The final exam (90 mins) consist of 3 parts:

Part 1. True/False Questions (from Question 1 to 15)

Part 2. Multiple Choice Questions (from Question 16 to 36)

Part 3. Case Discussion Questions (from Question 37 to 39)

1-20: 1.5 marks/each

21-30: 2,5 marks/each

37-39: 10 marks/each

Review the following chapters in your textbook:

Chapter 1. Strategic Leadership: Managing the Strategy-Making Process for Competitive

Advantage
Chapter 2. External analysis: The identification of opportunities and threats
Chapter 3. Internal Analysis: Resources and Competitive advantage
Chapter 4. Competitive advantage through functional-level strategy
Chapter 5. Business-level strategy
Chapter 6. Business-level strategy and the industry environment
Chapter 8. Strategy in the global environment
Chapter 9. Corporate-level strategy: Horizontal integration, vertical integration and
strategic outsourcing
Chapter 10: Corporate-level strategy: related and unrelated diversification
Chapter 12: Implementing strategy through organization

Example of case study

Verizon wireless: Competitive advantage

Established in 2000 as a joint venture between Verizon Communications and Britain’s
Vodafone, over the last 18 years Verizon Wireless has emerged as the largest and consistently
most profitable enterprise in the fiercely competitive U.S. wireless service. Today, the company
has over 150 million subscribers and a 36% market share.
One of the most significant facts about Verizon is that it has the lowest churn rate in the industry.
Customer churn refers to the number of subscribers who leave a service within a given time
period. Churn is important because it costs between $400 and $600 to acquire a customer (with
phone subsidies accounting for a large chunk of that). It can take months just to recoup the fixed
costs of a customer’s acquisition. If churn rates are high, profitability is eroded by the costs of
acquiring customers who do not stay long enough to provide a profit to the service provider. The
risk of churn increased significantly in the United States after November 2003, when the Federal
Communications Commission (FCC) allowed wireless subscribers to transfer their phone
numbers when they switched to a new service provider. Over the next few years, Verizon
Wireless emerged as the clear winner in the battle to limit customer defections. For example, in
early 2018, Verizon’s churn rate was 1.18% per month, compared to a rate of 1.32% at AT&T,
2.39% at Sprint, and 2.42% at T-Mobile. Verizon’s low churn rate has enabled the company to
grow its subscriber base faster than its rivals, which allows the company to better achieve
economies of scale by spreading the fixed costs of building a wireless network over a larger
customer base.
The low customer churn at Verizon is due to a number of factors. First, it has the most extensive
network in the United States, blanketing 95% of the nation. This means fewer dropped calls and
dead zones as compared to its rivals. For years, Verizon communicated its coverage and quality
advantage to customers with its “Test Man” advertisements. In these ads, a Verizon Test Man
wearing horn-rimmed glasses and a Verizon uniform wanders around remote spots in the nation
asking on his Verizon cell phone, “Can you hear me now?” Verizon claims that the Test Man
was actually the personification of a crew of 50 Verizon employees who each drive some
100,000 miles annually in specially outfitted vehicles to test the reliability of Verizon’s network.
Second, the company has invested aggressively in high-speed wireless networks, including most
recently 4G LTE, enabling rapid download rates on smartphones. Complementing this, Verizon
has a high-speed, fiber-optic backbone for transporting data between cell towers. Verizon has
invested some $150 billion in its wireless and fiber-optic network since 2000. The company also
looks set to be a leader in next generation 5G wireless networks, set to start rolling out in 2019,
that will have download rates up to 1,000 times faster than 4G networks. For customers, this
means a high-quality user experience when accessing data such as streaming video on their
smartphones. To drive this advantage home, in 2011, Verizon started offering Apple’s
marketleading iPhone in addition to the full range of Android smartphones it was already
offering (the iPhone was
originally exclusive to AT&T).
To further reduce customer churn, Verizon has invested heavily in its customer care function. Its
automated software programs analyze the call habits of individual customers. Using that
information, Verizon representatives will contact customers and suggest alternative plans that
might better suit their needs. For example, Verizon might contact a customer and say, “We see
that because of your heavy use of data, an alternative plan might make more sense for you and
help reduce your monthly bills.” The goal is to anticipate customer needs and proactively satisfy
them, rather than have the customer take the initiative and possibly switch to another service
provider.
Discussion questions:
1. What resources underlie Verizon’s strong competitive position in the U.S. wireless
telecommunications industry?
2. Explain how these resources enable Verizon to improve one or more of the following:
efficiency, quality, customer responsiveness, innovation.
3. How sustainable are Verizon's advantages? Can competitors easily replicate their network
infrastructure or customer service strategies? What are the barriers to imitation?
4. What role have mergers and acquisitions played in Verizon's growth and competitive
advantage? Consider their acquisition of Alltel and their joint venture with Vodafone.
5. What are the biggest threats to Verizon's continued success? How might new technologies,
changing consumer preferences, or regulatory changes impact their competitive position?
(Source: Hill, Charles W.L., , Schilling, Melissa A., Jones, Gareth R. (2020), Strategic
Management: An Integrated Approach: Theory and Cases, 13th ed., Cengage Learning, pp
C.234-235).

