at Best Buy and Office Depot are likely to know just a little bit about each of the various
brands their store carries.
In contrast, Apple’s stores are popular in part because store employees are experts about Apple products.
They can therefore provide customers with accurate and insightful advice about purchases and repairs.
This is an important advantage that has been created through forward vertical integration.
K E Y T A K E A W A Y
Vertical integration occurs when a firm gets involved in new portions of the value chain. By entering the
domain of a supplier (backward vertical integration) or a buyer (forward vertical integration), executives
can reduce or eliminate the leverage that the supplier or buyer has over the firm.
E X E R C I S E S
1. Identify a well-known company that does not use backward or forward vertical integration. Why do you
believe that the firm’s executives have avoided these strategies?
2. Some universities have used vertical integration by creating their own publishing companies. The Harvard
Business Press is perhaps the best-known example. Are there other ways that a university might vertical
integrate? If so, what benefits might this create?
Saylor URL: http://www.saylor.org/books Saylor.org
256
8.3 Diversification Strategies
L E A R N I N G O B J E C T I V E S
1. Explain the concept of diversification.
2. Be able to apply the three tests for diversification.
3. Distinguish related and unrelated diversification.
Firms using diversification strategies enter entirely new industries. While vertical integration involves
a firm moving into a new part of a value chain that it is already is within, diversification requires
moving into new value chains. Many firms accomplish this through a merger or an acquisition, while
others expand into new industries without the involvement of another firm.
Three Tests for Diversification
A proposed diversification move should pass three tests or it should be rejected. [1]
1. How attractive is the industry that a firm is considering entering? Unless the industry has strong
profit potential, entering it may be very risky.
2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the
expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late 1970s, it paid
four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was
sold in 1986.
3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive
advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example,
neither side benefited significantly from joining together.
Related Diversification
Related diversification occurs when a firm moves into a new industry that has important similarities with
the firm’s existing industry or industries (Figure 8.4 “The Sweet Fragrance of Success: The Brands That
“Make Up” the Lauder Empire”). Because films and television are both aspects of entertainment, Disney’s
purchase of ABC is an example of related diversification. Some firms that engage in related diversification
Saylor URL: http://www.saylor.org/books Saylor.org
257
aim to develop and exploit acore competency to become more successful. A core competency is a skill set
that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the
benefits enjoyed by customers within each business. [2] For example, Newell Rubbermaid is skilled at
identifying underperforming brands and integrating them into their three business groups: (1) home and
family, (2) office products, and (3) tools, hardware, and commercial products.
Figure 8.4 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire
Saylor URL: http://www.saylor.org/books Saylor.org
258
Saylor URL: http://www.saylor.org/books Saylor.org
259
Images courtesy of Betsy Weber, http://www.flickr.com/photos/betsyweber/5915582379/ (fourth
row left); ookikioo, http://www.flickr.com/photos/ookikioo/856924791/ (third row middle);
Shotcuts Software,http://www.flickr.com/photos/57283318@N07/5303842500/ (second row
right); Joanne Saige Lee,
http://www.flickr.com/photos/crystalliferous/3025018504/sizes/m/in/photostream/ (third row
left); Jessica Sheridan,http://www.flickr.com/photos/16353290@N00/4043846042/ (first row
middle); daveynin, http://www.flickr.com/photos/daveynin/2726423708/(second row left);
Handmade Image, http://www.flickr.com/photos/33707373@N03/4643563760/ (fourth row
right); Church Street Marketplace,
http://www.flickr.com/photos/churchstreetmarketplace/4180164459/(third row right); ookikioo,
http://www.flickr.com/photos/ookikioo/314692747/sizes/m/in/photostream/ (first row left);
Liane Chan, http://www.flickr.com/photos/porcupiny/1926961411/sizes/o/in/photostream/ (first
row right).
Honda Motor Company provides a good example of leveraging a core competency through related
diversification. Although Honda is best known for its cars and trucks, the company actually started out in
the motorcycle business. Through competing in this business, Honda developed a unique ability to build
small and reliable engines. When executives decided to diversify into the automobile industry, Honda was
successful in part because it leveraged this ability within its new business. Honda also applied its engine-
building skills in the all-terrain vehicle, lawn mower, and boat motor industries.
Saylor URL: http://www.saylor.org/books Saylor.org
260
Honda’s related diversification strategy has taken the firm into several businesses, including boat
motors.
Image courtesy of
Wikimedia,http://upload.wikimedia.org/wikipedia/en/5/53/Hondaoutboard .
Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both
soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers
to buy these products through marketing activities such as branding and advertising. Thus, on the surface,
the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing
marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never
materialized.
Unrelated Diversification
Why would a soft-drink company buy a movie studio? It’s hard to imagine the logic behind such a move,
but Coca-Cola did just this when it purchased Columbia Pictures in 1982 for $750 million. This is a good
example ofunrelated diversification, which occurs when a firm enters an industry that lacks any important
Saylor URL: http://www.saylor.org/books Saylor.org
261
similarities with the firm’s existing industry or industries (Figure 8.5 “Unrelated Diversification at
Berkshire Hathaway”). Luckily for Coca-Cola, its investment paid off—Columbia was sold to Sony for $3.4
billion just seven years later.
Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for
example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering
Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both
enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and
furniture businesses.
Lighter firm Zippo is currently trying to avoid this scenario. According to CEO Geoffrey Booth, the Zippo
is viewed by consumers as a “rugged, durable, made in America, iconic” brand. [3] This brand has fueled
eighty years of success for the firm. But the future of the lighter business is bleak. Zippo executives expect
to sell about 12 million lighters this year, which is a 50 percent decline from Zippo’s sales levels in the
1990s. This downward trend is likely to continue as smoking becomes less and less attractive in many
countries. To save their company, Zippo executives want to diversify.
The durability of Zippo’s products is illustrated by this lighter, which still works despite being made in 1968.
Image courtesy of David J. Fred, http://upload.wikimedia.org/wikipedia/commons/9/97/Zippo-Slim-1968-Lit .
Saylor URL: http://www.saylor.org/books Saylor.org
262
In particular, Zippo wants to follow a path blazed by Eddie Bauer and Victorinox Swiss Army Brands Inc.
The rugged outdoors image of Eddie Bauer’s clothing brand has been used effectively to sell sport utility
vehicles made by Ford. The high-quality image of Swiss Army knives has been used to sell Swiss Army–
branded luggage and watches. As of March 2011, Zippo was examining a wide variety of markets where
their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand
warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification options
would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as
Harley-branded bottled water, was a key challenge facing Zippo executives.
Strategy at the Movies
In Good Company
What do Techline cell phones, Sports America magazine, and Crispity Crunch cereals have in common?
Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy
in the 2004 movie In Good Company. Executive Carter Duryea was excited when his employer Globodyne
purchased Waterman Publishing, the owner of Sports America magazine. The acquisition landed him a
big promotion and increased his salary to “Porsche-leasing” size.
Synergy is created when two or more businesses produce benefits together that could not be produced
separately. While Duryea was confident that a cross-promotional strategy between his advertising division
and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman
saw little congruence between advertisements in Sports America on the one hand and cell phones and
breakfast cereals on the other. Despite his considerable efforts, Duryea was unable to increase ad pages
in Sports America because the unrelated nature of Globodyne’s other business units inhibited his strategy
of creating synergy. Seeing little value in owning a failing publishing company, Globodyne promptly sold
the division to another conglomerate. After the sale, the executives that had been rewarded for the initial
purchase of Waterman Publishing, including Duryea, were fired.
Globodyne’s inability to successfully manage Waterman Publishing illustrates the difficulties associated
with unrelated diversification. While buying companies outside a parent company’s core competencies
Saylor URL: http://www.saylor.org/books Saylor.org
263
can increase the size of the company and in turn its executives’ bank accounts, managing firms unfamiliar
to management is generally a risky and losing proposition. Decades of research on strategic management
suggest that when firms diversify, it is best to “stick to the knitting.” That is, stay with businesses
executives are familiar with and avoid moving into ventures where little expertise exists.
In Good Company starred Topher Grace as ill-fated junior executive Carter Duryea.
Image courtesy of David Shankbone,http://en.wikipedia.org/wiki/File:Topher_Grace_by_David_Shankbone .
K E Y T A K E A W A Y
Diversification strategies involve firmly stepping beyond its existing industries and entering a new value
chain. Generally, related diversification (entering a new industry that has important similarities with a
Saylor URL: http://www.saylor.org/books Saylor.org
264
firm’s existing industries) is wiser than unrelated diversification (entering a new industry that lacks such
similarities).
E X E R C I S E S
1. Studies have shown that executives’ pay increases when their firms gets larger. What role, if any, do you
think executive pay plays in diversification decisions?
2. Identify a firm that has recently engaged in diversification. Search the firm’s website to identify
executives’ rationale for diversifying. Do you find the reasoning to be convincing? Why or why not?
