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Strategic Management

Test 1 Answers
1. Discuss some of Demings 14 points tying together some of the points you discuss.
1. Develop a mission statement- Companies must stress long term and not short term goals as well as
consistency in decisions to work toward those goals (such as focusing on quality rather than
quantity). The company must also develop a commitment to never-ending improvement.
2. Adopt a new philosophy- if old methods have not been working, such as focusing on quantity, then
companies need to change the way in which they operate. Companies such as Harley Davidson focus
more on quality improvement since entering the global market. They have also changed to more of
a modular strategy where several of their parts are interchangeable among numerous models.
3. Cease dependence on mass inspection- Mass inspection is a process in which mass amounts of
product are inspected at the end of production runs. Elimination of this inspection process will save
costs. When flaws are found at the end of the production process, it costs the company more
money than if the flaw would have been caught at its particular point during assembly. Periodic
inspections throughout the production process allows a company to catch the problem prior to
completion. Doing things correctly the first time is far cheaper and efficient.
4. End practice of awarding business on price tag alone- Companies need to develop long-term
relationships with suppliers. Let all potential suppliers compete to be the chosen one. Renegotiate
the price annually. Avoid confrontational statements and work with the supplier through their
problems or until they fail. They must also focus on quality rather than costs from their suppliers.
5. Institute modern methods of supervision of production workers- people learn in different ways
such as sight, spoken word, writing it out, or a combination of the aforementioned to teach quality
using stats. From a company perspective, you only have one chance to train someone correctly so
make certain that it is done correctly and that employees have the resources to learn.
6. Continual improvement of people through education- Training of employees should never end. It is
more cost effective to continually train and educate employees such as teaching stats to measure
and achieve TQM which promotes improvement. Keep in mind how people learn. (through site,
spoken word, writing it out, and by a combination of all) and make certain they have the resources
to learn required information in the most efficient way for them.
TIE TOGETHER:
In order for a company to re-invent itself, it must admit to itself what its faults are such as focusing
on quantity rather than quality. Once this occurs, they can create a new mission statement which
focuses on long term rather than short term goals. In other words, they need to adopt a new
philosophy to reduce costs. They can also cease dependence on mass inspection processes which
are more costly than real-time inspections because they dont catch flaws soon enough. Another
way to change would be to end the practice of awarding business to suppliers based on price alone.
They should focus more on quality rather than just taking the cheapest bid. They can focus on one
supplier after it has been chosen, and work with them to develop a good relationship which is
conducive for both parties. They can also focus on implementing modern methods of supervision

such as the continuing improvement of people through training. Some people learn in different
ways such as through site, spoken word, writing it out, and by a combination of all in order to
promote improvement. More educated workers are more qualified, efficient, and drop costs
through their improved efficiency.

2. Discuss the barriers to entry providing examples for each barrier (average cost, etc)
1. Economies of scaleGraph:

Companies must have sufficient demand to justify building a new plant. New technology, location,
automated production, and streamlined manufacturing can all shift the curve downward. For instance,
Gortex is far ahead of competitors in the fabric they design. If a company such as Dupont wanted to
compete with them, they would have to pay far more in expenses as their technology in that fabric
market is far inferior. If they had the technology of Gortex, then their costs would mirror AC2. Since they
dont have that technology, their costs to enter the market are too high and those costs are a barrier.

2. Product Differentiation- By creating a product which is different than that of current companies in a
particular market, companies can start their own market niche which may make it difficult for others
to enter that market. Chipotle has differentiated themselves from the fast food industry by
providing healthier choices made with a modular process which allows for timely and efficient
service.
3. Brand preferences- It is hard to take market share from established firms such as apple. Samsung
faced that barrier and eliminated it by making apple users feel old by using confrontational
advertising.
4. Capital requirements- a high capital investment is a large barrier so a company may need investors
in order to enter the market. One such company is Quodoba who is attempting to compete with
Chipotle but is less than half its size.
5. Patents- Patents can create a barrier to entry by making guarding their technology/ideas with
patents. One such example is Gortex who has crafted their technology so far in advance of any other
competitor that the other companies would go out of business trying to improve upon or create a
superior product to that of Gortex.