Trouble at McDonald’s

For most of its history, McDonald’s has been an extraordinarily successful enterprise. It began in
1955, when the legendary Ray Kroc decided to franchise the McDonald brothers’ fast-food
concept. Since its inception, McDonald’s has grown into the largest restaurant chain in the
world, with almost 37,000 stores in 120 countries.
For decades, McDonald’s success was grounded in a simple formula: Give consumers value for
money, good quick service, and consistent quality in a clean environment, and they will return
time and time again. To deliver value for money and consistent quality, McDonald’s
standardized the process of order taking, making food, and providing service. Standardized
processes raised employee productivity while ensuring that customers had the same experience
in all branches of the restaurant. McDonald’s also developed close ties with wholesalers and
food producers, managing its supply chain to reduce costs. As it became larger, buying power
enabled McDonald’s to realize economies of scale in purchasing and pass on cost savings to
customers in the form of low-priced meals, which drove increased demand. There was also the
ubiquity of McDonald’s; their restaurants could be found everywhere. This accessibility, coupled
with the consistent experience and low prices, built brand loyalty.
The formula worked well until the early 2000s. By then, McDonald’s was under attack for
contributing to obesity. Its low-priced, high-fat foods were dangerous, claimed critics. By 2002,
sales were stagnating and profits were falling. It seemed that McDonald’s had lost its edge. The
company responded with a number of steps. It scrapped its supersize menu and added healthier
options such as salads and apple slices. Executives mined data to discover that people were
eating more chicken and less beef. So McDonald’s added grilled chicken sandwiches, chicken
wraps, Southernstyle chicken sandwiches, and more recently, chicken for breakfast to their
menu. Chicken sales doubled at McDonald’s between 2002 and 2008, and the company now
buys more chicken than beef. McDonald’s also shifted its emphasis on beverages. For decades,
drinks were an afterthought, but executives couldn’t help but note the rapid growth of Starbucks.
In 2006, McDonald’s decided to offer better coffee, including lattes. McDonald’s improved the
quality of its coffee by purchasing high-quality beans, using better equipment, and filtering its
water. The company did not lose sight of the need to keep costs low and service quick, however,
and continues to add coffee-making machines that produce lattes and cappuccinos in 45 seconds,
at the push of a button. Starbucks it is not, but for many people a latte from the McDonald’s
drivethrough window is comparable. Today, the latte machines have been installed in almost half
of the stores in the United States. All of these strategies seemed to work. Revenues, net profits
and profitability all improved between 2002 and 2013. By 2014, however, McDonald’s was once
more running into headwinds. Same-store sales declined in 2014, impacting profitability.
Among the problems that analysts identified at McDonald’s was an inability to attract customers
in the 19- to 30-year-old age group. Rivals offering healthier alternatives, such as Chipotle
Mexican Grill, and “better burger” chains that appeal tothis demographic, such as Smashburger,
are gaining ground at the expense of McDonald’s. A recent Consumer Reports survey ranked
McDonald’s burgers the worst among its peers. Another problem is that the quality of customer
service at McDonald’s seems to have slipped. Many customers say that employees at McDonalds
are rude and unprofessional.
One reason why McDonald’s employees might be feeling stressed out is that the menu has
grown quite large in recent years, and many restaurants are not longer staffed given the diversity
of the menu. In 2015, management at McDonald’s took steps to fix these problems. The
company emphasized a number of “velocity growth accelerators” including (1) an “Experience
of the Future” layout, which features a combination of ordering flexibility (including counter,
kiosk, Web, and mobile ordering), customer experience (including a blend of front counter, table
service, and curbside delivery), and a more streamlined menu (but one that still allows for
personalization); (2) mobile ordering and payments; and (3) delivery alternatives. The results of
these initiatives have been promising, with McDonald’s starting to see faster growth and better
profitability.
CASE DISCUSSION QUESTIONS
1. What functional-level strategies has McDonald’s pursued to boost its efficiency?
2. What functional-level strategies has McDonald’s pursued to boost its customer
responsiveness?
3. What does product quality mean for McDonald’s? What functional-level strategies has it
pursued to boost its product quality?
4. How has innovation helped McDonald’s improve its efficiency, customer responsiveness, and
product quality?
5. Do you think that McDonald’s has any rare and valuable resources? In what value creation
activities are these resources located?
6. How sustainable is McDonald’s competitive position in the fast-food restaurant business?
(Source: Hill, Charles W.L., , Schilling, Melissa A., Jones, Gareth R. (2020), Strategic
Management: An Integrated Approach: Theory and Cases, 13th ed., Cengage Learning, pp.139-
140).

