Timezone 1

SCHOOL OF MANAGEMENT AND LANGUAGES

External Programmes

C89ST / C89IM

STRATEGIC MANAGEMENT / INTERNATIONAL STRATEGIC MANAGEMENT

Semester 2 2013/14

Monday 2 June 2014

Duration: Three Hours Fifteen Minutes

INSTRUCTIONS TO CANDIDATES
1. At the start of the exam ensure that you have completed the information
on the front page of the Answer Book.
2. Read the instructions on page 2.
3. Use both sides of the paper when completing the Answer Book.
4. Start each question on a new left hand page.
5. Show all of your workings in the Answer Book workings/answers in the
Question Paper will not be marked.
6. Cross through (once) anything you dont wish the examiner to mark.
7. The Question Paper and Answer Book must be handed in entire.
PLEASE READ THE EXAMINATION REGULATIONS ON THE
BACK COVER

PART I QUESTION PAPER

Heriot-Watt University C89ST / C89IM
Stage 3 June 2014

EXAMINATION INSTRUCTIONS
The duration of the examination is 3 hours and 15 minutes. There will be 15
minutes reading time at the start of the examination; you will not be able to write
during this time period. At the end of the 15 minutes, you will be told that you can
start writing and you may then allocate the remaining 3 hours as you see fit. The
value of each section is shown below:

The paper is in three sections:

SECTION A: 40 marks
SECTION B: 30 marks
SECTION C: 30 marks

Answer ALL sections.

SECTION A: There is one question in this Section, Question A1, answer all parts of
the question.

SECTION B: is a multiple choice section and you should indicate your response on
the answer grid provided in Part II. No marks are deducted for wrong
answers. Answer ALL questions in this section.

SECTION C: Answer either Question C1 or Question C2.

This examination document is in two parts.

Part I is the question paper.

Part II is the answer book which also contains the ANSWER GRID for the multiple
choice questions

Please ensure that BOTH PARTS are returned at the end of this examination.

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Stage 3 June 2014

SECTION A (40 marks)

Answer all parts of Question A1.

Case study of Optimeyes and the eyeglass retail industry in Val Verde
(The names, locations and figures used in this case are fictional)

Background
The optical market in the Kingdom of Val Verde for
eyeglasses, contact lenses, sunglasses and eye care
products was estimated to be worth $4.77 billion. Retail
experts predict that the countrys optical market sales will
exceed $5.93 billion within the next fifteen years. Sales
growth was increasing for the reason that the profile of Val
Verdes population was ageing; there was a slow increase in the number of people aged
over forty, and these individuals generally required eye glasses or contact lenses to correct
eyesight problems.

Customers for eyeglasses in Val Verde are extremely price sensitive and demand a wide
range of choice in their frames and lenses. Replacement demand is high partly because of
changes to an individuals prescription, but also due to the fashionable nature of frames and
the desire to keep up with trends.

The industry environment in Val Verde was highly competitive for eyeglass retailers and was
characterised by the use of aggressive advertising and discounting (i.e. customers can
purchase two pairs of eye glasses for the price of one or two for one offers) to maintain
market share. The Val Verde industry was dominated by four major retail chains which were:
Eye Q, Spex in the City, V Eye P and Maximeyez. However, the arrival of an Internet-based
eyeglass retailer has dramatically changed the competitive situation for these major retail
chains.

A young entrepreneur called Kent C. Good revolutionised Val Verdes optical industry. His
Internet-based company, Optimeyes, started selling glasses at around ninety percent less
than those charged by the major high street outlets. In spite of charging less than his
competitors he still makes on average a respectable sixty percent gross margin on each pair
of eyeglasses sold. The business idea for this entrepreneurial venture began when Kent had
to purchase a pair of prescription glasses from a high street retailer. When the shops
optician told him that the price of a new pair of glasses would cost him $332 he was
horrified. As a financially struggling university student he was astonished that some wire
and glass should cost so much. Inquisitive about the logic behind the high price of retail
street glasses he decided to research the market.