TIE TOGETHER PARAGRAPH FOR QUESTION 2:

In regards to barriers to entry; product differentiation, brand preferences, capital requirements, and
patents need to be considered as well. Product differentiation by an existing company creates barriers
for potential competitors to enter. An example of this would be Chipotle who offers a fast-casual
environment with organically grown local ingredients. Other companies can mimic the Chipotle business
model but have difficulty in creating a sustainable supply chain for such ingredients. Brand preference is
when customers like a brand so much that they are unwilling to change to a competitor. In this respect,
Chipotle has also created a barrier to entry. They have been loyal to customers and those customers
have returned the favor as Taco Bell discovered recently when they tried to compete with Chipotle with
their fresh cantina bowls which has been largely unsuccessful to this point. Conversely Qudoba is finding
it difficult to compete with Chipotle due to their lack of capital. Finally, patents such as the ones medical
companies use, create barriers to entry and maintain that companys future through product
differentiation.

3. Explain what makes a supplier powerful using and integrating examples.


Several factors can make a supplier more or less powerful. These factors include, the number of
suppliers, degree of product differentiation, associated switching costs, cost of components, a threat
forward, and short supply. Intel is one of the few suppliers and controls most of the supply of computer
chips creating a limited supply which gives them more power with their customers. This leads to high
product differentiation meaning that because there are so few competitors, Intel is able to innovate and
differentiate themselves from competitors which adds to their power. In addition, for a company to
switch to the computer chip market would create high switching costs. An example would be Ford
making an attempt to manufacture computer chips. They would have difficulty making the switch from
cars to chips. This along with the fact that Intel has an established supply chain with cheap components
makes the switch economically unfeasible for Ford due to the aforementioned power. Finally, the threat
forward which would be Intel buying Dell, means that Intel has power over Dell in another market.

4. Explain what makes a buyer powerful again using and integrating examples.
Several factors make can make a buyer more or less powerful. These factors include the quantity,
product differentiation, switching costs, low profits, fixed costs, demand, and backward threats. For
instance, Walmart is a powerful buyer because they have low product differentiation, they have lower
switching costs which means they are more able to change suppliers. Their ability to purchase products
in mass also allows affords them power as a buyer due to lower prices. Weak demand also makes
Walmart more powerful because if there is a weak demand for its product, prices depress making them
more able to switch suppliers and or bargain. Once this occurs, there becomes a backward threat as walmart is in position to purchase their supplier. Together, low prices and high fixed costs create a more
powerful buyer as they will force any company to be more aggressive in order to lower costs.

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5. Discuss the concepts associated with jockeying for position using examples where it is
possible.
There are a large number of competitors- when there are several competitors in an industry, those
competitors fight harder to attain a larger market share. This increases jockeying for position.
A few competitors equal in size- when there are few competitors, companies generally have larger
market shares. An example would be the pick-up industry (Ford, GMC, Chevy, Toyota) this only
leaves the few others to gain market share from. When that occurs, competition (jockeying for
position) increases.
Slow growth market- Companies have to fight more for market share during slow growth phases
which increases jockeying for position.
Price cuts- When price wars start, companies have to fight to retain market share and will start to
jockey for position more. An example of this would be when airlines start slashing prices during their
off-season.
Switching costs- when switching costs are low for industry consumers, companies have to make
more attempts to maintain a competitive advantage. This increases jockeying for position. For
instance, it is very easy to get different types of loaves of bread at the super market, and because
there is such a wide variety, customers can easily switch to a competitor.
Low profits and high fixed (exit) costs- makes companies jockey for position.
The culture is diverse-companies are unsure of competitors next move example would be the
American auto companies vs the Japanese culture. Collectivistic vs. auto centric.
Confrontation- auto-companies
Product differentiation- When products are similar, competition increases. We can use the bread
companies from the previous example. Since there are so many, they must jockey more for
position.
TIE TOGETHER PARAGRAPH FOR QUESTION 5
In regards to jockeying for position, there are nine factors to consider. The number and size of
competitors, market growth, price cuts, switching costs, profit levels, cultural diversity, product
differentiation, and confrontation. When there are a large number of competitors or a few
competitors equal in size, confrontation can occur due to lack of several competitors and companies
begin to jockey for position in order to gain market share. When there are slow growth markets,
price cuts are one way that companies try to increase profits and compete for business which is an
example of jockeying for position. High fixed and switching costs, along with low profits make it
difficult for a company to exit any particular market and increase jockeying for position. In the auto
industry product differentiation is low and cultures are diverse (such as American vs. Japanese car
producers),companies are fearful of how the other will act so companies increase competition and
sometimes use confrontational advertising in order to differentiate themselves from competitors.