Dell Computer and the Personal Computer Industry

The global personal computer industry is very competitive. On a global basis, Dell was the
worldwide market share leader in 2005 with 18.1%, followed by Hewlett-Packard (15.6%),
Lenovo (6.2%), Acer (4.7%), Fujitsu (4.1%), and Apple (2.2%). The remaining 49% of the
market is accounted for by a long list of small companies, some of which focus on local markets
and make unbranded so-called white box computers.
The long list of small companies reflects relatively low barriers to entry. The open architecture of
the personal computer means that key components, such as an Intel compatible microprocessor, a
Windows operating system, memory chips, a hard drive, and so on, can be purchased easily on
the open market. Assembly is easy, requiring very little capital equipment or technical skills, and
economies of scale in production are not particularly significant. Although small entrants lack
the brand-name recognition of the market share leaders, they survive in the industry by pricing
their machines a few hundred dollars below those of the market leaders and capturing the
demand of price-sensitive consumers. This puts constant pressure on the prices that brand-name
companies can charge.

Moreover, most buyers view the product offerings of different branded companies as very close
substitutes for each other, so competition between them often defaults to price. Consequently, the
average selling price of a PC has fallen from around $1,700 in 1999 to under $1,000 in 2006, and
projections are that it may continue to fall, fueled in part by aggressive competition between Dell
computer and Hewlett-Packard.

The constant downward pressure on prices makes it hard for personal computer companies to
have big gross margins, and this factor results in lower profitability. The downward pressure on
prices has been exacerbated by slowing demand growth in many developed nations, including
the world’s largest market, the United States, where the market is now mature and demand is
limited to replacement demand plus an expansion in the overall population.

To make matters worse, personal computer companies have long had to deal with two very
powerful suppliers: Microsoft, which supplies the industry standard operating system, Windows,
and Intel, which supplies the industry standard microprocessor. Microsoft and Intel have been
able to charge high prices for their products, which has raised input costs for personal computer
manufacturers and thus reduced their profitability.