[1] Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 102–
121.
[2] Prahalad, C. K., & Hamel, G. 1990. The core competencies of the corporation. Harvard Business Review, 86(1),
79–91.
[3] http://th2010.townhall.com/news/us/2011/03/20/zippos_burning_ambition_lies_in_ retail_expansion.
Saylor URL: http://www.saylor.org/books Saylor.org
265
8.4 Strategies for Getting Smaller
L E A R N I N G O B J E C T I V E S
1. Understand why a firm would want to shrink or exit from a business.
2. Be able to distinguish retrenchment and restructuring.
“In what industry or industries should our firm compete?” is the central question addressed by
corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or
more industries.
Retrenchment
In the early twentieth century, many military battles were fought in series of parallel trenches. If an
attacking army advanced enough to force a defending army to abandon a trench, the defenders would
move back to the next trench and try to refortify their position. This small retreat was preferable to losing
the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a
retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms
using this strategy hope to make just a small retreat rather than losing a battle for survival.
Retrenchment is often accomplished through laying off employees. In July 2011, for example, South
African grocery store chain Pick n Pay announced plans to release more than 3,000 of its estimated
36,000 workers. Just over a month earlier, South African officials had approved Walmart’s acquisition of
a leading local retailer called Massmart. Rivalry in the South African grocery business seemed likely to
become fiercer, and Pick n Pay executives needed to cut costs for their firm to remain competitive.
A Pick n Pay executive explained the layoffs by noting that “the decision was not taken lightly but was
required to ensure the viability of the retail business and its employees into the future.” [1] This is a
common rationale for retrenchment—by shrinking the size of a firm, executives hope that the firm can
survive as a profitable enterprise. Without becoming smaller and more cost effective, Pick n Pay and other
firms that use retrenchment can risk total failure.
Saylor URL: http://www.saylor.org/books Saylor.org
266
The term retrenchment has its origins in trench warfare, which is shown in this World War I photo
taken in France.
Image courtesy of Lt. J. W. Brooke,
http://en.wikipedia.org/wiki/File:Cheshire_Regiment_trench_Somme_1916 .
Restructuring
Executives sometimes decide that bolder moves than retrenchment are needed for their firms to be
successful in the future. Divestment refers to selling off part of a firm’s operations. In some cases,
divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can
also be used to reverse backward vertical integration. General Motors (GM), for example, turned a parts
supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent firm.
This was done via a spin-off, which involves creating a new company whose stock is owned by investors.
GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder
who owned 100 shares of GM received 69 shares of the new company plus a small cash payment in lieu of
a fractional share.
Saylor URL: http://www.saylor.org/books Saylor.org
267
Divestment also serves as a means to undo diversification strategies. Divestment can be especially
appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often
struggle to understand the complexity of diversified firms, and this can result in relatively poor
performance by the stocks of such firms. This is known as a diversification discount. Executives
sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.
Fortune Brands provides a good example. Surprisingly, this company does not own Fortune magazine,
but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three businesses:
spirits (including Jim Beam and Maker’s Mark), household goods (including Masterlock and Moen
Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In December
2010, Fortune Brand’s CEO announced a plan to separate the three businesses to “maximize long-term
value for our shareholders and to create exciting opportunities within our businesses.” [2] Fortune Brands
took the first step toward overcoming the diversification discount in May 2011 when it reached an
agreement to sell its gold business to Fila. In June 2011, plans to spin off the home products business were
announced.
Fortune Brands hopes to unlock hidden shareholder value by divesting unrelated brands such as
Masterlock.
Image courtesy of Thegreenj,
http://upload.wikimedia.org/wikipedia/commons/a/a1/Masterpadlock .
Executives are sometimes forced to admit that the operations that they want to abandon have no value. If
selling off part of a business is not possible, the best option may be liquidation. This involves simply
Saylor URL: http://www.saylor.org/books Saylor.org
268
shutting down portions of a firm’s operations, often at a tremendous financial loss. GM has done this by
scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by
shutting down its Mercury brand. Such moves are painful because massive investments are written off,
but becoming “leaner and meaner” may save a company from total ruin.
K E Y T A K E A W A Y
Executives sometimes need to reduce the size of their firms to maximize the chances of success. This can
involve fairly modest steps such as retrenchment or more profound restructuring strategies.
E X E R C I S E S
1. Should Disney consider using retrenchment or restructuring? Why or why not?
2. Given how much information is readily available about companies, why do you think investors still
struggle to analyze diversified companies?