6. Explain the Business Level Strategies


MARKET CONDITIONS:
In growth markets there are there are 4 strategies. Stability and Growth phases are external,
conversely, Penetration, and Expansion are internal. During a stability strategy, a companys current
sales and market share remain flat because they are not being aggressive, confrontational, or
attempting to capture additional market share. During a growth strategy, a company increases market
share by being aggressive and increasing their market share along with their sales. During the
penetration strategy, companies attempt to penetrate an existing market by being aggressive with price
and advertising while attempting to differentiate themselves from competitors. During an expansion
strategy, such as wal-mart used, a company will attempt to expand. Wal-mart did this by leasing
buildings and land rather than purchasing them. This freed capital to purchase in bulk which lowered
prices and allowed them to gain their competitors market share.
In slow or stagnant growth markets, there may be niche markets known as growth segments that allow
growth. In others, the growth is slow so companies focus on operating efficiencies as well as innovative
and high-quality products. McDonalds did this with their egg-mcmuffin. They created an innovative and
high-quality breakfast sandwich and automated many of their processes which cut costs and gained
market share.
In declining markets, companies can choose to do one of the following: dominate (such as Chipotle did
during the recession), maintain position (like most diners and small business do), shrink selectively (like
taco bell is doing to combat Chipotles success), recover (such as GM did during the recession with their
bailout), or get out now (like Pan-Am did when they went out of business).
COMPETITIVE POSITIONS:
When companies are in a strong competitive position, they can choose to act in different ways. They can
stabilize which means that they do not increase market share or sales. They can choose an offensive
strategy and advertise stressing their product differentiation. They can fortify such as the cereal
manufacturers do by taking the top shelf in a grocery store to keep competition at bay. They can
become confrontational by portraying their competitors as inferior with advertising. They can reduce
like blockbuster did when Netflix came out. They selectively shrank in order to compete. Finally, a
company can strengthen their position through promotion, accessing new distribution channels and
product development.
When companies are in a low competitive position, they can become highly focused on one product or
service such as Apple and Netflix did when they began. Apple excelled at making an efficient use of R&D,
focusing on price and quality, and by staying in their niche market (schools) in order to gain strength.
When companies are in a turnaround phase, they are focusing on one of three things or a combination
of the following: generating more revenue through aggressive strategies, cutting cost to gain an
advantage monetarily, or reducing assets in order to raise capital and reposition themselves.

SEE GRAPH associated graph for question 6 turnaround phase.

7. Explain and discuss the following corporate strategies: market development, product
development, horizontal integration, vertical integration, concentric diversification, and
conglomerate diversification.
1. Market development-This occurs when a company starts a new market on a local, regional, national
or international level. An example of this would be McDonalds opening stores internationally and
creating a fast food market on a global scale.
2. Product development- This occurs when a company develops new products to sell. An example
would be golf club manufacturers who create new products on a constant basis.
3. Horizontal integration- This occurs when a company expands by purchasing an existing competitor
with similar products/services such as Comcast buying out time Warner.
4. Vertical integration- This is when a supplier/suppliers buy out a distributor. An example of this
would be farmers buying out a processing plant. (Dakota Pasta and Smithfield foods)
5. Concentric diversification- This occurs when a company purchases another company that produces
a related product or service such as when Pepsi bought KFC, Pizza Hut, and Taco Bell.
6. Conglomerate diversification- This occurs when a company buys another company that produces
unrelated products. an example would be Budweiser buying out IBM.