In sum, the personal computer industry is not particularly attractive. The combination of low
entry barriers, intense rivalry among established companies, slowing demand growth, buyers
who are indifferent to the offerings of various companies and often look at price before anything
else, and powerful suppliers who have raised the prices for key inputs all come together to make
it difficult for established companies to earn decent profits. Against this background, the
performance of Dell Computer over the last decade is nothing short of remarkable and illustrates
just how strong the company’s business model and competitive advantage had been.

Questions:

1. How is the nature of competition in the personal computer industry?

2. In recent years, which of the five competitive forces has become more positive for personal
computer producers?
3. In recent years, which of the five competitive forces has become less positive for personal
computer producers?

4. What are the primary challenges facing the personal computer industry?

5. Why is the personal computer industry not particularly attractive?

6. How can Dell leverage its competitive advantage to enter new markets or diversify its product
offerings?

IKEA

IKEA may be the world most successful global retailer. Established by Ingvar Kamprad in
Sweden in 1943 when he was 17 years old, the home furnishing superstore has grown into a
global cult brand, with 230 stores in 33 countries that host 410 million shoppers a year and
generated sales of €14.8 billion ($17.7 billion) in 2005. Kamprad himself, who still owns the
private company, is rumored to be world’s richest man.

IKEA’s target market is the global middle class who are looking for low-priced but attractively
designed furniture and household items. The company applies the same basic formula
worldwide: open, large warehouse stores, festooned in the blue and yellow colors of the Swedish
flag, that offer 8,000 to 10,000 items from kitchen cabinet to candlesticks. Use wacky
promotions to drive traffic into the stores. Configure the interior of the stores so that customers
have to pass through each department to get the checkout. Add restaurants and child-care
facilities so that shoppers stay as long as possible. Price the items as low as possible. Make sure
that product design reflects the simple clean Swedish lines that have become IKEA’s trademark.
And then watch the results: customers who enter the store planning to buy $40 coffee table and
end up spending $500 on everything from storage units to kitchen ware.

IKEA aims to reduce the price of its offerings by 2 to 3% per year, which requires relentless
attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA devotes
considerable attention to finding the right manufacturer for each item. Consider the company’s
best-selling Klippan love seat. Designed in 1980, the Klippan, with its clean lines, bright colors,
simple legs, and compact size has sold some 1.5 million units since its introduction. Originally
manufactured in Sweden, IKEA soon transferred production to lower-cost suppliers in Poland.
As demand for the Klippan grew, IKEA then decided that it made more sense to work with
suppliers initiated with shipping the product all over the world. Today there are five suppliers of
the frames in Europe, plus 3 in the United States and 2 in China. To reduce the cost of the cotton
slipcovers, production has been concentrated in four core suppliers in China and Europe. The
resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of
the Klippan by some 40% between 1999 and 2005.
Despite its standard formula, however, IKEA has found that global success requires that it adapt
its offerings to the tastes and preferences of consumers in different nations. IKEA first
discovered this in the early 1990s, when it entered the United States. The company soon found
that its European style offerings didn’t always resonate with American consumers. Beds were
measured in centimeters, not the king, queen, and twin sizes that Americans are familiar with.
Sofas weren’t big enough, wardrobe drawers were not deep enough, glasses wre too small,
curtains were too short, and kitchens didn’t fit U.S. size appliances. Since then, IKEA has
redesigned its offerings in the United States to appeal to American consumers, and it has been
rewarded with stronger store sales. The same process is now unfolding in China, where the
company plans to have 10 stores by 2010. The store lay out in China reflects the layout of many
Chinese apartments, and since many Chinese apartments have balconies, IKEA Chinese’s stores
include a balcony section. IKEA has had to adapt its locations to China, where car ownership is
not still widespread. In the West, IKEA stores are generally located in suburban areas and have
lots of parking space, but in China they are located near public transportation, and IKEA offers
delivery services so that Chinese customers can get their purchases home.

Case Discussion Questions:

1.What strategies did IKEA pursue before its global expansion?

2.What were the pressures that IKEA had to face in the global market?