[1] Chilwane, L. 2011, July 7. Pick n Pay to retrench. The New Age. Retrieved
fromhttp://www.thenewage.co.za/22462-1025-53-Pick_n_Pay_to_retrench
[2] Sauerhaft, R. 2011, May 20. Fortune Brands to sell Titleist and FootJoy to Fila Korea. Golf.com. Retrieved
fromhttp://www.golf.com/golf/tours_news/article/0,28136,2073173,00.html#ixzz1MvXStp2b
Saylor URL: http://www.saylor.org/books Saylor.org
269
8.5 Portfolio Planning and Corporate-Level Strategy
L E A R N I N G O B J E C T I V E S
1. Understand why a firm would want to use portfolio planning.
2. Be able to explain the limitations of portfolio planning.
Executives in charge of firms involved in many different businesses must figure out how to manage
such portfolios. General Electric (GE), for example, competes in a very wide variety of industries,
including financial services, insurance, television, theme parks, electricity generation, lightbulbs,
robotics, medical equipment, railroad locomotives, and aircraft jet engines. When leading a company
such as GE, executives must decide which units to grow, which ones to shrink, and which ones to
abandon.
Portfolio planning can be a useful tool. Portfolio planning is a process that helps executives assess
their firms’ prospects for success within each of its industries, offers suggestions about what to do
within each industry, and provides ideas for how to allocate resources across industries. Portfolio
planning first gained widespread attention in the 1970s, and it remains a popular tool among
executives today.
The Boston Consulting Group (BCG) Matrix
The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning.
Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions:
its share of the market and the growth rate of its industry. High market share units within slow-growing
industries are called cash cows. Because their industries have bleak prospects, profits from cash cows
should not be invested back into cash cows but rather diverted to more promising businesses.
Low market share units within slow-growing industries are called dogs. These units are good candidates
for divestment. High market share units within fast-growing industries are calledstars. These units
have bright prospects and thus are good candidates for growth. Finally, low-market-share units within
fast-growing industries are called question marks. Executives must decide whether to build these
units into stars or to divest them.
Saylor URL: http://www.saylor.org/books Saylor.org
270
Owning a puppy is fun, but companies may want to avoid owning units that are considered to be dogs.
Photo courtesy of D. Ketchen.
The BCG matrix is just one portfolio planning technique. With the help of a leading consulting firm, GE
developed the attractiveness-strength matrix to examine its diverse activities. This planning approach
involves rating each of a firm’s businesses in terms of the attractiveness of the industry and the firm’s
strength within the industry. Each dimension is divided into three categories, resulting in nine boxes.
Each of these boxes has a set of recommendations associated with it.
Limitations to Portfolio Planning
Although portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning
oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s
operations within an industry. Many dimensions are important to consider when making strategic
decisions, not just two. Second, portfolio planning can create motivational problems among employees.
For example, if workers know that their firm’s executives believe in the BCG matrix and that their
subsidiary is classified as a dog, then they may give up any hope for the future. Similarly, workers within
cash cow units could become dismayed once they realize that the profits that they help create will be
diverted to boost other areas of the firm. Third, portfolio planning does not help identify new
opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries a
firm should consider entering.
Saylor URL: http://www.saylor.org/books Saylor.org
271
K E Y T A K E A W A Y
Portfolio planning is a useful tool for analyzing a firm’s operations, but this tool has limitations. The BCG
matrix is one of the most widely used approaches to portfolio planning.
E X E R C I S E S
1. Is market share a good dimension to use when analyzing the prospects of a business? Why or why not?
2. What might executives do to keep employees within dog units motivated and focused on their jobs?
Saylor URL: http://www.saylor.org/books Saylor.org
272
8.6 Conclusion
This chapter explains corporate-level strategy. Executives grappling with corporate-level strategy
must decide in what industry or industries their firms will compete. Many of the possible answers to
this question involve growth. Concentration strategies involve competing within existing domains to
expand within those domains. This can take the form of market penetration, market development, or
product development. Integration involves expanding into new stages of the value chain. Backward
integration occurs when a firm enters a supplier’s business while forward vertical integration occurs
when a firm enters a customer’s business. Diversification involves entering entirely new industries;
this can be an industry that is related or unrelated to a firm’s existing activities. Sometimes being
smart about corporate-level strategy requires shrinking the firm through retrenchment or
restructuring. Finally, portfolio planning can be useful for analyzing firms that participate in a wide
variety of industries.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should create a
new portfolio planning technique by selecting two dimensions along which companies can be analyzed.