He discovered that the suppliers used by the major retail outlets (i.e. eyeglass manufacturing
laboratories which make to order prescription eyeglass lenses and then fit the lenses to a
selected frame) can fabricate a standard pair of glasses for as little as $13.85. Based on his
research Kent concluded there was a business opportunity in the cost differential between
the $332 charged by the high street retailer and the suppliers manufacturing cost of $13.85.
After much negotiation with various eyeglass manufacturing laboratories1 several agreed to
make prescription orders for Kents new venture. To make the most of the cost differential he
utilised Internet technology and a telephone call centre to transact with customers.

1
To begin with eyeglass manufacturing laboratories were disinclined to jeopardise their relationships with the
major retailers

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Stage 3 June 2014

To order glasses from Optimeyes a customer

must have their eyes tested by an optician,
who is then obliged by Val Verde law to
provide her or him with a prescription (i.e. the
amount of lens correction required to focus at
either distance or for reading at close
distances). Once a prescription has been
obtained a customer can simply telephone or
enter the details on-line at the companys
website. With the customers prescription
details the company is then able to construct
suitable lenses. Customers also select on-line
the type of frames they wish to buy. To assist this selection process the companys website
allows customers an opportunity to see what they would look like wearing any of its portfolio
of spectacles. Specifically, Optimeyes pioneered an Internet software system, which allowed
customers whilst on-line to try on a pair of spectacles. Customers can do this by
downloading a digital image of their face onto the companys website. Once the image is
downloaded customers can then position the spectacles of their choice via their computers
mouse.

Kents business model contrasts starkly with that of the incumbent eyeglass retailers, which
are Eye Q, Spex in the City, V Eye P and Maximeyez. Eye Q, Spex in the City, V Eye P and
Maximeyez have 380, 330, 690 and 750 retail stores each respectively. Each of these stores
has a number of qualified opticians who will test customers eyes and then issue lenses
specific to their requirements. The average price charged for a pair of spectacles by one of
the main incumbent retailers is typically around $332. This branch network is a costly asset
for these retailers, because Kent, via his on-line business model, is able to sell top-quality
spectacles, including designer frames, for below average prices. Optimeyes business
activities demonstrate a number of cost reducing activities such as low staff numbers, free of
costly eye testing equipment, do not offer advice about optical issues, reasonably priced
computer technology, relatively inexpensive physical infrastructure and a low cost location
for his business premises. Furthermore, sourcing lenses presents no problem as there are a
number of registered producers around the world. In addition, the quality of eyeglasses
produced by Optimeyes was equivalent to those being sold by the incumbent eyeglass
retailers, i.e. high. However, a weakness for Optimeyes is its narrow range of designer
frames. On the contrary the larger retail chains have an extensive range of designer frames.

A further weakness regarding Optimeyes business model was the lack of personal service
and support. Many customers rate the personal consultation offered by a trained staff
member at physical retail outlets highly. Certainly, the incumbent retailers see customer
service as a key differentiating factor between them and Optimeyes. Consumers state that
the customer service offered by an optician is a reassuring aspect of the purchase process,
particularly when it comes to advice about the selection of an appropriate style of spectacle
frame. In a recent market survey all of the main retailers were rated as offering very good
levels of customer service, while Optimeyes just received a satisfactory rating. Moreover, if
the spectacles the customers have bought from Optimeyes require minor adjustments for fit,
they need to approach an optical retail store for this service to be done at the cost of a small
fee. For the most part high street retailers will offer this service for free if the glasses were
purchased from its premises.

Since the business was established, Optimeyes has sold over 150,000 pairs of glasses.
Presently the company sells between 200 and 300 pairs of eyeglasses per day and sales
are expected to reach $6.92 million within two years. Val Verde consumers purchase less
than four percent of their eyeglass needs from online ventures such as Optimeyes at the
moment. The company predicts that its sales will be around $19.78 million within three
years. The company has already branched out into contact lenses and plans to expand

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Heriot-Watt University C89ST / C89IM
Stage 3 June 2014

overseas as well. Venture capitalists have helped fund Optimeyes growth by injecting
$989,000. Part of the additional capital supplied by venture capitalists was used to launch an
aggressive national advertising campaign, which involved sending out 1.5 million catalogues
via national newspapers.