3. How did IKEA respond to pressures for local responsiveness in its foreign markets?

4. What is the core of IKEA's business model?

5. What are the key factors that have contributed to IKEA's growth and profitability?

6. How does Porter's Five Forces model apply to the home furnishing industry?

Southwest Airlines

Southwest Airlines has long been one of the standout performers in the U.S. airline industry. It is
famous for its low fares, which are often about 30% beneath those of its major rivals. These are
balanced by an even lower cost structure, which has enabled it to record superior profitability
even in bad years such as 2002, when the industry faced slumping demand in the wake of the
September 11 terrorist attacks. Indeed, during 2001 to 2005, quite possibly the worst four years
in the history of the airline industry, when every other major airline lost money, Southwest made
money every year and earned a return on invested capital of 5.8%.
What is the source of Southwest’s competitive advantage? Many people immediately point to the
company’s business model and low cost structure.

With regard to their business model, while operators like American Airlines and United route
passengers through congested hubs, Southwest Airlines flies point-to-point, often through
smaller airports. By competing in a way that other airlines do not, Southwest has found that it
can capture enough demand to keep its planes full. Moreover, because it avoids many hubs,
Southwest has experienced fewer delays. In the first eight months of 2006, Southwest planes
arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental.

As for Southwest’s low cost structure, this has a number of sources. Unlike most airlines,
Southwest flies only type of plane, the Boeing 737. This reduces training costs, maintenance
costs, and inventory costs while increasing efficiency in crew and flight scheduling. The
operation is nearly ticketless and there is no seat assignment, which reduces cost and back-office
accounting functions. There are no meals or movies in flight, and the airline will not transfer
baggage to other airlines, reducing the need for baggage handlers.

The most important source of the company’s low cost structure, however, seems to be very high
employee productivity. One way airlines measure employee productivity is by the ratio of
employees to passengers carried. According to figures from company 10-K statements, in 2005,
Southwest had an employee-to-passenger ratio of 1 to 2,400, the best in the industry. By
comparison, the ratio at United Airlines during 2005 was 1 to 1,175 and at Continental, it was 1
to 1,125. These figures suggest that holding size constant, Southwest runs its operation with far
fewer people than competitors. How does it do this?

First, Southwest devotes enormous attention to the people it hires. On average, the company
hires only 3% of those interviewed in a year. When hiring, it emphasizes teamwork and a
positive attitude. Southwest rationalizes that skills can be taught but a positive attitude and a
willingness to pitch in cannot. Southwest also creates incentives for its employees to work hard.
All employees are covered by a profit-sharing plan, and at least 25% of an employee’s share of
the profit-sharing plan has to be invested in Southwest Airlines stock. This gives rise to a simple
formula: the harder employee work, the more profitable Southwest becomes, and the richer the
employees get. The results are clear. At other airlines, one would never see a pilot helping to
check passengers onto the plane. At Southwest, pilots and flight attendants have been known to
help clean the aircraft and check in passengers at the gate. They do this to turn around an aircraft
as quickly as possible and get it into the air again because an aircraft doesn’t make money when
it is sitting on the ground. This flexible and motivated work force leads to higher productivity
and reduces the company’s need for more employees.

Second, because Southwest because flies point-to-point rather than through congested airport
hubs, there is no need for dozens of gates and thousands of employees to handle banks of fights
that come in and then disperse within a two-hour window, leaving the hub empty until the next
flights a few hours later. The result: Southwest can operate with far fewer employees than
airlines that fly through hubs.

Case Discussion Questions:

1.What are the resources, capabilities of Southwest Airlines?

2. What is the core competence of Southwest Airlines that has allowed it to outperform its
competitors for so long?

3. What are the distinctive competencies of Southwest Airlines?

4. What specific operational practices have contributed to Southwest's high level of operational
efficiency?

5. How can Southwest continue to innovate and adapt to changing market conditions?

6.What are barriers to imitation of the distinctive competencies of Southwest Airlines?