Allow each group three to five minutes to present its approach to the class. Discuss which portfolio
planning technique seems to offer the best insights.
2. This chapter discussed Disney. Imagine that you were hired as a consultant by General Electric (GE), a firm
that competes with Disney in the movie, television, and theme park industries. What actions would you
recommend that GE take in these three industries to gain advantages over Disney?
Project 3: Internal Environmental Analysis
(Your Name)
BMGT 495 (section number)
(Instructor’s Name)
(Please do not use pictures or images on the Title Page – remove from your final copy)
Introduction
(The Introduction paragraph is the first paragraph of the paper and will be used to describe to the reader the intent of the paper explaining the main points covered in the paper. This intent should be understood prior to reading the remainder of the paper so the reader knows exactly what is being covered in the paper. Write the introduction last to ensure all of the main points are covered.)
Strategic Role of Corporate Strengths/Weaknesses in the Internal Strategy Analysis
(1. Perform an analysis on the focal company’s corporate-level strategies.)
(2. Create a partial SWOT table and performs a SW analysis and discuss the strategic inferences/implications (Discuss what strategies would allow the company to capitalize on its major strengths and what strategies would allow the company to improve upon its major.) weaknesses.)
(3. Create an IFE matrix analysis. Make sure to explain how the matrix was developed and discuss the strategic inferences/implications.)
(4. Develop a Grand Strategy Matrix. Make sure to explain how the matrix was developed and discuss the strategic inferences/implications at a corporate level and business-unit-level.)
Strategic Role of Internal Resources/Departments/Processes
(1. Perform an analysis on the focal company’s business-level strategies)
a. Evaluate the company’s product line and target market.)
b. Identify and explain business-level strategies.)
(2. Perform an analysis on the focal company’s functional-level strategies)
a.
Assess the organizational structure, the organizational culture, marketing production, operations, finance and accounting, and R&D that can be accomplished by viewing the company’s website, interviews, and surveys.)
b. Explain how these strategies align with the company’s vision and mission statements.)
Strategic Financial Analysis for the Last Reported Fiscal Year
(1, Use the company’s income statement and balance sheet to calculate no less than a total of ten (10) key financial ratios to the business that are relevant to the focal company. There must be a mix of four different key categories inclusive of the leverage, liquidity, profitability, and efficiency ratios so that the ratios do not all come from the same category. The specific ratios selection must come from the following categories.)
a. Leverage Ratios (Long term debt ratio, Total debt ratio, Debt-to-equity ratio, Times interest earned ratio, and Cash coverage ratio).
b. Liquidity Ratios (Net working capital to total assets ratio, current ratio, quick ratio, and cash ratio)
c. Efficiency Ratios (Asset turnover ratio, Average collection period, Inventory turnover ratio, and Days sales outstanding)
d. Profitability Ratios (Net profit margin, Return on assets, and Return on equity)
(The selection of the ratios has to be relevant to the focal company so it is important to choose wisely.)
(2. Quote industry financial average ratios that correlate to the 10 financial ratios selected for the focal company.)
(3. Discuss the corporate financial standing based on a financial ratio analysis. Include whether the company’s financial ratio is a strength, a weakness or a neutral factor.
Note:
Use the library to find the industry averages. A librarian can assist if you have difficulty finding. If copied directly from the Internet, a zero will be assigned. When placing any table or figure in a table, it must be explained in detail.
Composite Analysis
A composite analysis is one in which you will bring in a combination of relevant factors from the various analyses (EFE Matrix, IFE matrix, CPM matrix, SWOT, BCG Matrix, Grand Strategy Matrix and QSPM). The QSPM is a tool that helps determine the relative attractiveness of feasible alternative strategies based on the external and internal key success factors.
(1. Develop a Quantitative Strategic Planning Matrix (QSPM) analysis. Make sure to discuss how the matrix was developed and discuss the strategic inferences/implications.)
(2. Develop a composite analysis on internal factor strategy analysis based on the qualitative and quantitative analytical outcomes from those steps above.
Conclusion
(Create a concluding paragraph. The Conclusion is intended to emphasize the purpose/significance of the analysis, emphasize the significance/consequence of findings, and indicate the wider applications that are derived from the main points of the project’s requirements. You will draw conclusions about the findings of the external environment analysis.)
References
(The reference page is on a separate page from the report. The reference page is completed according to APA with each reference left-justified with hanging indentation for subsequent lines. References are completed in alphabetical order. Please see the module, Learn to Use APA to ensure references are in APA format.)