However, a major danger confronting Kent and other Internet sites was a possible harmful
ruling against Internet sales by Val Verdes General Optical Council (GOC), the official body
which regulates the optical industry. The GOC pronounced two years ago that it thought
internet sales of eyeglasses could pose a risk to "public safety". Despite receiving extensive
legal advice on the matter, the GOC has so far not made a decision about the legality of
selling prescription glasses on the Internet or even set a date for a decision to be made.
Kent alleges that any decision made by the GOC will be influenced by the composition of its
membership, which contains representatives from the major high street retailers. For
example, the chairman of the GOC works as a consultant for Eye Q. Kent feels that the
parochial interests of individual members could influence the GOCs position. Uncertainty
about the GOCs decision has already halted Optimeyes desire to seek additional funding for
expansion, as venture capitalists are reluctant to invest additional cash into the company
until they obtain legal clarification on the status of Internet sales.

Question A1 (answer all parts of this question)

(a) Construct a strategic group map using service quality and pricing policy as the axes to
illustrate the competitive position of the various retailers discussed in the retail industry
for eyeglasses in the Kingdom of Val Verde.
(5 marks)

(b) Construct another strategic group map of the retail industry for eyeglasses in the
Kingdom of Val Verde using frame range and retail stores as the axes.
(5 marks)

(c) Evaluate what the two strategic group maps tell you about the competitive conditions
confronting Optimeyes within the retail industry for eyeglasses in the Kingdom of Val
Verde.
(5 marks)

(d) Use Porters Five Forces model to analyse the competitive conditions for Optimeyes
within the retail industry for eyeglasses in the Kingdom of Val Verde.

Base your Five Forces analysis on the pricing policy and service quality strategic group
map featured in Question A1(a).
(15 marks)

(e) Construct a radar diagram to summarise the attractiveness of Optimeyes position or

strategic group.
(5 marks)

(f) Evaluate the strategic options available to Optimeyes competitors to ensure their future
success in the Kingdom of Val Verde.
(5 marks)

Total 40 marks

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Heriot-Watt University C89ST / C89IM
Stage 3 June 2014

SECTION B (30 marks)

Answer all questions in this section. There are 15 questions and each question
carries two marks.

Indicate your response on the answer grid provided in the answer book.

MCQs not released

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Stage 3 June 2014

SECTION C (30 marks)

Answer either Question C1 or Question C2.

Question C1

(a) Discuss why an understanding of socio-cultural differences between countries is

important for international business success.
(20 marks)

(b) Evaluate how one of the following impacts multi-national business: legal systems, tax
laws, OR accounting approaches across nations.
(10 marks)

Total 30 marks

OR

Question C2

(a) Discuss how political risks can influence a companys decision to set up in a country.
(18 marks)

(b) Evaluate why governments may intervene in international trade.

(12 marks)

Total 30 marks

END OF PAPER

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 Timezone 1

EXAMINATION REGULATIONS
Candidates are subject to the regulations governing examinations which are
published by the University. The main points are summarised below.

1. A candidate shall not bring written, printed or any other material into the
examination room except such as may be authorised by the examiners.
Briefcases and other similar containers, the main purpose of which is to
carry papers, shall not be brought into the examination room.

2. A candidate shall not communicate with, receive assistance from or copy

from the paper of another candidate during an examination.

3. A candidate shall not leave the examination room less than half an hour
after the start of an examination, except with the permission of the
invigilator and shall not leave the examination room during the last fifteen
minutes of an examination.

4. At the end of the examination a candidate must return the answer book or
books to the invigilator together with any other material on which he/she
has written or drawn during the examination. Under no circumstances
should a candidate remove an answer book, used or unused, from the
examination room.